<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO _______________
------------------------------------
COMMISSION FILE NUMBER 0-21484
THE SANTA CRUZ OPERATION, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN THIS CHARTER)
CALIFORNIA 94-2549086
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 ENCINAL STREET, SANTA CRUZ, CALIFORNIA 95060
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (408) 425-7222
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No _____
The number of shares outstanding of the registrant's common stock as of March
31, 1998 was 35,815,746
================================================================================
<PAGE> 2
THE SANTA CRUZ OPERATION, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ITEM 1. FINANCIAL STATEMENTS PAGE
<S> <C>
a) CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 1998 AND 1997......1
b) CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1998 AND SEPTEMBER 30, 1997.....................2
c) CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 1998 AND 1997................3
d) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS .......................4
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.................................................6
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................10
ITEM 6. EXHIBITS............................................................12
SIGNATURES ...............................................................................11
</TABLE>
<PAGE> 3
Part I. Financial Information
Item I. Financial Statements
THE SANTA CRUZ OPERATION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except earnings per share)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
1998 1997 1998 1997
--------- --------- --------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
NET REVENUES $ 50,540 $ 54,087 $ 98,037 $ 110,695
COST OF REVENUES 12,953 15,027 25,299 28,690
--------- --------- --------- ---------
GROSS MARGIN 37,587 39,060 72,738 82,005
--------- --------- --------- ---------
OPERATING EXPENSES:
Research and development 10,411 12,284 21,170 24,250
Sales and marketing 19,187 20,695 38,806 41,471
General and administrative 4,250 5,365 8,854 10,600
--------- --------- --------- ---------
Total operating expenses 33,848 38,344 68,830 76,321
--------- --------- --------- ---------
OPERATING INCOME 3,739 716 3,908 5,684
OTHER INCOME (EXPENSE):
Interest income, net 470 628 945 1,265
Other expense, net (52) (45) 49 (362)
--------- --------- --------- ---------
Income before income taxes 4,157 1,299 4,902 6,587
--------- --------- --------- ---------
Income taxes 956 325 1,277 1,647
--------- --------- --------- ---------
NET INCOME $ 3,201 $ 974 $ 3,625 $ 4,940
--------- --------- --------- ---------
NET INCOME PER SHARE:
Basic $ 0.09 $ 0.03 $ 0.10 $ 0.13
Diluted $ 0.09 $ 0.03 $ 0.10 $ 0.13
--------- --------- --------- ---------
SHARES USED IN INCOME PER SHARE CALCULATION:
Basic 36,094 36,611 36,221 36,762
Diluted 36,431 37,522 36,656 37,594
--------- --------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE> 4
THE SANTA CRUZ OPERATION, INC.
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
CONSOLIDATED BALANCE SHEETS 1998 1997
--------- -------------
(In thousands, except for share data) (UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 26,125 $ 23,225
Short-term investments 28,419 28,486
Receivables, net 38,050 36,546
Deferred tax asset 6,630 6,631
Other current assets 6,815 6,934
--------- ---------
Total current assets 106,039 101,822
--------- ---------
Property and equipment, net 13,875 13,666
Purchased software and technology licenses 14,329 16,523
Other assets 13,565 14,654
--------- ---------
TOTAL ASSETS $ 147,808 $ 146,665
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Royalties payable $ 6,944 $ 11,262
Trade accounts payable 11,916 8,600
Income taxes payable 1,710 1,101
Accrued expenses and other current liabilities 24,461 27,230
Deferred revenues 7,821 7,465
--------- ---------
Total current liabilities 52,852 55,658
--------- ---------
Other long-term liabilities 13,015 9,545
--------- ---------
SHAREHOLDERS' EQUITY
Common stock, net, authorized 100,000,000 shares
Issued and outstanding 35,815,746 and 36,450,115 shares 115,759 119,287
Cumulative translation adjustment 1,021 639
Accumulated deficit (34,839) (38,464)
--------- ---------
Total shareholders' equity 81,941 81,462
========= =========
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 147,808 $ 146,665
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 5
THE SANTA CRUZ OPERATION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
March 31,
1998 1997
-------- --------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,625 $ 4,940
Adjustments to reconcile net income to net cash
provided by operating activities -
Depreciation and amortization 6,979 9,350
Deferred tax assets (102) (102)
Exchange gain (362) --
Stock option income tax benefit -- 229
Changes in operating assets and liabilities -
