<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 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 its 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 offices) (Zip Code)
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 days. Yes [X] No [ ]
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 contained, to 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
12, 1997 as reported on the Nasdaq National Market was approximately
$74,966,400. 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 12, 1997, registrant had 36,202,255 shares
of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1997 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 16, 1998 to
be delivered to shareholders in connection with the Annual Meeting of
Shareholders to be held February 17, 1998 are incorporated by reference into
Part III.
================================================================================
<PAGE> 2
THE SANTA CRUZ OPERATION, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I PAGE NUMBER
<S> <C>
Item 1. Business 1
Item 2. Properties 13
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Executive Officers of the Registrant 13
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters 16
Item 6. Selected Financial Data 16
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations 16
Item 8. Financial Statements and Supplementary Data 16
Item 9. Changes in and Disagreement with Accountants on Accounting and Financial
Disclosures 16
PART III
Item 10. Directors and Executive Officers of the Registrant 17
Item 11. Executive Compensation 17
Item 12. Security Ownership of Certain Beneficial Owners and Management 17
Item 13. Certain Relationships and Related Transactions 17
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K 18
Signatures 20
</TABLE>
<PAGE> 3
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)product line and UNIX system technology
from Novell, Inc.
In 1997, the Company introduced an Application Broker for Network Computing,
announced a release strategy for UnixWare 7, and restructured to increase
overall efficiency, placing all of the Company's development groups under Doug
Michels, SCO's co-founder, executive vice president, and chief technology
officer.
SCO's mission is to be the leading supplier of UNIX System software for
business-critical, Network Computing environments. Network Computing offers
businesses a more powerful, reliable, and cost-effective way to share
business-critical applications and information with people anywhere in the
world. The two key elements of Network Computing are, first, powerful, scalable,
and reliable servers; and, second, support for a wide range of clients.
SCO also offers an Application Broker for Network Computing- Tarantella.
Tarantella runs on any UNIX server, and provides any Java client - NC, PC,
terminal, or workstation - with access to existing applications running on any
kind of server in the network - mainframe, mini, UNIX or NT server. By
leveraging SCO's core strengths - UNIX servers and Tarantella - SCO can move
businesses to Network Computing at their own pace, enabling them to utilize
their existing systems and giving them the broadest choices of technologies and
partners. SCO's product solutions are available through a global network of more
than 15,000 SCO distributors and resellers. Through our strategic partnerships
with the world's leading computer vendors, technology providers and support
providers, SCO will continue to deliver the industry's most advanced and
reliable products, backed by expert local support around the world.
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 fifteen 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. 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
1
<PAGE> 4
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 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, called Network 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 Network Computing model.
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 about 2.3 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. In
1997, the Company introduced the world's first Application
2
<PAGE> 5
Broker for Network Computing, and announced a release strategy for its
next-generation, UNIX operating system, which is initially targeted at high-end
departmental computing and enterprise environments. 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 UNIX System software.
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. That includes Network
Computing environments. 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 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 Network 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 (Personal Digital Assistants), 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.
3
<PAGE> 6
In addition, SCO now offers Tarantella, the Company's new Application Broker for
Network Computing. Tarantella enables customers to deliver both new and existing
applications to any Java technology-enabled client. These applications include
Windows, UNIX system, and mainframe applications. The clients can be palmtop
devices, Web TV, a mobile phone, an NC, a character terminal, or a PC
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 or other RISC-based 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. In addition,
Comprehensive education and training programs for reseller and end users are
available though the Company's Advanced Education Centers. Information on these
programs is available on the Services and Support page of the SCO Web site.
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 I20, XPG-4, Spec 1170, DCE and
OSF/Motif(R) from The Open Group, POSIX(R) from IEEE, Federal Information
Processing Standard (FIPS) from the National Institute of Standards (NIST), and
Internet standards. 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 a number of 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.
4
<PAGE> 7
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 12 years, SCO has developed a highly
trained, multi-tiered, value-added distribution and support infrastructure. This
worldwide network includes over 15,000 resellers and distributors. 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. 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 makes 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. 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.
5
<PAGE> 8
PRODUCTS
The Company offers two categories of products: (1) UNIX server products, which
include layered server products such as SCO's Internet Family of products, and
(2) client-integration products, which include Tarantella.
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.
SCO OpenServer Internet FastStart: The Internet FastStart system enables users
to take full advantage of the Internet, providing advanced Network Computing
features.
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).
6
<PAGE> 9
The SCO Internet Family. The SCO Internet Family provides Internet
access for corporate LANs. By using the family of products 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 SCO Internet Family provides everything needed to get up and running on the
web quickly. It includes 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. It also supports TCP/IP,
IPX/SPX(TM), NFS(R), NIS, DNS, PPP, SMTP, POP networking protocols, and includes
network install capability.
Additional SCO Internet Family Product Options -- For customers with
existing SCO servers, or those who wish to extend their Internet functionality,
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.
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 PCs 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. 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 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,
7
<PAGE> 10
"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 Vision97 - Bringing together Windows, UNIX and the Internet
SCO Vision97 integrates Windows, UNIX and the Internet for just a little more
than the price of a PC-X server. SCO Vision97 is a new generation of Windows to
UNIX integration products, designed to bring the benefits of the new Internet
computing model to Windows PC users. Going beyond simply accessing UNIX
applications, SCO Vision97 adopts the principles of centralized management,
server deployment and Internet integration and cuts the cost of ownership of
existing PC networks.
Individual products offer access to X and character-based applications,
server-based file and print sharing and ODBC middleware. Together they form a
tightly integrated suite that is designed for Network Computing.
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 PC X 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.
Premier Motif - The Business Critical Motif
8
<PAGE> 11
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 four years' experience as the world's leading third party Motif
supplier. 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.
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 12 years, SCO has developed a highly trained and diverse sales and
distribution channel of over 15,000 resellers and distributors. 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 a
limited amount of product 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 90 days, which can be applied against future purchases. The Company, as
a matter of policy, does not allow product returns 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. During the third fiscal quarter of 1997, the Company reduced its
channel inventory across all product lines resulting in reduced revenues. There
can be no assurance 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.
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:
9
<PAGE> 12
* 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 from Novell
Corporation and is now a primary driving force behind this open systems
platform.
During the third quarter of fiscal 1997, SCO restructured to increase overall
efficiency. SCO integrated the efforts of its various development teams to
deliver the features and functionality businesses expect from SCO systems faster
and more efficiently.
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 one integrated organization that
implements SCO's two product strategies--UNIX servers and Client Integration
products.
The UNIX server development teams are responsible for the core operating systems
and services including SCO OpenServer, SCO UnixWare, and the forthcoming 64-bit
UNIX system. They are 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 projects that are UNIX
kernel-related such as clustering and NUMA support. In addition, they are
responsible 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 Client integration Development teams are responsible 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.
10
<PAGE> 13
The teams build the SCO Vision family of products which includes SCO Vision97,
SCO XVision, SCO TermVision, SCO SuperVision, SCO SQL-Retriever. They also
develop Tarantella products, which extend SCO's "any-client" proposition to
Network Computing 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 products in the fiscal year ending
September 30, 1998. 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 system software may be a
competitive disadvantage to 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.
11
<PAGE> 14
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
Network 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 systems. 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.
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, or alternatively, SCO could continue operations without
such technology with no material impact to its business. However, the loss of
any significant third-party license, 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.
12
<PAGE> 15
EMPLOYEES
As of September 30, 1997, the Company had 1,082 employees, including 334 in
product development, 345 in sales and marketing, 159 in customer support
services, and 244 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 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 370,000 square feet.
The Company believes that these facilities are adequate for its needs in the
foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
In August 1993, a securities class action lawsuit was filed in Superior Court of
San Francisco, California against the Company, one current employee, three
former employees and the Company's underwriters. The lawsuit alleged 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. Subject to final court approval, this matter
was settled in October 1997 for an immaterial amount.
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 1997.
