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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, 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 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 (831) 425-7222
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
PREFERRED SHARE PURCHASE RIGHTS COMMON STOCK, NO PAR VALUE
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. [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
15, 1998 as reported on the Nasdaq National Market was approximately
$80,222,235. 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 15, 1998, registrant had 34,372,468 shares of
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1998 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 22, 1999 to
be delivered to shareholders in connection with the Annual Meeting of
Shareholders to be held February 23, 1999 are incorporated
by reference into Part III.
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PART I
THE SANTA CRUZ OPERATION, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
<TABLE>
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PART I PAGE NUMBER
<S> <C>
Item 1. Business 1
Item 2. Properties 14
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Executive Officers of the Registrant 14
PART II
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters 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
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PART I
ITEM 1. BUSINESS
INTRODUCTION
The Santa Cruz Operation, Inc. (SCO or the Company) was incorporated in
California in 1979 and shipped its first product, SCO(R) XENIX(R) System V, a
packaged version of the UNIX(R) operating system, in 1983. In 1985, the Company
introduced its first operating system for the 32-bit Intel(R) microprocessor
environment, SCO XENIX 286, and followed with its SCO XENIX 386 in 1987. The
Company first shipped its UNIX trademarked commercial product, SCO UNIX System
V/386, for the Intel CPU-based platforms in 1989 and followed with an
integrated, graphical version of this product, SCO Open Desktop(R), in 1990. In
1993, the Company introduced two families of systems software--SCO
OpenServer(TM) products, a complete line of advanced server and SCO Open Desktop
products, a complete line of advanced workstation (client) operating systems. In
1995, SCO integrated these products into a single line, called the SCO
OpenServer family. SCO also introduced its SCO Vision family of
client-integration products, which integrate Windows(R) PC's with UNIX Servers
from all major UNIX vendors. SCO also created a Optional Services 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 1998, the Company launched UnixWare 7, began moving toward to a new
electronic distribution system and formed a new management team. Also in 1998,
SCO announced a that it had entered into a strategic business agreement with IBM
to jointly develop a UNIX system for the forthcoming Intel IA-64 processors. The
purpose of this alliance is to create a single product line that will run on
Intel IA-32, Intel IA-64 and IBM microprocessor systems that range from
entry-level servers to large enterprise environments.
SCO's mission is to provide the system software that system builders choose for
network computing. Designed specifically for network computing, SCO system
software products help organizations extend their business-critical applications
inside and outside the enterprise to employees, customers, and partners without
disrupting their current operations or replacing their current system. The two
key elements of Network Computing are, first, powerful, scalable and reliable
servers; and, second, support for a wide range of clients.
To facilitate network computing in the enterprise, SCO 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 its strategic alliances 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.
This report contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
reflect management's expectations 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.
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
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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, together with declining costs for both system
memory and data storage, have given PCs the power to process large volumes of
business-critical data. These developments have accelerated the emergence of a
new computing paradigm in which central processing on mainframes or
minicomputers is being replaced by processing distributed between desktop PC or
workstation "clients," which handle user interface and application logic, and
business critical servers responsible for shared access to enterprise data,
business-critical applications, database management, and data security. This
approach, in principle, combines the efficiency of desktop processing with
access to enterprise-wide data and applications. However, the leading operating
system for Intel CPU-based client PCs, (Microsoft Windows or Windows NT(R)) 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 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
price-performance benefits of client/server computing.
A major drawback 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(R) 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 multiple
applications simultaneously, they are especially well suited for business
critical servers that provide data access and business-critical applications to
users throughout the enterprise.
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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 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 stand-alone 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, 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 success depends 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 achieve revenue growth and profitability on a
quarterly or annual basis. SCO's strategy includes 10 key elements:
1) FOCUSING 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 and
telecommunications.
2) 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
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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 to support its Windows Integration strategy. 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.
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.
3) SUPPORTING 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 types of 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, Inprise,
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.
4) DELIVERING 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 resellers 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.
5) SUPPLYING MIDDLEWARE FOR MULTIPLE HARDWARE PLATFORMS
Middleware products and technologies represent a class of system software that
enhances the basic operating system. SCO's Optional Service Products division is
tasked with providing middleware for SCO OpenServer Systems, as well as other
UNIX servers.
6) PROVIDING 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
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vendors and applications, the Company believes there are currently over 15,000
business-critical software solutions compatible with SCO's products.
7) LEVERAGING 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 OpenServer 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.
8) DISTRIBUTING PRODUCTS WORLDWIDE
In contrast to operating system software for stand-alone 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.
9) EVANGELIZING 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.
10) EXECUTING 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, distribution and representative 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.
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.
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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.
PRODUCTS
The Company offers three categories of products: (1) UNIX server operating
system products, which include optional server products, (2) Tarantella, the
world's first Application Broker, and 3) client-integration products.
SCO UNIXWARE PRODUCTS
Designed from the ground up to support distributed network computing, UnixWare 7
delivers purpose-built operating system configurations designed to power
departmental databases, application servers, intranet servers, mail and
messaging servers and environments specifically tailored to run
telecommunications and other embedded environments. UnixWare 7 is supported by
leading enterprise application vendors, and backed by more enterprise hardware
manufacturers than any other UNIX server environment.
As an applications server, SCO UnixWare 7 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
levels 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 7 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.
BASE UNIXWARE OPERATING SYSTEMS
UnixWare 7 Base Edition: Base-line services for the individual workstation user
or as a platform for building dedicated environments, such as a telephony or
embedded solution.
UnixWare 7 Enterprise Edition: A highly available, scalable, high-performance,
network-ready and secure operating environment to run enterprise-wide business
applications that manage, distribute and warehouse business critical
information.