Receivables (897) (4,159)
Other current assets 244 1,866
Royalties payable (4,311) (2,893)
Trade accounts payable 3,119 (2,849)
Income taxes payable 539 (2,066)
Accrued expense and other current liabilities (3,956) 3,360
Deferred revenue 505 1,875
-------- --------
Net cash provided by operating activities 5,383 9,551
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,128) (2,079)
Purchases of software and technology licenses (1,121) (3,635)
Sales of short-term investments 14,242 7,381
Purchases of short-term investments (14,175) (9,405)
Changes in other assets 1,080 (3,640)
-------- --------
Net cash used for investing activities (1,102) (11,378)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease (1,166) (652)
Net proceeds from sale of common stock 969 1,727
Payments on stock repurchases (4,497) (6,666)
Other long-term liabilities 2,965 2,404
-------- --------
Net cash used for financing activities (1,729) (3,187)
-------- --------
Effects of exchange rate changes on cash and cash equivalents 348 92
-------- --------
Change in cash and cash equivalents 2,900 (4,922)
Cash and cash equivalents at beginning of period 23,225 32,065
-------- --------
Cash and cash equivalents at end of period $ 26,125 $ 27,143
-------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid-
Income taxes $ 733 $ 3,636
Interest 524 139
Non-cash financing and investing activities-
Assets recorded under capital leases $ 2,574 $ 2,449
-------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 6
THE SANTA CRUZ OPERATION,INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited, consolidated
statements of operations, balance sheets and statements of cash flows have
been prepared in accordance with generally accepted accounting principles
and include all material adjustments (consisting of only normal recurring
adjustments) necessary for their fair presentation. The financial
statements include the accounts of the Company and its wholly owned
subsidiaries after all material intercompany balances and transactions
have been eliminated. The Notes to Consolidated Financial Statements
contained in the fiscal year 1997 report on form 10K should be read in
conjunction with these Consolidated Financial Statements. The consolidated
interim results presented are not necessarily indicative of results to be
expected for a full year. Certain reclassifications have been made for
consistent presentation. The September 30, 1997 balance sheet was derived
from audited financial statements, and is included for comparative
purposes.
2. EARNINGS PER SHARE (EPS) DISCLOSURES
The Company has adopted the provisions of Statement of Financial
Accounting Standards No. 128 (SFAS 128), Earnings Per Share, effective
December 31, 1997. SFAS 128 requires the presentation of basic and diluted
earnings per share. Basic EPS is computed by dividing income available to
common stockholders by the weighted average number of common shares
outstanding for the period. Diluted EPS is computed giving effect to all
dilutive potential common shares that were outstanding during the period.
Dilutive potential common shares consist of the incremental common shares
issuable upon the exercise of stock options for all periods. All prior
period earnings per share amounts have been restated to comply with SFAS
128. Basic and diluted earnings per share were calculated as follows
during the three month and six month periods ended March 31, 1998 and
1997:
<TABLE>
<CAPTION>
(In thousands, except per share and option data) Three Months Ended Six Months Ended
March 31, March 31,
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Basic:
Weighted average shares 36,094 36,611 36,221 36,762
Net income $ 3,201 $ 974 $ 3,625 $ 4,940
Net income per share $ 0.09 $ 0.03 $ 0.10 $ 0.13
Diluted:
Weighted average shares 36,094 36,611 36,221 36,762
Common equivalent shares from
stock options and warrants 337 911 435 832
---------- ---------- ---------- ----------
Shares used in per share calculation 36,431 37,522 36,656 37,594
========== ========== ========== ==========
Net income $ 3,201 $ 974 $ 3,625 $ 4,940
Net income per share $ 0.09 $ 0.03 $ 0.10 $ 0.13
Options outstanding at 3/31/98 and at 3/31/97
not included in computation of
diluted EPS because the options' exercise
price was greater than the average market
price of the common shares 7,271,036 2,617,903 6,497,155 3,317,704
Price range of options not used in
diluted EPS calculation $4.44-12.00 $7.63-13.94 $4.88-12.00 $7.13-13.94
</TABLE>
4
<PAGE> 7
3. RECENT ACCOUNTING PRONOUNCEMENTS
In October 1997, the AICPA issued Statement of Position (SOP) 97-2,
Software Revenue Recognition, which supersedes SOP 91-1. It provides
guidance on applying generally accepted accounting principles in
recognizing revenue on software transactions. Different interpretations of
a provision of SOP 97-2 have arisen with the result that the effective
date of that provision of SOP 97-2 for certain transactions has been
deferred for one year. The Company will be required to adopt SOP 97-2