EXECUTIVE OFFICERS AND OFFICERS OF THE REGISTRANT
The executive officers and officers of the Company as of September 30, 1997 were
as follows:
<TABLE>
<CAPTION>
Name Age Position with the Company
- ---- --- -------------------------
EXECUTIVE OFFICERS:
<S> <C> <C>
Alok Mohan 49 President and Chief Executive Officer
Edwin Adams 53 Senior Vice President and General Manager, The Americas
Ray Anderson 39 Senior Vice President, Marketing, Products Division
James Clark 57 Senior Vice President, Asia/Pacific Operations
John Luhtala 54 Senior Vice President, Operations, and Chief Financial Officer
David McCrabb 49 Senior Vice President, Market Planning
Douglas L. Michels 43 Executive Vice President, Chief Technical Officer
</TABLE>
13
<PAGE> 16
<TABLE>
<S> <C> <C>
Jack Moyer 48 Vice President, Human Resources
Steve Sabbath 50 Vice President, Law and Corporate Affairs and
Secretary
Geoff Seabrook 49 Senior Vice President, and General manager, EMEIA
OFFICERS:
Helene Mann-Bouchard 37 Vice President, Worldwide Customer Delivery
Systems
James Wilt 51 Vice President, Business Development
</TABLE>
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. 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, Marketing, Products Division in
June 1997. Between June 1997 and December 1994, Mr. Anderson served as Senior
Vice President and Managing Director, Client Integration Division. 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.
Dr. Clark was named Senior Vice President, Asia/Pacific Operations in November
1996. Prior to joining the Company, Dr. Clark held various senior executive
positions with AT&T Bell Laboratories commencing in September 1989 as well as
served as a professor at the Queensland University of Technology, School of Data
Communications, Brisbane, Australia.
Mr. Luhtala was named Senior Vice President and Chief Financial Officer in
January 1997. Prior to joining the Company, between May 1996 and December 1996,
Mr. Luhtala served as Chief Financial Officer and Vice President, Mergers,
Acquisitions and Joint Ventures at SyQuest Technology. From February 1987 to May
1996, Mr. Luhtala served in various financial management positions with Amdahl.
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.
Mr. McCrabb was named Senior Vice President, Market Planning in July 1997.
Between January 1995 and June 1997, he served as 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. Michels is the principal architect of the Company's technology strategy and
has served as the head of product development since June 1997. 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(R) user consortium, and served as its President
from 1989 to 1990.
14
<PAGE> 17
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 Mirconetics, 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, and General Manager, EMEIA in
January 1996. 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. Wilt was named Vice President, Business Development in August 1991. 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.
15
<PAGE> 18
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 1996:
<S> <C> <C>
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
Fiscal 1997:
First Quarter 6-1/4 7-3/8
Second Quarter 6-1/4 8-1/2
Third Quarter 3-1/4 6-5/16
Fourth Quarter 3-11/16 7-1/16
</TABLE>
On December 12, 1997, there were approximately 6,800 holders of the Company's
Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
The information set forth on page 10 of the 1997 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 11 through 15 of the 1997 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 16 through 31
of the 1997 Annual Report to Shareholders are incorporated herein by reference.
o Consolidated Statements of Operations for each of the years in the three
year period ended September 30, 1997
o Consolidated Balance Sheets as of September 30, 1997 and 1996
o Consolidated Statements of Shareholders' Equity for each of the years in
the three year period ended September 30, 1997
o Consolidated Statements of Cash Flows for each of the years in the three
year period ended September 30, 1997
o Notes to Consolidated Financial Statements
o Report of Independent Auditors
o Quarterly Financial Information
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None
16
<PAGE> 19
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 17, 1998 (the "Proxy Statement"). Such
information is incorporated herein by reference. Information with respect to
Executive Officers and Officers may be found on pages 13 through 15 hereof,
under the caption "Executive Officers and 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.
17
<PAGE> 20
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 Schedule
<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 schedule 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>
18
<PAGE> 21
<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)
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 1997.
19
<PAGE> 22
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.
By: /s/ John W. Luhtala By: /s/ Steven M. Sabbath
--------------------------------- ----------------------------------
John W. Luhtala Steven M. Sabbath
Senior Vice President, Operations, Vice President,
and Chief Financial Officer Law and Corporate Affairs & Secretary
Date: December 23, 1997 Date: December 23, 1997
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
Date: December 23, 1997
/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, 1997
Date: December 23, 1997
/s/ Enzo Torresi /s/ Gilbert P. Williamson
- -------------------------------------- ------------------------------
Enzo Torresi Gilbert P. Williamson
Director Director
Date: December 23, 1997 Date: December 23, 1997
/s/ Ronald Lachman /s/ Jean-Francois Heitz
- -------------------------------------- ------------------------------
Ronald Lachman Jean-Francois Heitz
Director Director
Date: December 23, 1997 Date: December 23, 1997
/s/ Ninian Eadie /s/ R. Duff Thompson
- -------------------------------------- ------------------------------
Ninian Eadie R. Duff Thompson
Director Director
Date: December 23, 1997 Date: December 23, 1997
</TABLE>
20
<PAGE> 23
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders of The Santa Cruz Operation, Inc.:
Under date of October 22, 1997, we reported on the consolidated balance sheets
of The Santa Cruz Operation, Inc. and subsidiaries as of September 30, 1997 and
1996, 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, 1997, as contained in the 1997 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 1997. 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
San Jose, California
October 22, 1997
21
<PAGE> 24
THE SANTA CRUZ OPERATION, INC.
SCHEDULE II/RULE 5-04
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
(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>
Year Ended September 30, 1997
Allowance for returns $ 9,245 $33,115 $33,224 -- $ 9,136
Allowance for doubtful accounts 1,885 349 491 -- 1,743
---------- ----------- ---------- --------- ----------
Total allowance $11,130 $33,464 $33,715 -- $10,879
========== =========== ========== ========= ==========
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
========== =========== ========== ========= ==========
</TABLE>
(1) Adjustment for purchase of Visionware Limited
22
<PAGE> 25
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)
</TABLE>
<PAGE> 26
<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)
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 13
THE SANTA CRUZ OPERATION, INC.
SELECTED FIVE YEAR FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
-------------------------------------------------------------
(In thousands, except per share data) 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net revenues $ 193,660 $ 207,890 $ 199,329 $ 184,068 $ 178,243
Cost of revenues 55,315 54,402 54,133 51,953 52,292
- ---------------------------------------------------------------------------------------------------------
Gross margin 138,345 153,488 145,196 132,115 125,951
Operating expenses 154,939 177,069 151,688 113,490 108,559
- ---------------------------------------------------------------------------------------------------------
Operating earnings (loss) (16,594) (23,581) (6,492) 18,625 17,392
- ---------------------------------------------------------------------------------------------------------
Other income (expense):
Interest income, net 2,291 2,302 2,703 1,829 381
Other expense, net (866) (394) (363) (561) (427)
- ---------------------------------------------------------------------------------------------------------
Profit (loss) before income taxes (15,169) (21,673) (4,152) 19,893 17,346
- ---------------------------------------------------------------------------------------------------------
Income taxes 1 741 1,956 5,647 3,500
- ---------------------------------------------------------------------------------------------------------
Net profit (loss) $ (15,170) $ (22,414) $ (6,108) $ 14,246 $ 13,846
- ---------------------------------------------------------------------------------------------------------
Net profit (loss) per share $ (0.41) $ (0.62) $ (0.20) $ 0.45 $ 0.47
- ---------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 36,628 36,179 30,922 31,941 29,527
- ---------------------------------------------------------------------------------------------------------
September 30,
-------------------------------------------------------------
(In thousands) 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------
Working capital $ 46,164 $ 61,935 $ 60,539 $ 77,291 $ 60,072
Total assets 146,665 166,807 131,870 138,574 111,276
Long-term obligations 9,545 9,332 7,521 1,084 1,898
Shareholders' equity 81,462 101,581 82,182 89,644 70,531
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
SCO's mission is to be the software that system builders choose for Network
Computing. SCO is the world's leading supplier of UNIX server and host systems,
with a worldwide market share of over 36%, and worldwide market share of over
78% of UNIX Systems on the Intel platform. SCO sells and supports its products
through a worldwide network of distributors, resellers, system integrators and
OEMs.
SCO is committed to bringing Network Computing to business-critical environments
because it can dramatically lower the total cost of computing and is ideal for
supporting heterogeneous systems and networks. Network 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
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 $193.7 million in fiscal 1997, a 7% decrease from $207.9
million in fiscal 1996 and were $199.3 million in fiscal 1995, an increase of 4%
from fiscal 1995 to fiscal 1996. Beginning in fiscal 1996, net revenues included
revenues derived from UnixWare packaged product shipments and source license
revenue related to the acquisition of the UNIX assets 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. Revenue is net of a provision for estimated future returns for stock
balancing and excess quantities above levels the Company believes are
appropriate in its distribution channel partners.