UnixWare 7 Departmental Edition: A high-performance and reliable operating
environment that supports any client and runs applications that automate
business processes and reliably share business critical information.
UnixWare 7 Messaging Edition: Scalable, reliable and advanced mail and messaging
system that includes all of the components required to run a powerful Email
solution.
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.
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Base SCO OpenServer Operating Systems--
SCO OpenServer Enterprise System: 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: 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: An advanced, single-user operating system that
delivers secure workstation capabilities and performance on cost-effective Intel
platforms.
SCO OPTIONAL SERVICES PRODUCTS
SCO Optional Services Products include The SCO Internet Family of products, plus
SCO Advanced File and Print Server, SCO(R) ARCserve(R)/Open from Cheyenne(R),
and SCO Doctor(TM).
The SCO Internet Family. 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 optional 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
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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 regular
phone lines to ensure that the widest range of UNIX systems can, at last,
"afford" to be managed. It includes a full-featured set of facilities for file
transfer, remote command execution and remote login facilities. By incorporating
powerful remote communications features, the need to purchase a separate
communications product is eliminated.
TARANTELLA
Tarantella is the first application broker for network computing. Tarantella
provides any client device on the network with secure, Web browser access to any
server application on the network. This enables organizations to provide anyone,
inside or outside the enterprise, with secure access to their current
business-critical applications.
Running on any UNIX server -- including those from Sun, IBM, HP, and Siemens --
Tarantella software immediately enables any application to be accessed by any
user device with a Web browser (PC, network computer, graphical terminal,
palmtop computer, or other device). Unlike other client-integration solutions,
Tarantella usually requires no software to be installed on the user devices.
This dramatically reduces the cost, time, and labor of moving to Internet-based
network computing. Unlike competing products that provide access to only one
kind of application, Tarantella provides access to mainframe and minicomputer
applications, X applications, and even Windows applications.
Tarantella dramatically lowers the total cost of ownership by supporting
hardware and software already in use, by eliminating the cost of installing
software on clients, and by providing centralized system administration. With
Tarantella, organizations can move their current applications onto the network
without rewriting code or disrupting their current operations.
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. SCO Vison97 offers 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 PCs directly connected to the network
and those connected remotely over a modem link.
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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
Premier Motif, which provides Windows management technology, 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 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 continues to drive the Small and Medium Business market forward with
new products, such as SCO OpenServer Release 5.0.5, which incorporates the
latest Internet and multimedia technologies, and the new UnixWare 7 Business
Edition, scheduled for release in 1999. Many of today's largest retail chains,
with numerous replicated sites, depend on SCO OpenServer to run their day-to-day
operations.
For enterprise environments, SCO this year launched UnixWare 7 - the most
advanced operating system for the Intel platform. It combines the power,
reliability, availability, and scalability of UNIX systems with the volume
economics of Intel processors.
Meanwhile, SCO is also accelerating its growth into the enterprise computing
market with Tarantella, the first application broker for network computing.
Tarantella provides virtually any client device on the network with secure, Web
browser access to any server application on the network.
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SALES AND DISTRIBUTION
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. 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 180 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:
* 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.
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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, Inc.
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, Pentium II 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 has taken strong steps to mitigate operating system date processing errors
that might occur with the onset of the Year 2000 (Y2K). SCO has:
o Issued a Year 2000 Date Processing Warranty that defines how we expect
our products to perform when processing dates in the Year 2000.
o Published the SCO Year 2000 Whitepaper detailing how Year 2000 affects
SCO products and what products are covered by the Year 2000 Date
Processing Warranty.
o Performed Year 2000 testing of all current SCO products.
o Prepared fixes for Year 2000 problems that have been detected in current
SCO supported products.
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, code-named Monterey64. 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. 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 and "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 can be 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.
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The Company anticipates new releases of products in the fiscal year ending
September 30, 1999. There can be 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 operating systems is very competitive and rapidly changing. The
Company encounters significant competition from a limited number of direct
competitors including Microsoft, Novell, IBM and Sun Microsystems, which offer
hardware-independent multi-user operating systems for Intel platforms, and from
OEMs such as AT&T, Compaq, 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. Over the past months competition from companies
selling versions of the Linux Operating System has increased. 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
increasingly penetrate the markets for larger and multiprocessor servers, SCO
will increasingly face competition from IBM's AS/400, Compaq's Alpha-based
servers, and Sequent servers.
Competitive systems not based on Intel microprocessors are offered by DEC,
Hewlett-Packard, IBM, and Sun Microsystems, 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.
Over recent years, operating systems such as GNU, Linux, FreeBSD and others
developed using collaborative and "open source" techniques have gained
popularity with highly technical users, and some integrators. Some of SCO's
competitors may exploit this technology to build competitive products, or the
market for SCO's products may be reduced by either technical users using these
products or the products becoming easier to use and more stable.
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.
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
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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.
SCO's Tarantella product faces competition from products using technologies to
deploy applications -- such as terminal emulation, compression systems, virtual
private networks -- and also faces competition from products taking a similar
approach to web-enabling applications. These include offerings from companies
such as WRQ, Hummingbird and GraphOn. In addition, products that deploy Windows
applications only can be configured with additional functions such as terminal
emulators to provide functional behavior similar to that of Tarantella. These
products include CITRIX, NCD WinCenter, and Microsoft Windows Terminal Server.
SCO is targeting Tarantella products and services into the enterprise market
where SCO does not have a strong range of partners and where the SCO brand is
little known, making alternative suppliers a competitive threat. SCO's
Tarantella products run on Solaris, AIX, HP/UX and other UNIX operating systems,
and therefore are dependant on continued use of these products in the target
markets. Tarantella aims to support many different server types and client
types, but it is possible that client or server vendors could "close" access to
their products to prevent customers from using Tarantella.