prospectively for software transactions entered into beginning October 1,
1998. The Company's management is currently evaluating whether the
adoption of SOP 97-2 will have a material impact on the Company's
financial position or results of operations.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 (SFAS 130), Reporting Comprehensive
Income. This statement establishes requirements for disclosure of
comprehensive income and becomes effective for the Company for fiscal
years beginning after December 15, 1997, with reclassification of earlier
financial statements for comparative purposes. Comprehensive income
generally represents all changes in stockholders' equity except those
resulting from investments or contributions by stockholders. The Company
is evaluating alternative formats for presenting this information, but
does not expect this pronouncement to materially impact the Company's
results of operations.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, (SFAS 131), Disclosures about
Segments of an Enterprise and Related Information. This statement
establishes standards for disclosure about operating segments in annual
financial statements and selected information in interim financial
reports. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. This
statement supersedes Statement of Financial Accounting Standards No. 14,
Financial Reporting for Segments of a Business Enterprise. The new
standard becomes effective for fiscal years beginning after December 15,
1997, and requires that comparative information from earlier years be
restated to conform to the requirements of this standard. The Company is
evaluating the requirements of SFAS 131 and the effects, if any, on the
Company's current reporting and disclosures.
5
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
In addition to historical information contained herein, this Discussion and
Analysis may contain forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
reflect management's analysis only as of the date hereof. The Company undertakes
no obligation to publicly release the results of any revision to these
forward-looking statements, which may be made to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
RESULTS OF OPERATIONS
NET REVENUES
Net revenues for the three months ended March 31, 1998 were $50.5 million as
compared to $54.1 million for the same period in fiscal year 1997. For the six
months ended March 31, 1998, net revenues decreased 11% to $98.0 million from
$110.7 million in the six months ended March 31, 1997. This quarter's decline
resulted in part from continued weakness in the Asian market due to currency
instability as well as competitive pressures that impacted the Company's
Openserver volume. No one customer accounted for more that 10% of net revenues
for the three and six month periods ending March 31, 1998 and March 31, 1997.
International revenues continue to be a significant portion of net revenues,
comprising 54% of the revenues for the second fiscal quarter of 1998, and 50%
for the same quarter in fiscal year 1997.
COST AND EXPENSES
Cost of revenues as a percentage of net revenues decreased to 26% in the second
quarter of 1998 from 28% for the same period in 1997. Lower technology costs as
certain purchased technology licenses were fully amortized was the main driver
of that decline. For the six months ended March 31, 1998 and 1997, the cost of
revenues represented 26% of net revenues.
Research and development expenses decreased 15% to $10.4 million for the quarter
ended March 31, 1998 (21% of net revenues) compared to $12.3 million (23% of net
revenues) for the same quarter in 1997. For the six months ended March 31, 1998,
research and development expenses were $21.2 million, representing a 13%
decrease compared to $24.3 million, however remained stable at 22% of net
revenues. The spending decrease is primarily attributable to reduced staffing
levels initiated with the restructuring of operations in the third quarter of
fiscal 1997.
Sales and marketing expenses decreased 7% to $19.2 million for the second
quarter of fiscal 1998 from $20.7 million for the comparable period in 1997,
representing 38% of net revenues in both periods. For the six months ended March
31, 1998, sales and marketing expenses decreased to $38.8 million (40% of net
revenues) from $41.5 million (37% of net revenues) for the same period of the
prior fiscal year. The decline in absolute dollars resulted principally from
reduced labor costs through lower headcount.
General and administrative expenses decreased 21% to $4.3 million or 8% of net
revenues, for the three months ended March 31, 1998 from $5.4 million or 10% of
net revenues, for the same period in 1997. For the six months ended March 31,
1998, general and administrative expenses decreased 16% to $8.9 million from
$10.6 million for the same period of the prior year, representing 9% and 10% of
net revenues, respectively. Reduced headcount, a drop in legal costs and lowered
discretionary spending resulted in the decline.