LICENSE REVENUES License revenues were $174.6 million in fiscal 1997 as compared
to $189.0 million in fiscal 1996 and $177.5 million in fiscal 1995, representing
a decrease of 8% in fiscal 1997 over 1996 and an increase of 6% in fiscal 1996
over 1995. License revenues were approximately 90% of total net revenues for
fiscal 1997 and 91% and 89% of total net revenues for fiscal 1996 and 1995,
respectively. The fiscal 1997 decline resulted from significant planned
reduction in channel inventories across all product lines in the third quarter.
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. For the fiscal years ended September 30, 1997,
1996 and 1995, no single customer accounted for greater than 10% of the
Company's license revenues.
SERVICE REVENUES Revenue from services remained relatively constant in fiscal
1997 at $19.1 million, a 1% increase over the $18.9 million level of 1996.
Service revenues of 1996 decreased 13% from $21.8 million in fiscal 1995. The
decrease in service revenues in fiscal 1996 was primarily attributable to the
Company's decision to transition responsibility for the training and support of
its product offerings to its
<PAGE> 3
channel partners in the first half of fiscal 1996. As a result, training and
support revenues recognized by the Company decreased in 1996.
COST OF REVENUES
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, between product families, between geographic regions and
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 gross margin percentage 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 includes royalties paid to
certain software vendors, amortization of acquired technologies, 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 increased to 21% for fiscal
1997 from 19% in fiscal 1996 and 1995. 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 in 1997. Reduced third party royalty payments
associated with the purchase of the UNIX assets 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.
COST OF SERVICE REVENUES Cost of service revenues includes documentation,
consulting and personnel related expenses associated with providing such
services. Cost of service revenues as a percentage of service revenues remained
at 94% in fiscal 1997 as in 1996, but had increased from 91% in 1995. The fiscal
1996 increase in cost of service revenues as a percentage of service revenues
resulted primarily from incremental support costs for product offerings
associated with the acquisition of the UNIX assets from Novell.
RESEARCH AND DEVELOPMENT
The Company invests in research and development both for new products and to
provide continuing enhancements to current products. Research and development
expenses increased 18% to $46.1 million in fiscal 1997 from $39.0 million in
fiscal 1996. In fiscal 1996, research and development expenses increased 21%
from fiscal 1995 total expenditures of $32.2 million.
Research and development expenses represented 24%, 19% and 16% of total net
revenues in fiscal 1997, 1996 and 1995, respectively. The 1997 spending increase
as a percentage of sales was primarily attributable to personnel costs relating
to accelerated development of next generation operating systems and technology
focused on internet-enabled products. The fiscal 1995 to 1996 increase in
research and development spending was principally due to increased personnel and
facility costs associated with the acquisition of the UNIX assets acquired from
Novell and to increased spending levels associated with the development and
release of layered products.
To date, the Company has expensed as incurred all of its software development
costs before reaching technological feasibility, which is defined as reaching a
working model.
SALES AND MARKETING
Sales and marketing expenses, at $79.5 million, remained even with 1996 spending
of $79.4 million. This represented a 4% decline from the 1995 level of $82.5
million. Sales and marketing expenses represented 41%, 38% and 41% of total net
revenues in fiscal 1997, 1996 and 1995, respectively. While flat in absolute
terms, the Company retargeted 1997 marketing spending towards reseller training,
<PAGE> 4
independent software vendor recruitment and higher corporate brand awareness.
The fiscal 1995 to fiscal 1996 decrease was primarily attributable to decreased
project spending in 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 assets from Novell.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased by 3% to $20.9 million in fiscal
1997 from $20.3 million in fiscal 1996 and by 8% in fiscal 1996 from $18.9
million in fiscal 1995. General and administrative expenses represented 11% of
total net revenues for fiscal 1997, 10% for 1996 and 9% for 1995. The increased
spending in 1997 was primarily attributable to a one-time charge for settlement
of litigation. In 1996, increased spending was due to personnel related costs
associated with the purchase and assimilation of the UNIX assets from Novell. (
See Note 14 of Notes to Consolidated Financial Statements.)
NON-RECURRING CHARGES
A worldwide restructuring during the third quarter of fiscal 1997 resulted in a
one-time charge of $8.4 million, 4% of 1997 revenues. The charge includes a 10%
reduction in headcount of $3.4 million, elimination of lease obligations of
non-essential facilities of $1.9 million and a write-off of certain acquired
technologies of $1.4 million. Of the $8.4 million, $5.3 million related to cash
expenditures and $3.1 million related to non-cash charges. The Company
anticipates that the majority of the payments will be made by fiscal 1998.
Non-recurring charges were $38.4 million representing 18% of total revenues in
fiscal 1996. The charges primarily related to UnixWare products which had not
yet reached technological feasibility and 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 resulting from a
worldwide restructuring that included an 8% workforce reduction.
OTHER INCOME (EXPENSE)
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 for fiscal 1997 and 1996 and $2.7 million for 1995. The
net interest income decrease in fiscal 1996 from 1995 was primarily attributable
to a decrease in the weighted average interest bearing balances maintained
throughout the year. Other expense was $.9 million for fiscal 1997 and $.4
million for fiscal 1996 and 1995. The change in 1997 was due to a foreign
exchange loss of $.6 million associated with the settlement of an intercompany
loan to the Company's U.K. subsidiary.
INCOME TAXES
In fiscal 1997, 1996 and 1995, the Company's effective income tax rates were 0%,
(3)% and (47)%, respectively. The fiscal 1997 rate primarily reflects the
establishment of a valuation allowance for fiscal 1997 losses. The fiscal 1996
rate reflects non-deductible, non-recurring charges related to the acquisition
of the UNIX assets and a change in the valuation allowance for deferred tax
assets, while the fiscal 1995 rate reflects non-deductible, non-recurring
charges related to the acquisition of Visionware. For an analysis of income
taxes, see Note 12 of Notes to Consolidated Financial Statements.
NET PROFIT (LOSS)
<PAGE> 5
The Company reported net losses of $15.2 million, $22.4 million and $6.1 million
in fiscal 1997, 1996 and 1995, respectively. The fiscal 1997, 1996 and 1995 net
losses were primarily attributable to absolute increases in operating expenses
and non-recurring charges.
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 the Company's products. The process of developing new
high technology products is complex and uncertain and requires accurate
anticipation of customer needs and technological trends. The industry has become
increasingly competitive and, accordingly, the Company's results may also be
adversely affected by the actions of existing or future competitors, including
the development of new technologies, the introduction of new products, and the
reduction of prices by such competitors to gain or retain market share. The
Company's results of operations could be adversely affected if it were required
to lower its prices significantly.
The Company participates in a highly dynamic industry and future results could
be subject to significant volatility, particularly on a quarterly basis. The
Company's revenues and operating results may be unpredictable due to the
Company's shipment patterns. The Company operates with little backlog of orders
because its products are generally shipped as orders are received. In general, a
substantial portion of the Company's revenues have been booked and shipped in
the third month of the quarter, with a concentration of these revenues in the
latter half of that third month. In addition, the timing of closing of large
license contracts and the release of new products and product upgrades increase
the risk of quarter to quarter fluctuations and the uncertainty of quarterly
operating results. The Company periodically may adjust the level of inventory
held in its distribution channels which may also cause quarter-to-quarter
fluctuations. The Company's staffing and operating expense levels are based on
an operating plan and are relatively fixed throughout the quarter. As a result,
if revenues are not realized in the quarter as expected, the Company's expected
operating results could be adversely affected, and such effect could be
substantial and could result in an operating loss.
The Company experiences seasonality of revenues for both the European and the
U.S. federal government markets. European revenues during the quarter ending
June 30 are historically lower or relatively flat compared to the prior quarter.
This reflects a reduction of customer purchases in anticipation of reduced
selling activity during the summer months. Sales to the U.S. federal government
generally increase during the quarter ending September 30. This seasonal
increase is primarily attributable to increased purchasing activity by the U.S.
federal government prior to the close of its fiscal year. Additionally, net
revenues for the first quarter of the fiscal year are typically lower or
relatively flat compared to net revenues of the prior quarter.
The overall cost of revenues may be affected by changes in the mix of net
revenue contribution between licenses and services, product families,
geographical regions and channels of distribution, as the costs associated with
these revenues may have substantially different characteristics. The Company may
also experience a change in margin as net revenues increase or decrease since
technology costs, service costs and production costs are fixed within certain
volume ranges.