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. 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.
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EMPLOYEES
As of September 30, 1998, the Company had 1,136 employees, including 363 in
product development, 380 in sales and marketing, 152 in customer support
services, and 241 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 Murray Hill, 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 and
representative 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
No material legal proceedings are pending to which the Company is a party or to
which any property of the Company is subject.
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 1998.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company as of September 30, 1998 were as follows:
<TABLE>
<CAPTION>
Name Age Position with the Company
- ---- --- -------------------------
<S> <C> <C>
Douglas L. Michels 44 President and Chief Executive Officer
Ray Anderson 40 Senior Vice President, Marketing
John Luhtala 55 Senior Vice President, Operations, and Chief Financial
Officer
David McCrabb 50 Executive Vice President, Worldwide Sales and Field
Operations
Jack Moyer 49 Senior Vice President, Human Resources
Steve Sabbath 51 Senior Vice President, Law and Corporate Affairs, and
Secretary
Geoff Seabrook 50 Senior Vice President, Corporate Development
James Wilt 52 Senior Vice President, Products
</TABLE>
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Mr. Michels was named President and Chief Executive Officer in April 1998. Mr.
Michels is the principal architect of the Company's technology strategy and
served as the head of product development between June 1997 and April 1998 and
as Chief Technical Officer between February 1993 and June 1997. Mr. Michels has
been a director of the Company since 1979 and served as the Company's Executive
Vice President between 1979, when he co-founded the Company, and April 1998. Mr.
Michels is one of the founders of Uniforum, a UNIX(R) user consortium, and
served as its President from 1989 to 1990.
Mr. Anderson was named Senior Vice President, Marketing in April 1998. Between
June 1997 and April 1998, he served as Senior Vice President, Marketing,
Products Division. Between December 1994 and June 1997, 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.
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.
Mr. McCrabb was named Executive Vice President, Worldwide Sales and Field
Operations in April 1998. Between January 1995 and June 1997, he served as Vice
President, Marketing and Channel Sales, then as Senior Vice President, Market
Planning between July 1997 and April 1998 . 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. Moyer was named Senior Vice President, Human Resources in January 1998. He
has served as Vice President, Human Resources since 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 Senior Vice President, Law and Corporate Affairs, and
Secretary in January 1998. Between 1993 and 1997, he served as Vice President,
Law and Corporate Affairs, and Secretary and served as Vice President, Legal
Affairs between 1991 and 1993. 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, Corporate Development in April
1998. Since joining the Company in 1989, Mr. Seabrook has held a number of
strategic positions, including Senior Vice President and General Manager, EMEIA.
Prior to joining the Company, Mr. Seabrook served as Vice President
International Operations at Century Data Inc.
Mr. Wilt was named Senior Vice President, Products in April 1998. Since joining
the Company in 1983, Mr. Wilt has held a number of strategic positions both in
the U.S. and in Europe including those of Vice President, Business Development
and 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
-------------- ---------------
<S> <C> <C>
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
Fiscal 1998:
First Quarter 4 6-3/8
Second Quarter 3-3/8 5-5/16
Third Quarter 3-7/8 6-3/8
Fourth Quarter 2-3/4 4-15/16
</TABLE>
On December 15, 1998, there were approximately 7,200 holders of the Company's
Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
The information set forth on page 10 of the 1998 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 17 of the 1998 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 reports of independent accountants set forth on pages 18 through
33 of the 1998 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, 1998
o Consolidated Balance Sheets as of September 30, 1998 and 1997
o Consolidated Statements of Shareholders' Equity (Deficit) for
each of the years in the three-year period ended September 30,
1998
o Consolidated Statements of Cash Flows for each of the years in
the three-year period ended September 30, 1998
o Notes to Consolidated Financial Statements
o Reports of Independent Accountants
o Quarterly Financial Information
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
On December 30, 1997, the Company changed its independent auditors from KPMG
Peat Marwick LLP to PricewaterhouseCoopers LLP as previously reported on Form
8-K filed with the Securities and Exchange Commission on January 7, 1998 (File
No 0-21484). There were no disagreements with any of the Company's independent
accountants during the fiscal year ended September 30, 1998.
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 23, 1999 (the "Proxy Statement"). Such
information is incorporated herein by reference. Information with respect to
Executive Officers and Officers may be found on pages 14 through 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 SCHEDULE 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)
10.11 Software License Agreement with Locus Computing
Corporation effective January 11, 1989. (1)
10.12 Lease with Encinal Partnership No. 1 commencing May 1,
1991 (100 Pioneer Street). (1)
10.13 Lease with Encinal Partnership No. 1 commencing January
1, 1989 (425 Encinal Street). (1)
10.14 Lease with Wave Crest Development, Inc. commencing
August 1, 1987 (440 Encinal Street). (1)
10.15 Lease with Wave Crest Development, Inc. commencing June
1, 1988 (400 Encinal Street). (1)
10.16 Lease with Wave Crest Development, Inc. commencing July
1, 1988 (399 Encinal Street). (1)
10.17 Form of Indemnification Agreement. (1)
10.18 Master Registration Rights Agreement as amended. (1)
10.19 1993 Stock Purchase Plan and form of Stock Purchase
Agreement. (3)(7)
10.20 1994 Incentive Stock Option Plan and form of Incentive
Stock Option Agreement. (3)(7)
10.21 401(k) Plan, as amended. (1) (7)
10.23 Revised 1993 Employee Stock Purchase Plan. (5) (7)
10.24 1993 Director Stock Option Plan. (1) (7)
10.34 Shareholders' Rights Agreement. (6)
10.35 Change-in-control agreement between the Company and
certain key management. (7)
10.36 Employment Agreement with Alok Mohan.
13 Annual Report to Shareholders.
21.1 Subsidiaries of Registrant.
</TABLE> 18
<PAGE> 21
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
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.