Other income consists of net interest income, foreign exchange gain and loss as
well as other miscellaneous income and expense items. For the second quarter of
fiscal 1998, other income was $0.4 million, compared to $0.6 million for the
same quarter of fiscal 1997. The decrease in other income in the second quarter
of fiscal 1998 was due primarily to an increase in usage of the lease line of
credit and discount amortization resulting from a technology buyout. For the six
months ended March 31, 1998, other income was $1.0 million as compared to $0.9
million for the same period in 1997. This increase was due to foreign exchange
translation gains in 1998 in the Company's UK subsidiary.
6
<PAGE> 9
The provision for income taxes was $1.0 million for the second quarter of fiscal
1998 compared to $0.3 million for the same period of the prior fiscal year, and
$1.3 million for the six months ended March 31, 1998 compared with $1.6 million
for the corresponding fiscal 1997 period. The tax provision for the current
fiscal year resulted from foreign taxes paid. The tax provision for the prior
fiscal year reflects taxes provided on operations at an effective tax rate of
25%. The tax provisions for fiscal 1998 and fiscal 1997 reflect the realization
of certain deferred tax assets for which a valuation allowance was previously
established.
Net profit for the three months ending March 31, 1998 was $3.2 million, triple
the $1.0 million earned in the same period of 1997. For the six months ended
March 31,1998, net profit was $3.6 million compared to $4.9 million in the same
period in 1997.
CERTAIN FACTORS BEARING ON FUTURE RESULTS
The Company's future operating results may be affected by various uncertain
trends and factors which are beyond the Company's control. These include adverse
changes in general economic conditions and rapid or unexpected changes in the
technologies affecting the Company's products. The process of developing new
high technology products is complex and uncertain and requires accurate
anticipation of customer needs and technological trends. The industry has become
increasingly competitive and, accordingly, the Company's results may also be
adversely affected by the actions of existing or future competitors, including
the development of new technologies, the introduction of new products, and the
reduction of prices by such competitors to gain or retain market share. The
Company's results of operations could be adversely affected if it were required
to lower its prices significantly.
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.
As the Company determines that it is more likely than not able to utilize its
tax carryforwards and other deferred tax assets in the future and as new tax
legislation is enacted, the Company's effective tax rate is subject to change.
7
<PAGE> 10
The Company depends on information received from external sources in evaluating
the inventory levels at distribution partners in the determination of
contingency reserves for the return of materials not sold, stock rotation, price
protection, etc. Significant effort has gone into developing systems and
procedures for determining the appropriate reserve level. Control review by an
independent third party has confirmed that the procedures are acceptable.
A substantial portion of the Company's revenues are derived from outside the
United States. Trade sales to international customers represented 54% and 50% of
total revenues for the first quarter of fiscal 1998 and 1997, respectively. A
substantial portion of these international revenues are denominated in the U.K.
pound sterling and operating results can vary with changes in the U.S. dollar
exchange rate for such currency. The Company's revenues can also be affected by
general economic conditions in the United States, Europe and other international
markets. The Company's operating strategy and pricing take into account changes
in exchange rates over time. However, the Company's results of operations may be
significantly affected in the short term by fluctuations in foreign currency
exchange rates.
The Company has adopted a strategy of reviewing and forecasting all material
foreign denominated assets and liabilities to cover any potential transactional
gain or loss which may occur should exchange rates change significantly. The
Company may employ hedging instruments to offset uncovered exposure.
The Company'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.
Many computer systems experience problems handling dates beyond the year 1999.
Therefore, some computer software will need to be modified prior to the year
2000 in order to remain functional. The Company has assessed both the readiness
of its internal computer systems and the compliance of its software sold to
customers for handling the year 2000 issue. The Company has designed and tested
the most current versions of its products to be year 2000 compliant. However,
there can be no assurances that the Company's current products do not contain
undetected errors or defects associated with year 2000 date functions that may
result in material costs to the Company. The Company has also instituted a
warranty program to support earlier product versions and provide corrections
where necessary. The Company does not believe that the cost of such actions will
have a material effect on the Company's results of operations or financial
condition. The Company expects to implement successfully the internal
information systems changes necessary to address year 2000 issues by the end of
fiscal 1998, however, there can be no assurances that such changes will be fully
completed in a timely manner. Moreover, the Company could be adversely impacted
by year 2000 issues faced by major distributors, suppliers, customers and
financial service organizations with which the Company interacts.