The Company's results of operations could be adversely affected if it were to
lower its prices significantly. In the event the Company reduced its prices, the
Company's standard terms for selected distributors provide credit for inventory
ordered in the previous 180 days, such credits to be applied against future
purchases. The Company, as a matter of policy, does not allow product returns
for refund. Product returns are generally allowances for stock balancing and are
accompanied by compensating and offsetting orders. Revenue is net of a provision
for estimated future stock balancing and excess quantities above levels the
Company believes are appropriate in its distribution channels. The Company
monitors the quantity and mix of its product sales.
<PAGE> 6
The Company's effective tax rate is subject to change based on the ability of
the Company to utilize its tax carryforwards and as new tax legislation is
enacted.
A substantial portion of the Company's revenues are derived from outside the
United States. Trade sales to international customers represented 55%, 53% and
60% of total revenues for fiscal 1997, 1996 and 1995, respectively. A
substantial portion of these international revenues are denominated in the U.K.
pound sterling and operating results can vary with changes in the U.S. dollar
exchange rate for such currency. The Company's revenues can also be affected by
general economic conditions in the United States, Europe and other international
markets. The Company's operating strategy and pricing take into account changes
in exchange rates over time. However, the Company's results of operations may be
significantly affected in the short term by fluctuations in foreign currency
exchange rates.
The Company has adopted a strategy of reviewing and forecasting all material
foreign denominated assets and liabilities to cover any potential transactional
gain or loss which may occur should exchange rates change significantly. The
Company may employ hedging instruments to offset uncovered exposure.
The Company's policy is to amortize purchased software and technology licenses
using the straight-line method over the remaining estimated economic life of the
product, or on the ratio of current revenues to total projected product
revenues, whichever is greater. Due to competitive pressures, it is 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 acquisition candidates. Such
candidates are selected based on products or markets which are complementary to
those of the Company's. Acquisitions involve a number of special risks,
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
<PAGE> 7
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, 1997, the
Company's principal sources of liquidity included cash and short-term
investments of $51.7 million and available bank lines of credit of approximately
$17 million against which the Company had $.7 million in outstanding borrowings.
The Company does not believe it will require borrowing capacity greater than the
amount available under these lines of credit for at least the next twelve
months. See Notes 2, 3 and 7 of Notes to the 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 $13.4 million in fiscal 1997, $27.0 million in
fiscal 1996 and $2.8 million in fiscal 1995. Cash provided by (used for)
investing activity during fiscal 1997, 1996 and 1995 was $(13.2) million,
$(21.4) million and $6.4 million, respectively. In fiscal 1997 and 1996, cash
provided by operations was used to fund purchases of technology, property and
equipment, common stock repurchases 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. Cash provided by
(used for) financing activities was $(10.0) million, $(5.3) million and $(5.0)
million for fiscal 1997, 1996 and 1995, respectively. In fiscal 1997, 1996 and
1995, proceeds from the sale of Common Stock were more than offset by the
Company's stock repurchases and payments on capital lease obligations.
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 1998.
<PAGE> 8
THE SANTA CRUZ OPERATION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------
(In thousands, except per share data) 1997 1996 1995
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net revenues:
Licenses $ 174,552 $ 189,032 $ 177,534
Services 19,108 18,858 21,795
- --------------------------------------------------------------------------------------------------
Net revenues 193,660 207,890 199,329
- --------------------------------------------------------------------------------------------------
Cost of revenues:
Licenses 37,272 36,633 34,342
Services 18,043 17,769 19,791
- --------------------------------------------------------------------------------------------------
Total cost of revenues 55,315 54,402 54,133
- --------------------------------------------------------------------------------------------------
Gross margin 138,345 153,488 145,196
- --------------------------------------------------------------------------------------------------
Operating expenses:
Research and development 46,130 39,009 32,208
Sales and marketing 79,536 79,359 82,493
General and administrative 20,900 20,338 18,893
Non-recurring charges 8,373 38,363 18,094
- --------------------------------------------------------------------------------------------------
Total operating expenses 154,939 177,069 151,688
- --------------------------------------------------------------------------------------------------
Operating loss (16,594) (23,581) (6,492)
Other income (expense):
Interest income, net 2,291 2,302 2,703
Other expense, net (866) (394) (363)
- --------------------------------------------------------------------------------------------------
Loss before income taxes (15,169) (21,673) (4,152)
- --------------------------------------------------------------------------------------------------
Income taxes 1 741 1,956
- --------------------------------------------------------------------------------------------------
Net loss $ (15,170) $ (22,414) $ (6,108)
- --------------------------------------------------------------------------------------------------
Net loss per share $ (0.41) $ (0.62) $ (0.20)
- --------------------------------------------------------------------------------------------------
Common and common equivalents used in computing
net loss per share 36,628 36,179 30,922
- --------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 9
THE SANTA CRUZ OPERATION, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
----------------------
(In thousands, except for share data) 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 23,225 $ 32,065
Short-term investments 28,486 22,766
Receivables, net 36,546 47,176
Deferred tax assets 6,631 6,152
Other current assets 6,934 9,670
- -------------------------------------------------------------------------------------------
Total current assets 101,822 117,829
- -------------------------------------------------------------------------------------------
Property and equipment, net 13,666 15,546
Purchased software and technology licenses, net 16,523 19,908
Other assets 14,654 13,524
- -------------------------------------------------------------------------------------------
Total assets $ 146,665 $ 166,807
- -------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Royalties payable $ 11,262 $ 10,644
Trade accounts payable 8,600 12,755
Income taxes payable 1,101 3,369
Accrued expenses and other current liabilities 27,230 22,288
Deferred revenues 7,465 6,838
- -------------------------------------------------------------------------------------------
Total current liabilities 55,658 55,894
- -------------------------------------------------------------------------------------------
Other long-term liabilities 9,545 9,332
- -------------------------------------------------------------------------------------------
Shareholders' equity:
Common stock, net of notes receivable of $88 from an officer
of the Company, authorized 100,000,000 shares
Issued and outstanding 36,450,115 and 37,105,892 shares 119,287 125,172
Cumulative translation adjustment 639 (297)
Accumulated deficit (38,464) (23,294)
- -------------------------------------------------------------------------------------------
Total shareholders' equity 81,462 101,581
- -------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 146,665 $ 166,807
- -------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 10
THE SANTA CRUZ OPERATION, INC.
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, 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 asset 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
Issuance under stock option and
purchase plans 872 2,981 -- -- 2,981
Common stock repurchases (1,528) (9,110) -- -- (9,110)
Stock option income tax benefit -- 244 -- -- 244
Translation adjustment -- -- 936 -- 936
Net loss -- -- -- (15,170) (15,170)
- --------------------------------------------------------------------------------------------------
BALANCES, SEPTEMBER 30, 1997 36,450 $ 119,287 $ 639 $(38,464) $ 81,462
- --------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 11
THE SANTA CRUZ OPERATION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------
(In thousands) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(15,170) $(22,414) $ (6,108)
Adjustments to reconcile net loss to net cash
provided by operating activities -
Depreciation and amortization 16,312 16,151 10,369
Fixed assets received in lieu of payment -- -- (467)
Charge for purchased research and development -- 38,363 11,177
Deferred tax assets (1,017) (1,842) (4,673)
Stock option income tax benefit 244 263 1,533
Changes in operating assets and liabilities, net of acquisitions -
Receivables 10,630 (2,167) (5,176)
Other current assets 2,736 (336) (226)
Royalties payable 618 5,002 (543)
Trade accounts payable (4,155) 2,548 176
Income taxes payable (1,132) 423 (4,350)
Accrued expenses and other current liabilities 3,714 (7,333) 1,318
Deferred revenue 627 (1,673) (272)
- --------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 13,407 26,985 2,758
- --------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,796) (4,874) (9,940)
Purchase of software and technology licenses (5,188) (5,953) (4,868)
Sales of short-term investments 17,006 15,514 57,647
Purchases of short-term investments (22,726) (23,464) (20,851)
Purchase of Visionware -- -- (13,675)
Changes in other assets (499) (2,658) (1,960)
- --------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities (13,203) (21,435) 6,353
- --------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital leases (1,627) (3,924) (1,353)
Net proceeds from sale of common stock 2,981 2,742 3,263
Repurchases of common stock (9,110) (4,752) (7,489)
Other long-term liabilities (2,224) 588 575
- --------------------------------------------------------------------------------------------------------------
Net cash used for financing activities (9,980) (5,346) (5,004)
- --------------------------------------------------------------------------------------------------------------
Effects of exchange rate changes on cash and cash equivalents 936 (213) 264
- --------------------------------------------------------------------------------------------------------------
Change in cash and cash equivalents (8,840) (9) 4,371
Cash and cash equivalents at beginning of year 32,065 32,074 27,703
- --------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 23,225 $ 32,065 $ 32,074
- --------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid -
Income taxes $ 2,168 $ 1,955 $ 8,545
Interest 643 147 254
Non-cash financing and investing activities -
Assets recorded under capital leases $ 4,063 $ 2,676 $ 29
Networking technology buyout (see Note 6) -- 8,205 --
Purchase of UNIX assets with common stock -- 43,773 --
- --------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY SCO is a leading provider of UNIX-based, open system software. The
Company's products enable 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
distribution and development infrastructure to support its products.