(6) Incorporated by reference to the Form 8-A12G filed on September 18,
1997.
(7) Designates management contracts or compensatory plans, contracts or
arrangements.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the last quarter of
fiscal 1998.
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, Senior Vice President,
and Chief Financial Officer Law and Corporate Affairs & Secretary
Date: December 23, 1998 Date: December 23, 1998
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:
/s/ Douglas L. Michels
- ----------------------------------
Douglas L. Michels
President, Chief Executive Officer
and Director
Date: December 23, 1998
/s/ Alok Mohan /s/ Robert M. McClure
- ---------------------------------- ----------------------------------------
Alok Mohan Robert M. McClure
Chairman of the Board of Directors Director
Date: December 23, 1998 Date: December 23, 1998
/s/ Glenn Ricart /s/ Gilbert P. Williamson
- ---------------------------------- ----------------------------------------
Glenn Ricart Gilbert P. Williamson
Director Director
Date: December 23, 1998 Date: December 23, 1998
/s/ Ronald Lachman /s/ Jean-Francois Heitz
- ---------------------------------- ----------------------------------------
Ronald Lachman Jean-Francois Heitz
Director Director
Date: December 23, 1998 Date: December 23, 1998
/s/ Ninian Eadie /s/ R. Duff Thompson
- ---------------------------------- ----------------------------------------
Ninian Eadie R. Duff Thompson
Director Director
Date: December 23, 1998 Date: December 23, 1998
20
<PAGE> 23
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders of The Santa Cruz Operation, Inc.:
Under date of October 23, 1998, except for Note 7 which is as of December 11,
1998, we reported on the consolidated balance sheet of The Santa Cruz Operation,
Inc. and subsidiaries as of September 30, 1998, and the related consolidated
statements of operations, shareholders' equity (deficit), and cash flows for the
year ended September 30, 1998, as contained in the 1998 annual report to
shareholders. These consolidated financial statements and our report thereon are
incorporated by reference in the annual report on Form 10-K for the year 1998.
In connection with our audit 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/ PricewaterhouseCoopers LLP
San Jose, California
October 23, 1998
The Board of Directors and Shareholders of The Santa Cruz Operation, Inc.:
Under date of October 22, 1997, we reported on the consolidated balance sheet of
The Santa Cruz Operation, Inc. and subsidiaries as of September 30, 1997, and
the related consolidated statements of operations, shareholders' equity
(deficit), and cash flows for each of the years in the two-year period ended
September 30, 1997. These consolidated financial statements and our report
thereon are incorporated by reference in the annual report on Form 10-K for the
year 1998. In connection with our audits of the aforementioned consolidated
financial statements, we also audited the related financial statement schedule
as of and for each of the years in the two-year period ended September 30, 1997,
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 of and for
each of the years in the two-year period ended September 30, 1997.
/s/ KPMG Peat Marwick LLP
Mountain View, 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, 1998, 1997 AND 1996
(In thousands)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE
BEGINNING REVENUES OR AT END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
---------- ------------ ---------- ---------
<S> <C> <C> <C> <C>
Year Ended September 30, 1998
Allowance for returns $ 9,136 $ 18,200 $ 17,093 $ 10,243
Allowance for doubtful accounts 1,743 (132) 66 1,545
-------- -------- -------- --------
Total allowance $ 10,879 $ 18,068 $ 17,159 $ 11,788
======== ======== ======== ========
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
======== ======== ======== ========
</TABLE>
22
<PAGE> 25
INDEX TO EXHIBITS
<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)
10.11 Software License Agreement with Locus Computing
Corporation effective January 11, 1989. (1)
10.12 Lease with Encinal Partnership No. 1 commencing May 1,
1991 (100 Pioneer Street). (1)
10.13 Lease with Encinal Partnership No. 1 commencing January
1, 1989 (425 Encinal Street). (1)
10.14 Lease with Wave Crest Development, Inc. commencing
August 1, 1987 (440 Encinal Street). (1)
10.15 Lease with Wave Crest Development, Inc. commencing June
1, 1988 (400 Encinal Street). (1)
10.16 Lease with Wave Crest Development, Inc. commencing July
1, 1988 (399 Encinal Street). (1)
10.17 Form of Indemnification Agreement. (1)
10.18 Master Registration Rights Agreement as amended. (1)
10.19 1993 Stock Purchase Plan and form of Stock Purchase
Agreement. (3)(7)
10.20 1994 Incentive Stock Option Plan and form of Incentive
Stock Option Agreement. (3)(7)
10.21 401(k) Plan, as amended. (1)(7)
10.23 Revised 1993 Employee Stock Purchase Plan. (5)(7)
10.24 1993 Director Stock Option Plan. (1)(7)
10.34 Shareholders' Rights Agreement. (6)
10.35 Change-in-control agreement between the Company and
certain key management. (7)
10.36 Employment Agreement with Alok Mohan.
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.
(6) Incorporated by reference to the Form 8-A12G filed on September 18,
1997.
(7) Designates management contracts or compensatory plans, contracts or
arrangements.
<PAGE> 1
EXHIBIT 10.35
CHANGE-IN-CONTROL AGREEMENT
4 June 1997
Dear :
The Santa Cruz Operation, Inc., a California corporation (the "Company"),
considers it essential to the best interests of its shareholders to take
reasonable steps to retain key management personnel. Further, the Board of
Directors of the Company, through its Compensation Committee (the "Committee")
recognizes that the uncertainty and questions which might arise among management
in the context of a change in control of the Company could result in the
distraction or departure of management personnel to the detriment of the Company
and its shareholders.