8
<PAGE> 11
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and short-term investments totaled $54.5 million at March 31,
1998, representing 37% of total assets. The six month increase in cash and
short-term investments of $2.8 million was primarily attributable to funding
received from OEM partners in excess of funds spent in a joint product
development program with those partners. At March 31, 1998, the Company had
available lines of credit of approximately $17.0 million under which the Company
had $0.4 million in outstanding borrowings. The Company believes that its
existing cash and short-term investments, funds generated from operations and
available borrowing capabilities will be sufficient to meet its operating
requirements through at least calendar 1998.
The Company's second quarter ended March 31, 1998 Days Sales Outstanding (DSO)
was 67.8 days, a 4.3 day increase from the first quarter ended December 31,
1997. The increase was primarily attributable to revenue growth and a 5%
increase in the percentage of revenue in the third month of the quarter as
compared to total quarterly revenue, thus increasing ending accounts receivable.
The Company is engaged in a systematic repurchase of the Company's Common Stock
for the funding of its employee programs. Additionally, the Company is
authorized to buy back up to 4,000,000 additional shares. As of March 31, 1998,
1,087,350 shares had been repurchased and retired under this non-systematic
program.
9
<PAGE> 12
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Santa Cruz Operation, Inc. held an annual meeting of shareholders on
February 17, 1998. The following matters were approved by the
shareholders by the votes indicated:
<TABLE>
<CAPTION>
MATTER NUMBER OF SHARES
- ------ ----------------
FOR WITHHELD
--- --------
<S> <C> <C>
ELECTION OF DIRECTORS:
Ninian Eadie 32,524,316 727,188
Jean-Francois Heitz 32,476,709 774,795
Ronald Lachman 32,522,668 728,836
Robert M. McClure 32,485,630 765,874
Douglas L. Michels 32,473,979 777,525
Alok Mohan 32,496,486 755,018
R. Duff Thompson 32,524,816 726,688
Enzo Torresi 32,524,177 727,327
Gilbert Williamson 32,519,870 731,634
</TABLE>
<TABLE>
<CAPTION>
BROKER
OTHER MATTERS: FOR AGAINST ABSTAIN NON-VOTES
--- ------- ------- ---------
<S> <C> <C> <C> <C>
Amendment of the Company's 1994 20,210,214 2,829,910 116,819 10,094,561
Incentive Stock Option Plan to
increase the Plan share reserve by
2,000,000 shares.
Amendment of the Company's 1993 20,830,485 3,220,937 119,005 9,081,077
Director Option Plan to increase the
Plan share reserve by 200,000 shares.
Amendment of the Company's 1993 23,327,664 758,219 84,544 9,081,077
Employee Stock Purchase Plan to
increase the Plan share reserve by
750,000 shares.
Ratification of Coopers & Lybrand, 33,011,121 137,375 103,008 -0-
L.L.P. as independent certified public
accountants of the Company.
</TABLE>
ITEM 6. EXHIBITS
(a) Exhibits
27. Financial Data Schedule.
ITEMS 1, 2, 3, AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
10
<PAGE> 13
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
The Santa Cruz Operation, Inc.
Date: May 15, 1998 By: /s/ John Luhtala
------------------------------------
John Luhtala
Senior Vice President, Operations,
and Chief Financial Officer
By: /s/ Randy Bresee
------------------------------------
Randy Bresee
Vice President, Corporate Controller
11
<PAGE> 14
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 26,125
<SECURITIES> 28,419
<RECEIVABLES> 46,787
<ALLOWANCES> (8,737)
<INVENTORY> 1,582
<CURRENT-ASSETS> 106,039
<PP&E> 58,589
<DEPRECIATION> (44,714)
<TOTAL-ASSETS> 147,808
<CURRENT-LIABILITIES> 52,852
<BONDS> 0
0
0
<COMMON> 115,759
<OTHER-SE> (33,818)
<TOTAL-LIABILITY-AND-EQUITY> 81,941
<SALES> 46,977
<TOTAL-REVENUES> 50,540
<CGS> 8,809
<TOTAL-COSTS> 12,953
<OTHER-EXPENSES> 33,848
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 233
<INCOME-PRETAX> 4,157
<INCOME-TAX> 956
<INCOME-CONTINUING> 3,201
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,201
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.09
</TABLE>