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 lower of cost or net realizable
value.
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 with an original maturity of 90 days or less at the date of
acquisition to be cash equivalents. Short-term investments include instruments
with lives ranging from 91 days to three years. The Company classifies its
investments in certain debt and equity securities as available-for-sale. Such
investments are recorded at fair market value, based on quoted market prices,
and unrealized gains and losses are reported as a separate component of
shareholders' equity. As of September 30, 1997 and 1996, unrealized gains or
losses on such investments were not significant. The cost of securities is based
on the specific identification method.
PROPERTY AND EQUIPMENT Property and equipment are stated at cost and, except for
assets recorded under 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 recorded
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, ranging from one to ten years.
PURCHASED SOFTWARE AND TECHNOLOGY LICENSES Purchased software consists of core
intellectual property rights which the Company owns. Technology licenses
represent payments for the rights to use and integrate completed third party
technology into the Company's product offerings. Amounts capitalized are
amortized on a straight-line basis over the estimated product life, ranging from
three to six years, or on the ratio of current revenues to total projected
product revenues, whichever is greater.
ACCOUNTING FOR LONG-LIVED ASSETS The Company reviews property and equipment and
purchased software and technology licenses for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability is measured by comparison of its carrying amount
to future net cash flows the assets are expected to generate. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the asset exceeds its fair market value.
SOFTWARE DEVELOPMENT COSTS Statement of Financial Accounting Standard No. 86
provides for the capitalization of certain software development costs once
technological feasibility is established.
<PAGE> 13
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, 1997, 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 probable. For those agreements which provide the customer the right to
multiple copies in exchange for a nonrefundable 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 believes are 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, product acceptance
and delivery. 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 are 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 expenses advertising costs as incurred. 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. For 1997, 1996 and 1995 cooperative advertising expense totaled
approximately $8.6 million, $8.2 million and $6.2 million, respectively.
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 are considered. When necessary, a valuation allowance is
recorded to reduce tax assets to an amount whose realization is more likely than
not.
NET LOSS PER SHARE Net 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 October 1997, the AICPA issued Statement of
Position (SOP) 97-2, Software Revenue Recognition, which supersedes SOP 91-1.
The Company will be required to adopt SOP 97-2 prospectively for software
transactions entered into beginning October 1, 1998. SOP 97-2 generally requires
revenue earned on software arrangements involving multiple elements such as
software products, upgrades, enhancements, postcontract customer support,
installation and training, to be allocated to each element based on the relative
fair values of the elements. The fair value of an element must be based on
evidence which is specific to the vendor. The revenue allocated to software
products, including specified upgrades or enhancements generally is recognized
upon delivery of the products. The
<PAGE> 14
revenue allocated to postcontract customer support generally is recognized
ratably over the term of the support and revenue allocated to service elements
generally is recognized as the services are performed. If a vendor does not have
evidence of the fair value for all elements in a multiple-element arrangement,
all revenue from the arrangement is deferred until such evidence exists or until
all elements are delivered. The Company's management is currently evaluating
whether the adoption of SOP 97-2 will have a material impact on the Company's
results of operations.
The Financial Accounting Standards Board issued Statements of Financial
Accounting Standards (SFAS) No. 128, Earnings Per Share, in February 1997. SFAS
No. 128 requires the presentation of basic earnings per share (EPS) for all
companies, and diluted EPS for companies with complex capital structures or
potentially dilutive securities, such as convertible debt, options and warrants.
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.
STOCK-BASED COMPENSATION The Company accounts for its stock-based compensation
plans using the intrinsic value method. As such, compensation expense would be
recorded on the date of grant only if the current market price of the underlying
stock exceeded the exercise price.
FOREIGN CURRENCY TRANSLATION The functional currency of the Company's foreign
subsidiaries is the local foreign currency. All assets and liabilities
denominated in foreign currencies are translated into US dollars at the exchange
rate on the balance sheet date. Revenues, costs 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 and have not been significant.
HEDGING OF FOREIGN CURRENCY TRANSACTIONS The Company utilizes foreign currency
forward exchange contracts to hedge foreign currency market exposures of
underlying assets, liabilities and other obligations. The Company does not use
forward exchange contracts for speculative or trading purposes. The Company's
accounting policies for these instruments are based on the Company's designation
of such instruments as hedging transactions. The criteria the Company uses for
designating an instrument as a hedge include the instrument's effectiveness in
risk reduction and one-to-one matching of forward exchange contracts to
underlying transactions. Gains and losses on currency forward contracts that are
designated and effective as hedges of firm commitments are deferred and
recognized in income in the same period that the underlying transactions are
settled. Gains and losses on currency forward contracts that are designated and
effective as hedges of existing transactions are recognized in income in the
same period as losses and gains on the underlying transactions are recognized
and generally offset. Gains and losses on any instruments not meeting the above
criteria would be recognized in income in the current period. The Company
transacts business in various foreign currencies. During 1997, the Company
established hedging programs to protect against exposure on certain foreign
denominated transactions through the use of foreign currency forward exchange
contracts. At September 30, 1997, the Company had foreign exchange contracts,
all having maturities of 90 days or less, to purchase approximately $7,875,000
and sell approximately $2,250,000 in British Pounds.
The fair value of these contracts at September 30, 1997 is not significant. The
counterparties to these contracts are substantial and credit worthy
multinational commercial banks. The risks of counterparty nonperformance
associated with these contracts are not considered to be significant.
<PAGE> 15
NOTE 2 - CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
September 30,
---------------------
(In thousands) 1997 1996
- ---------------------------------------------------
<S> <C> <C>
Bank demand deposits $ -- $ 4,160
Certificates of deposit 2,173 676
Money market accounts 21,052 23,652
Corporate bonds -- 3,577
- ---------------------------------------------------
$23,225 $32,065
- ---------------------------------------------------
</TABLE>
NOTE 3 - SHORT-TERM INVESTMENTS
<TABLE>
<CAPTION>
September 30,
---------------------
(In thousands) 1997 1996
- ---------------------------------------------------
<S> <C> <C>
U.S. Treasury bills $ -- $ 119
U.S. Treasury notes 4,643 3,462
Certificates of deposit 1,145 1,136
Government agency bonds 10,351 10,450
Corporate bonds 12,347 7,599
- ---------------------------------------------------
$28,486 $22,766
- ---------------------------------------------------
</TABLE>
At September 30, 1997, investments with maturity dates ranging from 91 days to 1
year totaled $5.2 million, and investments with maturity dates ranging from 1
year to 3 years totaled $23.3 million.
NOTE 4 - RECEIVABLES
<TABLE>
<CAPTION>
September 30,
------------------------
(In thousands) 1997 1996
- -------------------------------------------------------------
<S> <C> <C>
Trade accounts receivable $ 47,425 $ 58,306
Less allowance for returns and
doubtful accounts (10,879) (11,130)
- -------------------------------------------------------------
$ 36,546 $ 47,176
- -------------------------------------------------------------
</TABLE>
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 years ended September 30, 1997, 1996 and 1995, no one
customer's balance exceeded 10% of trade receivables or accounted for greater
than 10% of the Company's revenues.