The Committee has determined, therefore, that appropriate steps should be taken
to reinforce and encourage the continued attention and dedication of members of
the management of the Company and its subsidiaries to their assigned duties
without distraction in the face of potentially disturbing circumstances arising
from any possible change in control of the Company.
In order to induce you to remain in the employ of the Company, the Company has
determined to enter into this letter agreement (this "Agreement") which
addresses the terms and conditions of your employment in the event of a change
in control of the Company.
Term of Employment Under this Agreement. The term of your employment under this
Agreement shall commence on the Change in Control Date and shall continue until
the six month anniversary of the Change in Control Date (the "Term").
Termination Payments and Other Benefits.
If, during the term of this Agreement, the Involuntary Termination of your
employment, as defined in item (g) of the definitions, occurs in connection with
a change in control, you shall be entitled to receive a termination payment from
the Company (the "Termination Payment"). The Termination Payment shall be made
in a lump sum not more than five days following the date of the Termination. The
amount of the Termination Payment shall be equal to the product of six times
your Total Monthly Compensation including targeted bonuses at 100% attainment.
You shall also receive the full base salary for the month in which the
Involuntary Termination occurs.
In the event of your Involuntary Termination during the Term, you and your
eligible dependents shall continue to be eligible to participate during the
Benefit Continuation Period (as hereinafter defined) in medical, dental, health,
life, long-term disability and other fringe benefit plans and arrangements
applicable to you immediately prior to your Involuntary Termination on the same
terms and conditions in effect for you and your dependents immediately prior to
such Involuntary Termination. For purposes of the previous sentence, "Benefit
Continuation Period" means the period beginning on the Date of Termination and
ending on the earlier to occur (i) the six month anniversary of the Date of
Termination and (ii) the date that you and your dependents are eligible and
elect coverage under the plans of a subsequent employer which provide
substantially equivalent or greater benefits to you and your dependents. To the
extent that such benefits or service credit for benefits are not payable or
provided under such plans or programs the Company itself shall pay or provide
payment of such benefits or service credit for benefits. For the purposes of
this section, vacation, sick leave, stock option or stock purchase plans or
agreements shall not be considered "employee benefit plans or programs." Also,
for purposes of this section, coverage under the disability plans, life
insurance or other death benefit plans provided to you by a new employer shall
not be deemed to be "substantially equivalent" to the corresponding coverage
provided under this section unless the dollar amount thereof is substantially
the same or greater. In addition, if you have been utilizing the services of a
tax preparer and/or advisor (e.g. Coopers & Lybrand) at the expense of the
Company, you shall be entitled to receive such services at Company's expense
with respect to the tax year in which your employment terminates and the next
subsequent tax year.
Your right to the Termination Payment shall be conditioned upon your execution
of a release in favor of the Company in substantially the form of the release
required for the receipt of severance payments under the Severance Plan (as in
effect on the date of this Agreement) which is not revoked by you within the
revocation period specified therein.
You shall not be required to mitigate the amount of any payment provided for in
this Agreement by seeking other employment or otherwise, nor shall the amount of
any payment or benefit provided for in this Agreement be reduced by any
compensation earned by you as the result of employment by another employer or by
pension benefits paid by
<PAGE> 2
the Company or another employer after the Date of Termination or otherwise
except as specifically provided in clause (ii) of the last sentence of the
Benefit Payment provision set forth in section 2(b) above.
Stock Options
All stock options granted to you shall vest and become fully exercisable in the
event of your Termination on or following the Change in Control Date so long as
you remain an employee on the Change in Control Date.
Confidential Information
You agree not to disclose, either while in the Company's employ or at any time
thereafter, to any person not employed by the Company and not engaged to render
services to the Company any confidential information obtained while in the
employ of the Company (including, without limitation, any of the Company's
inventions, processes, methods of distribution, customer or trade secrets). This
section shall not preclude you from the use or disclosure of information known
generally to the public or of information not considered confidential by the
Company or from making disclosures required by law or court order.
You agree that upon leaving the Company's employ, you will not remove from the
Company's possession, without the prior written consent of an officer authorized
to act in the matter by the Board of Directors, any business plans, financial
information, product pricing information, or other documents which are of a
confidential nature (including, without limitation, its methods of
distribution).
You agree to continue to abide by the terms and conditions of the Proprietary
Information Agreement signed upon the commencement of your employment with
Company.
Limitation on Payments
In the event that the Termination Payment together with all other payments and
the value of any benefit received or to be received by you in connection with
the Termination or otherwise (i) constitutes a "parachute payment" within the
meaning of Section 280G (b) (2) of the Internal Revenue Code of 1986, as amended
("Code") and (ii) such Termination Payment, together with all other payments or
benefits which constitute "parachute payments" within the meaning of Section
280G (b) (2) would result in all or a portion of such termination payment being
subject to excise tax under Section 4999 of the Code, then you Termination
Payment shall be either: the amount determined under sections 2 and 3; or such
lesser amount which would result in no portion of the severance pay being
subject to excise tax under Section 4999 of the Code whichever of the foregoing
amounts, taking into account the applicable Federal, State and local income
taxes and the excise tax imposed by Section 4999, results in your receipt, on an
after-tax basis, of the greatest amount of Termination Pay under sections 2 and
3, notwithstanding that all of some portion of the Termination Payment may be
taxable under Section 4999 of the Code.
For purposes of applying the applicable limitation of section 5(a), the
following provisions shall be in effect.