<PAGE> 16
NOTE 5 - PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
September 30,
------------------------
(In thousands) 1997 1996
- ----------------------------------------------------------------
<S> <C> <C>
Computer and office equipment $ 39,098 $ 34,284
Furniture and fixtures 7,469 7,245
Leasehold improvements 7,540 6,719
- ----------------------------------------------------------------
54,107 48,248
Less accumulated depreciation and
amortization (40,441) (32,702)
- ----------------------------------------------------------------
$ 13,666 $ 15,546
- ----------------------------------------------------------------
</TABLE>
NOTE 6 - PURCHASED SOFTWARE AND
TECHNOLOGY LICENSES
<TABLE>
<CAPTION>
September 30,
------------------------
(In thousands) 1997 1996
- --------------------------------------------------------------
<S> <C> <C>
Purchased software and
technology licenses, at cost $ 22,279 $ 23,128
Less accumulated amortization (5,756) (3,220)
- --------------------------------------------------------------
$ 16,523 $ 19,908
- --------------------------------------------------------------
</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. Installment
payments of $3.0 million were made during both fiscal 1996 and 1997. The present
value of the license is included in purchased software and technology licenses
in the Company's consolidated balance sheet. Amortization expense of $1.4
million in 1997 and $1.0 million in 1996 is included in cost of license revenues
in the Company's consolidated statements of operations.
NOTE 7 - BANK LINE OF CREDIT
At September 30, 1997, the Company had available lines of credit of
approximately $17.0 million. The domestic credit agreement provides that the
Company may borrow an amount equal to 75% of eligible accounts receivable,
subject to a total of $15.0 million. The interest rate on the domestic line of
credit is the prime rate and borrowings are unsecured. This line of credit was
not used during fiscal 1997. 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, 1997. The Company maintains a $2.0 million line of
credit internationally under which the Company had $.7 million in outstanding
borrowings at September 30, 1997. The interest rate on borrowings made against
this line of credit during fiscal 1997 was 2.125%.
NOTE 8 - ROYALTIES PAYABLE
Royalties payable represent obligations to pay authors of certain software
products under licensing agreements. Two corporate shareholders accounted for
$8.3 million and $7.6 million of the royalties payable balance at September 30,
1997 and 1996 respectively, and $4.2 million and $4.1 million of royalty expense
for fiscal 1997and 1996, respectively. One of the aforementioned shareholders
accounted for $7.4 million of royalty expense for fiscal 1995.
<PAGE> 17
NOTE 9 - ACCRUED EXPENSES AND OTHER
CURRENT LIABILITIES
<TABLE>
<CAPTION>
September 30,
---------------------
(In thousands) 1997 1996
- ---------------------------------------------------------------
<S> <C> <C>
Accrued wages, commissions, bonuses $ 7,236 $ 6,211
Accrued advertising 3,829 4,030
Accrued fringe benefits 2,488 2,075
Other accrued expenses 13,677 9,972
- ---------------------------------------------------------------
$27,230 $22,288
- ---------------------------------------------------------------
</TABLE>
NOTE 10 - COMMITMENTS
LEASE COMMITMENTS Future minimum lease payments under noncancelable operating
leases (with initial or remaining lease terms in excess of one year) and future
minimum capital lease payments as of September 30, 1997 were as follows:
<TABLE>
<CAPTION>
Capital Operating
(In thousands) Leases Leases
- ------------------------------------------------------------------------------
<S> <C> <C>
Year Ending September 30,
1998 $ 2,492 $ 8,141
1999 2,149 6,143
2000 744 5,787
2001 75 5,408
2002 27 4,949
Later years, through 2020 -- 23,766
------- --------
Total minimum lease payments 5,487 $ 54,194
========
Less amount representing interest 494
-------
Present value of net minimum capital lease
payments 4,993
Less current installments of
obligations under capital leases 2,171
- ------------------------------------------------------------------------------
Obligations under capital leases,
excluding current installments $ 2,822
- ------------------------------------------------------------------------------
</TABLE>
The cost of assets recorded under capital leases was $7.4 million and $3.6
million at September 30, 1997 and 1996, respectively. Accumulated amortization
on those dates was $2.2 million and $1.4 million, respectively.
Rent expense amounted to approximately $8.6 million, $8.2 million and $7.4
million in fiscal 1997, 1996 and 1995, 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 equivalent to agreements that would
be negotiated with independent third parties on an "arms-length" basis. The
remaining lease term of these facilities is between one and eight years. Rent
expense for these facilities amounted to approximately $1.4 million in each of
fiscal 1997, 1996 and 1995.
<PAGE> 18
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 was phased-in over three years. The Company matched 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 fiscal 1997, 1996
and 1995, the Company's total contributions towards the 401(k) plan amounted to
$.9 million, $.5 million and $.2 million, respectively.
NOTE 11 - SHAREHOLDERS' 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, 1997, 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 1997, 1996 and 1995, employees purchased 431,351, 317,722 and
376,047 shares at an average per share price of $4.81, $5.47 and $5.67,
respectively. The number of shares reserved for issuance under the Purchase Plan
increased by 750,000 shares in February 1997. As of September 30, 1997,
1,017,764 shares were reserved for future issuance.
1994 INCENTIVE STOCK OPTION PLAN As of September 30, 1997, the Company had
authorized 13,013,665 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.
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 1997, the number of shares available for issuance under the Director
Plan was increased by 200,000 shares from 550,000 shares to 750,000 shares.
A summary of the status of the Company's stock option plans as of September 30,
1997, 1996 and 1995, and changes during the years then ended on those dates is
presented below:
<PAGE> 19
<TABLE>
<CAPTION>
(In thousands, except 1997 1996 1995
per share price) --------------------- --------------------- ---------------------
Weighted- Weighted- Weighted-
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
Option and Director Plans (000) Price (000) Price (000) Price
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 6,419 $ 6.93 6,244 $ 6.60 4,470 $ 4.48
Granted 8,345 5.43 1,424 7.03 2,730 9.35
Exercised (441) 2.08 (506) 1.96 (528) 2.17
Cancelled (5,765) 7.62 (743) 7.73 (428) 7.52
------ ----- -----
Outstanding at end of year 8,558 5.25 6,419 6.93 6,244 6.60
====== ===== =====
Options exercisable at year-end 1,678 $ 5.54 2,468 $ 5.73 2,007 $ 3.84
Weighted-average fair value of
options granted during the year $ 2.13 $ 3.48
- -----------------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes information about stock options outstanding at
September 30,1997:
(In thousands)
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------- -------------------------------
Range of Number Weighted-Avg Number
Exercise Price Outstanding Remaining Weighted-Avg Exercisable Weighted-Avg
$2.00 increments at 9/30/97 Contractual Life Exercise Price at 9/30/97 Exercise Price
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ .41 - 1.50 265 2.2 years $ 1.19 265 $ 1.19
2.00 - 3.75 489 7.4 3.28 156 2.45
4.38 - 5.63 5,580 8.9 4.89 395 5.32
6.00 - 7.75 1,823 7.2 6.56 606 6.63
8.00 - 9.75 283 5.1 8.76 162 8.78
10.00 - 12.00 118 4.7 11.10 94 11.22
-------- - -------
$ .41 - 12.00 8,558 8.1 $ 5.25 1,678 $ 5.54
======== = =======
- -----------------------------------------------------------------------------------------------------
</TABLE>
PRO FORMA FAIR VALUE ACCOUNTING FOR STOCK-BASED COMPENSATION SFAS No. 123,
Accounting for Stock-Based Compensation, requires pro forma information
regarding net income and earnings per share be determined as if the Company had
accounted for it's employee stock options and other stock-based compensation
granted subsequent to September 30, 1995 under the fair value method of that
statement. The fair value of the options granted under the Incentive Option Plan
and the Director Option Plan was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1997 and 1996: risk-free interest rate of 6.19% for 1997 and
5.97% for 1996; dividend yield of 0%; volatility factor of the expected market
price of the Company's common stock of 55%; and a four year and five year
expected life for options granted to non-executives and executives,
respectively.
<PAGE> 20
The fair value for the Employee Stock Purchase Plan rights were also estimated
at the date of grant using a Black-Scholes option pricing model with the
following assumptions for 1997 and 1996: risk-free interest rates of 5.31% and
5.34%; dividend yield of 0%; volatility factor of 55%; and six month expected
life. The weighted average fair value of the ESPP rights granted in 1997 and
1996 was $ 1.71 and $ 2.01, respectively.