The parachute payment attributable to the accelerated vesting of your options
under Section 3.2 of this Agreement shall be calculated in accordance with the
valuation methodology established under Internal Revenue Code Section 280G and
the applicable Treasury Regulations thereunder (including Q&A 24 of Section
1.280G-1 of the proposed Treasury Regulations) and shall include an appropriate
dollar amount (utilizing the 1% per month formula set forth in such Q&A 24) to
reflect the lapse of your obligation to remain in the Company's employ as a
condition to the vesting of one or more of the accelerated option installments.
In no event, however, shall such option parachute payment exceed the spread (the
excess of the fair market value of the accelerated option shares over the option
exercise price payable for those shares) existing at the time of acceleration.
Should it become necessary to reduce part of your termination benefits under
this Agreement so as not to exceed the applicable section 5(a) limitation, then
such reduction shall be effected, solely to the extent necessary to avoid an
excess payment under section 56(a), by an appropriate reduction in the dollar
amount of the Termination Payment otherwise due to you under section 2.
Assumption by Successor. The Company will require any successor (whether direct
or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business or assets of the Company expressly to assume
and to agree to perform this Agreement in the same manner and to the same extent
that the Company would be required to perform it if no such succession had taken
place; provided, however, that no such assumption shall relieve the Company of
its obligations hereunder. As used in this Agreement, the "company" shall mean
the Company as hereinbefore defined any successor to its business and/or assets
as aforesaid which assumes and agrees to perform this Agreement by operation of
law or otherwise.
<PAGE> 3
Enforceability; Beneficiaries. This Agreement shall be binding upon and inure to
the benefit of you and your heirs and the Company and any organization which
succeeds to substantially all of the business or assets of the Company, whether
by means of merger, consolidation, acquisition of all or substantially all of
the assets of the Company or otherwise, including, without limitation, as a
result of a Change in Control or by operation of law. This Agreement shall inure
to the benefit of and be enforceable by your personal or legal representatives,
executors, administrators, successors, and heirs. If you should die while any
amount would still be payable to you hereunder if you had continued to live, all
such amounts, unless otherwise provided herein, shall be paid in accordance with
the terms of this Agreement to your designee or estate.
No Contract of Employment. Your employment is at will. Nothing in this Agreement
shall be construed as giving you any right to be retained in the employ of the
Company or shall affect the terms and conditions of your employment with the
Company prior to the commencement of the term hereof.
Withholding. Amounts paid to you hereunder shall be subject to all applicable
federal, state and local withholding taxes.
Notices. Any purported termination of your employment by the Company or by you
shall be communicated by written Notice of Termination to the other party
hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a
notice which shall indicate the specific termination provision in this Agreement
relied upon and shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of your employment under the
provisions so indicated.
All notices, requests, and other communications contemplated by this Agreement
shall be in writing and shall be sufficiently given if mailed in the continental
United States by registered or certified mail, return receipt requested, or
personally delivered to the party entitled thereto at the address stated below
(or to such changed address as the addressee may have given by a similar
notice):
To the Company:
Attention: Chief Executive Officer
400 Encinal Street
Santa Cruz, CA 95060
Any notice delivered in person shall be deemed to have been received on the date
of delivery. Any notices delivered by mail shall be deemed to have been received
on the date of acknowledgment of its receipt.
No Setoff. There shall be no right of setoff or counterclaim, with respect to
any claim, debt, or obligation, against payments to you under this Agreement.
Death or Incompetence. In the event of your death or a judicial determination of
your incompetence, references in this Agreement to you shall, where appropriate,
be deemed to refer to your beneficiary or beneficiaries or, if none, to your
legal representative. The term "beneficiary," as used in this Agreement, shall
mean a beneficiary or beneficiaries designated to receive any amount hereunder
or, if no beneficiary has been so designated, the legal representative of your
estate.
No Assignment. No right, benefit or interest hereunder shall be subject to
anticipation, alienation, sale, assignment, encumbrance, charge, pledge,
hypothecation, execution, forfeiture, attachment, levy, or similar process or
assignment by operation of law by you. Any attempt, voluntary or involuntary, to
effect any action specified in the preceding sentence shall, to the full extent
permitted by law, be null, void, and of no effect.
Company's Successors. This Agreement shall be binding upon and inure to the
benefit of the Company and any successor of the Company (including, without
limitation, any corporation or other entity which directly or indirectly
acquires all or substantially all of the assets or shares of the Company,
whether by merger, consolidation, sale, or otherwise) but shall not otherwise be
assignable by the Company. The Company shall require that any such successor
expressly assume and agree to perform this Agreement in the same manner and to
the same extent that the Company would be required to perform this Agreement if
no succession had taken place.
Waivers and Amendments. No provision of the Agreement shall be amended or waived
unless such amendment or waiver is authorized by the Board of Directors or any
authorized committee of the Board of Directors and is agreed to in writing and
signed by you and by an officer of the Company. No waiver by either party hereto
of any breach by the other party hereto of any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of a
similar or dissimilar provision or condition at the same or at any prior or
subsequent time. The waiver by one party of the performance of any covenant,
condition or promise in this Agreement shall not invalidate
<PAGE> 4
this Agreement, nor shall it be considered a waiver by such party of any other
covenant, condition or promise hereunder. A waiver by either party or both
parties of the time for performing any acts shall not constitute a waiver of the
time for performing any other act of any identical act required to be performed
by any party.
Arbitration. In the event that any dispute arises hereunder, such dispute shall,
at the election and upon written demand of either party, be finally determined
by arbitration in the City of San Jose in accordance with the rules and
procedures of the American Arbitration Association, and judgment upon the award
may be entered in any court having jurisdiction thereof.
Choice of Law. The validity, interpretation, construction, performance, and
enforcement of this Agreement shall be governed by the internal laws of the
State of California, without regard to the principles of conflict of laws
thereof.
Headings. The titles of sections in the Agreement are intended solely for
convenience, and no provision of this Agreement is to be construed by reference
to the title of any section.
Severability. In the event that any provision or portion of this Agreement is
determined by arbitration or by a court of competent jurisdiction to be invalid
or unenforceable for any reason, the remaining provisions and portions of this
Agreement shall be unaffected thereby and shall remain in full force and effect
to the fullest extent permitted by law.
Specific Performance. The Company and you recognize that each party will have no
adequate remedy at law for breach by the other of any of the agreements
contained herein and, in the event of any such breach, the Company and you
hereby agree and consent that the other shall be entitled to a decree of
specific performance, mandamus, or other appropriate remedy to enforce
performance of such agreements.
Presumption. The Company shall make a payment described in this Agreement upon
receiving written notice from you describing such payment, referring to the
provision of this Agreement under which such payment is claimed and certifying
that all conditions for such payment, as set forth in this Agreement, have been
satisfied. The information so furnished to the Company by you shall be presumed
to be correct, subject to rebuttal by the Company.
Entire Agreement. This Agreement sets forth the entire agreement of the parties
hereto in respect of the subject matter contained herein and during the term of
this Agreement supersedes the provisions of all prior agreements, promises,
covenants, arrangements, communications, representations or warranties, whether
oral or written, by any officer, employee or representative of any party hereto
with respect to the subject matter contained herein.
Definitions.
"Cause" shall mean a termination of your employment during the term which is a
result of (i) your felony conviction, (ii) your willful disclosure of material
trade secrets or other material confidential information related to the business
of the Company and its subsidiaries or (iii) your willful and continued failure
substantially to perform your duties with the Company (other than any such
failure resulting from your incapacity due to physical or mental illness or any
such actual or anticipated failure resulting from a resignation by you for Good
Reason) after a written demand for performance is delivered to you by the
Company, which demand specifically identifies the manner in which the Company
believes that you have not substantially performed your duties, and which
performance is not substantially corrected by you within 10 days of receipt of
such demand. For purposes of the previous sentence, no act or failure to act on
your part shall be deemed "willful" unless done, or omitted to be done, by you
not in good faith and without reasonable belief that your action or omission was
in the best interest of the Company.
"Change in Control" shall mean change of control as defined in the 1994
Incentive Stock Option Plan; i.e. (i) when any "person," as such term is used in
Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended
(other than the Company, a Subsidiary or a Company employee benefit plan,
including any trustee of such plan acting as trustee) is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities of the Company representing more than twenty-five
percent (25%) of the combined voting power of the Company's then outstanding
securities entitled to vote generally in the election of directors; or (ii) a
merger or consolidation of the Company with any other corporation, other than a
merger or consolidation which would result in the voting securities of the
Company outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) at least seventy-five percent (75%) of the total voting power
represented by the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation, or the stockholders
of the Company approve an agreement for the sale or disposition by the Company
of all or substantially all the Company's assets; or (iii) a change in the
composition of the board of Directors of the Company occurring within a two-year
period, as a result of which fewer than a majority of the directors are
Incumbent Directors. "Incumbent Directors shall mean directors who either (A)
are directors of the Company as of the date hereof, or (B) are elected, or
nominated for election, to the Board of Directors of the Company with the
affirmative votes of a least a majority of the Incumbent Directors at the time
of such election or nomination (but shall not include an individual whose
election or nomination is in connection with an actual or threatened proxy
contest relating to the election of directors to the Company).
<PAGE> 5
"Change in Control Date" shall mean the earliest of (i) the date on which the
Change in Control occurs, (ii) the date on which the Company executes an
agreement, the consummation of which would result in the occurrence of a Change
in Control, and (iii) the date the Board approves a transaction or series of
transactions, the consummation of which would result in a Change in Control. If
the Change in Control Date occurs as a result of an agreement described in
clause (ii) of the previous sentence or as a result of the approval of the board
described in clause (iii) of the previous sentence and the Change in Control to
which such agreement or approval relates (the "Contemplated Change in Control")
subsequently does not occur, then the term shall expire on the sixtieth day (the
"Reset Date") following the date the Board certifies by resolution duly adopted
by a majority of the Directors then in office that the Contemplated Change in
Control is not reasonably likely to occur; provided, however, that this sentence
shall not apply if (A) an Involuntary Termination of your employment with the
Company has occurred on and after the Change in Control Date and on or prior to
the Reset Date of (B) the Contemplated Change in Control subsequently occurs
within three months of the Reset Date. Following the Reset Date, the provisions
of this Agreement shall remain in effect and a new Term shall commence upon the
occurrence of a subsequent Change in Control Date. Notwithstanding the first
sentence of this section, if your employment with the Company terminates prior
to the Change in Control Date and it is reasonably demonstrated that your
termination of employment (i) was at the request of the third party who has
taken steps reasonably calculated to effect the Change in Control or (ii)
otherwise arose in connection with or in anticipation of the Change in Control,
then Change in Control Date shall remain the date immediately prior to the date
of your termination of employment.
"Code" means the Internal Revenue Code of 1986, as it may be amended.
"Company" means the Company, all Subsidiaries and any corporation owning not
less than 50 percent of the total combined voting power of all classes of
outstanding shares of the Company.