<TABLE>
<CAPTION>
(In thousands, except Fiscal Year Ended
per share price) September 30,
------------------------
1997 1996
- --------------------------------------------------------
<S> <C> <C>
Pro forma net loss (18,625) (23,376)
Pro forma loss per share (0.51) (0.65)
- --------------------------------------------------------
</TABLE>
During the initial phase-in period, the effects of applying SFAS No. 123 for
recognizing compensation expense may not be representative of the effects on the
reported net income or loss for future years because the options granted by the
Company vest over several years and additional awards may be made in the future.
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, 1997, 1996 and 1995, the
purchases and retirements of common stock under the systematic plan were 843,000
shares, 601,000 shares and 760,000 shares, respectively. Under the
non-systematic repurchase plan, the Company may repurchase up to 4,000,000
shares of its common stock. During the fiscal years ended September 30, 1997 and
1996, 685,000 and 88,000 shares, respectively, were repurchased and retired
under the non-systematic plan. Both the systematic and non-systematic plans have
been approved for continuance into fiscal 1998.
SHAREHOLDER RIGHTS In September 1997, the Company adopted a Shareholder Rights
Plan which provides existing stockholders with the right to purchase a partial
share of preferred stock for each share of common stock owned by the shareholder
in the event of certain changes in the Company's ownership. These rights may
serve as a deterrent to certain unauthorized takeover attempts which are not in
the best interests of shareholders. The rights expire in September 2007.
NOTE 12 - INCOME TAXES
Loss before income taxes for fiscal 1997, 1996 and 1995 include foreign pretax
profit (loss) of approximately $2.2 million, $2.2 million and $(.9) million,
respectively. The components of income taxes are as follows:
<PAGE> 21
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
-------------------------------
(In thousands) 1997 1996 1995
- -------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ (846) $ 301 $ 4,352
State (774) 814 (390)
Foreign 2,394 1,205 1,134
- -------------------------------------------------------------
Total current 774 2,320 5,096
- -------------------------------------------------------------
Deferred:
Federal 1,450 (1,684) (3,751)
State (308) (568) (928)
Foreign (2,159) 410 6
- -------------------------------------------------------------
Total deferred (1,017) (1,842) (4,673)
- -------------------------------------------------------------
Charge in lieu of income
tax expense related to
employee stock options 244 263 1,533
- -------------------------------------------------------------
$ 1 $ 741 $ 1,956
=============================================================
</TABLE>
Income taxes differ from the amount computed by applying the statutory federal
income tax rate to loss before income taxes as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
---------------------------------
(In thousands) 1997 1996 1995
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal income tax
benefit at 34% $ (5,157) $ (7,369) $ (1,412)
State income tax (benefit),
net of federal effect (714) 162 (870)
Non-deductible purchased
research and development 104 2,239 4,022
Foreign income taxed at
different rates 502 577 778
Research credit (2,122) (258) (400)
Change in the total
valuation allowance 7,854 5,398 (173)
Other, net (466) (8) 11
- -------------------------------------------------------------------------
$ 1 $ 741 $ 1,956
=========================================================================
</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:
<PAGE> 22
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
----------------------------------
(In thousands) 1997 1996 1995
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Deferred tax assets:
Accruals and reserve
accounts $ 6,130 $ 7,685 $ 4,822
Property and equipment 2,696 142 988
Purchased software -- 5,005 --
Net operating loss carryforwards 9,644 -- --
Research credit 6,715 4,593 4,030
Other credits 1,986 -- 683
- ----------------------------------------------------------------------
Total gross deferred tax assets 27,171 17,425 10,523
Less valuation allowance (17,452) (9,598) (4,200)
- ----------------------------------------------------------------------
Net deferred tax assets 9,719 7,827 6,323
- ----------------------------------------------------------------------
Deferred tax liabilities:
Purchased software 1,690 815 1,153
- ----------------------------------------------------------------------
Total deferred tax liabilities 1,690 815 1,153
- ----------------------------------------------------------------------
Net tax assets and liabilities $ 8,029 $ 7,012 $ 5,170
======================================================================
</TABLE>
The net change in the total valuation allowance for the years ended September
30, 1997, 1996 and 1995 was an increase (decrease) of approximately $7.9
million, $5.4 million and $(.2) million, respectively.
The Company's management believes the uncertainty regarding the timing of the
realization of net deferred tax assets requires a valuation allowance.
At September 30, 1997, the Company has net operating losses of $26.8 million
which expire in fiscal 2012, and foreign tax and research credit carryforwards
of approximately $2.0 million and $6.7 million, respectively, which expire in
fiscal 1998 through 2012.
At September 30, 1997, the foreign subsidiaries of the Company had cumulative
unremitted foreign earnings of approximately $2.8 million. Had these earnings
been repatriated during fiscal 1997, the incremental U.S. tax liability would
not have been material after taking into account underlying foreign tax credits
and the Company's unused carryforwards. The management intends to reinvest these
earnings indefinitely.
NOTE 13 - RESTRUCTURING CHARGE
A worldwide restructuring during the third quarter of fiscal 1997 resulted in a
one-time charge of $8.4 million. The charge included a 10% reduction in
headcount, elimination of lease obligations of non-essential facilities and a
write-off of certain acquired technologies. The majority of the reduction of
force was in manufacturing, product development and marketing. Of the $8.4
million, $5.3 million related to cash expenditures and $3.1 million related to
non-cash charges. As of September 30,1997, a total of 94 positions have been
eliminated. As a result of this restructuring, the Company 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. The Company anticipates that the majority of the payments will be
made by fiscal 1998.
The restructuring charge payable and payments against it can be summarized as
follows:
<PAGE> 23
<TABLE>
<CAPTION>
Reduction
(In thousands) in Force Facilities Technology Other Total
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Restructuring charge accrued $ 3,359 $ 1,925 $ 1,433 $ 1,656 $ 8,373
Payments / write-offs (2,551) (485) (1,433) (1,055) (5,524)
- ------------------------------------------------------------------------------------------------------
Accrual at end of year $ 808 $ 1,440 $ -- $ 601 $ 2,849
======================================================================================================
</TABLE>
NOTE 14 - ACQUISITIONS
VISIONWARE LIMITED In December 1994, the Company completed the acquisition of
Visionware Limited (Visionware), a developer and distributor of PC connectivity
software, 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 which $11.2 million related to non-tax
deductible purchased research and development for Visionware products which had
not yet reached technological feasibility and $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 1997 and 1996 and
$.7 million in fiscal 1995 and is included in cost of license revenues in the
Company's Consolidated Statements of Operations. The acquisition has been
accounted for using the purchase method of accounting and, therefore, the
results of operations of Visionware have been included in the consolidated
financial statements since December 1994.
UNIX ASSETS 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 newly issued shares of 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 are achieved. To date, distribution unit volume of UNIX has not
reached levels which have required the Company to make cash payments to Novell.
Such payments terminate at the end of calendar year 2002. Non-recurring charges
of $38.4 million were incurred in fiscal 1996 for costs allocated to in-process
research and development. The Company also purchased core intellectual property
totaling $5.8 million, software technology licenses totaling $5.5 million and
intangibles of $1.7 million.
NOTE 15 - INVESTMENTS
In November 1996, the Company purchased $2.0 million of convertible debentures
of a domestic distribution channel partner. The debentures can be converted, in
whole or in part, at any time prior to maturity on November 18, 1998, for
preferred stock equal to 19.9% of the fully diluted common stock outstanding. If
the Company does not convert the debenture, the partner will repay all principal
and interest in twelve equal quarterly installments commencing December 31,
1998.
In January 1995, the Company purchased 10% of another domestic distribution
channel partner's preferred 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 stock
or common stock. Interest on the outstanding borrowing is due and payable at the
loan's maturity.
At September 30, 1997, the Company had accounts receivable outstanding with the
related parties of $3.9 million. Sales to the related parties for fiscal 1997
were $18.3 million. One of the parties accounted for
<PAGE> 24
receivables of $1.6 million as of September 30, 1996, and sales of $7.7 million
and $4.6 million for fiscal 1996 and 1995, respectively.
NOTE 16 - INFORMATION BY GEOGRAPHIC AREA
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
-------------------------------------
(In thousands) 1997 1996 1995
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
NET REVENUES:
United States $ 113,328 $ 125,759 $ 111,530
Europe 77,931 80,603 87,799
Other international operations 2,401 1,528 --
- ----------------------------------------------------------------------------
Total net revenues $ 193,660 $ 207,890 $ 199,329
============================================================================
TRANSFERS BETWEEN GEOGRAPHIC AREAS:
United States $ 13,205 $ 16,894 $ 23,807
Europe 2,136 916 945
- ----------------------------------------------------------------------------
Total transfers $ 15,341 $ 17,810 $ 24,752
============================================================================
OPERATING EARNINGS (LOSS):
United States $ (17,496) $ (29,017) $ (5,111)
Europe 1,999 2,864 121
Other international operations 189 120 (1,052)
Eliminations (1,286) 2,452 (450)
- ----------------------------------------------------------------------------
Operating loss $ (16,594) $ (23,581) $ (6,492)
============================================================================
IDENTIFIABLE ASSETS:
United States $ 117,068 $ 135,040 $ 108,078
Europe 32,816 31,930 33,280
Other international operations 3,728 3,860 5,310
Eliminations (6,947) (4,023) (14,798)
- ----------------------------------------------------------------------------
Total assets $ 146,665 $ 166,807 $ 131,870
============================================================================
</TABLE>
Intercompany sales between geographic areas are accounted for at prices
representative of unaffiliated party transactions. "Other international
operations" includes a subsidiary in Japan.
NOTE 17 - SUBSEQUENT EVENT
In August 1993, a securities class action lawsuit was filed against the Company.
In November 1997, the lawsuit was settled for an insignificant amount, subject
to final court approval. The settlement was fully provided for at September 30,
1997.
<PAGE> 25
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, 1997 and 1996, 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, 1997.
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, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended September 30, 1997, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
San Jose, California
October 22, 1997
<PAGE> 26
THE SANTA CRUZ OPERATION, INC.
QUARTERLY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------------------------------------------------------
(In thousands, except Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30, June 30, Mar. 31, Dec. 31,
per share data) 1997 1997 1997 1996 1996 1996 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues:
Licenses $47,060 $ 26,728 $ 48,918 $ 51,846 $ 50,162 $ 49,404 $ 46,291 $ 43,175
Services 4,739 4,438 5,169 4,762 5,052 4,623 4,444 4,739
- -----------------------------------------------------------------------------------------------------------------------------
Net revenues 51,799 31,166 54,087 56,608 55,214 54,027 50,735 47,914
- -----------------------------------------------------------------------------------------------------------------------------
Cost of revenues:
Licenses 9,205 8,371 10,385 9,311 9,912 10,266 8,530 7,925
Services 4,595 4,455 4,642 4,351 4,333 4,491 4,374 4,571
- -----------------------------------------------------------------------------------------------------------------------------
Total cost of revenues 13,800 12,826 15,027 13,662 14,245 14,757 12,904 12,496
- -----------------------------------------------------------------------------------------------------------------------------
Gross margin 37,999 18,340 39,060 42,946 40,969 39,270 37,831 35,418
- -----------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Research and
development 10,825 11,055 12,284 11,966 11,071 10,617 9,376 7,945
Sales and marketing 17,868 20,197 20,695 20,776 20,386 19,575 19,676 19,722
General and
administrative 4,776 5,523 5,365 5,236 5,141 5,201 5,284 4,712
Non-recurring charges -- 8,373 -- -- -- -- -- 38,363
- -----------------------------------------------------------------------------------------------------------------------------
Total operating
expenses 33,469 45,148 38,344 37,978 36,598 35,393 34,336 70,742
- -----------------------------------------------------------------------------------------------------------------------------
Operating earnings (loss) 4,530 (26,808) 716 4,968 4,371 3,877 3,495 (35,324)
Other income (expense):
Interest income, net 630 396 628 637 646 547 480 629
Other income (expense), net 157 (661) (45) (317) (90) (16) (94) (194)
- -----------------------------------------------------------------------------------------------------------------------------
Profit (loss) before
income taxes 5,317 (27,073) 1,299 5,288 4,927 4,408 3,881 (34,889)
- -----------------------------------------------------------------------------------------------------------------------------
Income taxes 798 (2,444) 325 1,322 855 1,102 970 (2,186)
- -----------------------------------------------------------------------------------------------------------------------------
Net profit (loss) $ 4,519 ($24,629) $ 974 $ 3,966 $ 4,072 $ 3,306 $ 2,911 ($32,703)
- -----------------------------------------------------------------------------------------------------------------------------
Net profit (loss) per share $ 0.12 ($ 0.67) $ 0.03 $ 0.11 $ 0.11 $ 0.09 $ 0.08 ($ 0.99)
- -----------------------------------------------------------------------------------------------------------------------------
Weighted average
shares outstanding 37,720 36,547 37,522 37,683 38,150 38,502 38,164 32,968
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 27
DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
BOARD OF DIRECTORS CORPORATE OFFICERS DIVISIONAL OFFICERS
<S> <C> <C>
NINIAN EADIE ALOK MOHAN*+ MICK ADAMSON
President and Chief Executive Vice President and General
JEAN-FRANCOIS HEITZ Officer Manager, The Americas
Tarantella Business Unit
RONALD LACHMAN ED ADAMS+
Senior Vice President and SHEILA BAKER
ROBERT MCCLURE General Manager, Vice President, Strategic Business
The Americas Development
DOUG MICHELS
ALOK MOHAN RAY ANDERSON+ EDMUNDO COSTA
Senior Vice President, Vice President, The Americas,
R. DUFF THOMPSON Marketing, Channel Sales
Products Division
ENZO TORRESI DAVE CUSS
JIM CLARK+ Regional Vice President, (Nordic,
GIL WILLIAMSON Senior Vice President and Benelux, Iberia,
General Manager, Middle East, and Africa)
Asia/Pacific Operations
CHRIS FLYNN
JOHN LUHTALA*+ Regional Vice President, (Germany,
Senior Vice President, France,
Operations, and UK and India)
Chief Financial Officer
SHAMIM FORMOSO
HELENE MANN-BOUCHARD Vice President, The Americas,
Vice President, Worldwide Partner Programs
Customer
Delivery Systems
NIMER MAABADI
DAVID MCCRABB+ Vice President, The Americas,
Senior Vice President, Market Canada and Latin
Planning America
DOUG MICHELS LISA OZIMEK
Executive Vice President and Vice President, Platform
Chief Technology Officer Technology Group
ANTONIO PRIVITERA
JACK MOYER+ Regional Vice President, (Italy,
Vice President, Human Greece,
Resources Turkey, Eastern Europe, and
Central Asia)
STEVE SABBATH*+ RON RASMUSSEN
Vice President, Law and Vice President, Volume Systems
Corporate Af fairs, Group
Secretary
CHRIS SCHEYBELER
GEOFF SEABROOK+ Vice President, Client Integration
Senior Vice President and Development
General Manager,
EMEIA
CHARLIE SCIORRA
Vice President, U.S. Sales
JAMES WILT
Vice President, Business CRAIG SCOBIE
Development Vice President, U.S. Project Area
RICHARD TREADWAY
Vice President, Segment 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
<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.
33-24913) on Form S-8 of The Santa Cruz Operation, Inc. of our reports dated
October 22, 1997, relating to the consolidated balance sheets of The Santa Cruz
Operation, Inc. and subsidiaries as of September 30, 1997 and 1996, 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, 1997,
and the related schedule, which reports appear or are incorporated by reference
in the September 30, 1997 annual report on Form 10-K of The Santa Cruz
Operation, Inc.
/s/ KPMG Peat Marwick LLP
--------------------------------
San Jose, California
December 18, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 23,225
<SECURITIES> 28,486
<RECEIVABLES> 47,425
<ALLOWANCES> (10,879)
<INVENTORY> 1,510
<CURRENT-ASSETS> 101,822
<PP&E> 54,107
<DEPRECIATION> (40,441)
<TOTAL-ASSETS> 146,665
<CURRENT-LIABILITIES> 55,658
<BONDS> 0
0
0
<COMMON> 119,287
<OTHER-SE> (37,825)
<TOTAL-LIABILITY-AND-EQUITY> 146,665
<SALES> 174,552
<TOTAL-REVENUES> 193,660
<CGS> 37,272
<TOTAL-COSTS> 55,315
<OTHER-EXPENSES> 154,939
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,425
<INCOME-PRETAX> (15,169)
<INCOME-TAX> 1
<INCOME-CONTINUING> (15,170)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,170)
<EPS-PRIMARY> (0.41)
<EPS-DILUTED> (0.41)
</TABLE>