"Good Reason" shall mean a resignation of your employment during the term as a
result of any of the following:
A reduction by the Company in your annual base salary as in effect immediately
prior to the Change in Control Date or as the same may be increased from time to
time thereafter; a failure by the Company to increase your salary at a rate
commensurate with that of other key executives of the Company; or a reduction in
your target annual bonus (expressed as a percentage of base salary) below the
target in effect for you on the Change in Control Date;
The relocation of the office of the Company where you are employed immediately
prior to the Change in Control Date (the "Location") to a location which, in
your good faith assessment, would cause a hardship in commuting from your
principal residence.
The failure by the Company to continue in effect any compensation plan in which
you participated prior to the Change in Control Date or made available to you
after the Change in Control Date, unless an equitable arrangement has been made
with respect to such plan in connection with the Change in Control, or the
failure by the Company to continue your participation therein on at least as
favorable a basis, both in terms of the amount of benefits provided and the
level of your participation relative to other participants, as existed on the
Change in Control Date:
The failure by the Company to continue to provide you with benefits at least as
favorable in the aggregate to those enjoyed by you under the Company's pension,
savings, life insurance, health, disability, and fringe benefit plans and
programs (including, without limitation, programs, if any, relating to use of a
car, secretary, office space, telephones, expense reimbursement) in which you
were participating immediately prior to the change in Control Date; or the
failure by the company to provide you with the number of paid vacation days to
which you are entitled on the basis of years of service with the Company in
accordance with the Company's normal vacation policy in effect immediately prior
to the Change in Control;
Any termination of your employment which is not effected pursuant to the terms
of this Agreement; or
A material breach by the company of the provisions of this Agreement; provided,
however, that an event described above in clause (ii), (iv), (v) or (vii) shall
not constitute Good Reason unless it is communicated by you to the Company in
writing and is not corrected by the Company in a manner which is reasonably
satisfactory to you (including full retroactive correction with respect to any
monetary matter) within 10 days of the Company's receipt of such written notice
from you.
"Involuntary Termination" shall mean (i) the termination of your employment by
the Company and/or its subsidiaries during the Term other than for Cause or
Disability or (ii) your resignation of employment with the Company and its
subsidiaries during the Term for Good Reason.
"Subsidiary" means any corporation, if the Company and/or one or more other
Subsidiaries own not less than 50 percent of the total combined voting power of
all classes of outstanding stock of such corporation. A corporation
<PAGE> 6
that attains the status of a Subsidiary on a date after the execution of this
Agreement shall be considered a Subsidiary commencing as of such date.
"Total Monthly Compensation" means the sum of your monthly salary plus targeted
bonus at the rate in effect immediately prior to the Termination, but in no
event less than your monthly salary at the rate in effect on the date of this
Agreement.
This letter sets forth our agreement on the subject matter hereof.
Please sign and return this Agreement to Steve Sabbath in the Legal Department.
Sincerely,
The Santa Cruz Operation, Inc.
- -------------------------------
Jack Moyer
Agreed:
- --------------------------------
<PAGE> 1
EXHIBIT 10.36
EMPLOYMENT AGREEMENT WITH ALOK MOHAN
The following summarizes the agreement between SCO and Alok Mohan effective with
the appointment of a new President & CEO.
Effective with the appointment of a new President & CEO for SCO, Alok shall
become an advisor to the Company. The term of this agreement will be for one
year, and the board shall give him notice not later than 90 days prior to the
expiration of the term of the agreement, of their intention as to renewal for an
additional year. He shall remain as an employee while serving as an advisor and
shall be entitled to the same benefits as enjoyed by other officers of SCO. As
an advisor while remaining as an employee of the Company, Alok shall be
compensated as follows:
o Term of this agreement shall be for one year commencing on the
date the newly elected CEO takes office. Such agreement may be
extended beyond this one year term at the request of the CEO and
acceptability of the Board.
o Base Salary to be $200,000 per year with an annual bonus
opportunity of $152,000 at target. His bonus shall be based on
the Corporate Incentive Plan for Fiscal Year 1998 and any
subsequent years.
o Alok shall be expected to give SCO in his new role as an
advisor, between 25% and 50% of his available work time during
the term of this agreement.
o He will continue to vest in the stock options he has been
granted during the term of his tenure as an advisor to the
Company.
o This agreement shall cover customary travel and entertainment
normally accorded to someone in this position, including travel
between Dayton and Santa Cruz.
o His focus in this role will be:
o Assist in the transition of General Management
responsibilities to the new CEO.
o Provide ongoing advice and counsel, as requested and
needed by the new CEO.
o Assist the CEO with Board matters and other issues of
importance to the Corporation.
o Identify and develop potential incubators which are
critical to and capable of providing a "third pillar"
for SCO's product strategy.
o Assist SCO management in identifying and working with
potential acquisitions.
It has been suggested by Alok, and that suggestion is supported by Doug as the
new CEO, that he serve as Chairman of the Board. If he is so elected, such
election does not alter the terms and conditions of this agreement and no
additional compensation shall be provided.
<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) 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net revenues $ 171,900 $ 193,660 $ 207,890 $ 199,329 $ 184,068
Cost of revenues 45,898 55,315 54,402 54,133 51,953
- ---------------------------------------------------------------------------------------------------------------------------------
Gross margin 126,002 138,345 153,488 145,196 132,115
Operating expenses 139,595 154,939 177,069 151,688 113,490
- ---------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) (13,593) (16,594) (23,581) (6,492) 18,625
- ---------------------------------------------------------------------------------------------------------------------------------
Other income (expense):
Interest income, net 2,261 2,291 2,302 2,703 1,829
Other income (expense), net 226 (866) (394) (363) (561)
- ---------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (11,106) (15,169) (21,673) (4,152) 19,893
- ---------------------------------------------------------------------------------------------------------------------------------
Income taxes 3,559 1 741 1,956 5,647
- ---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (14,665) $ (15,170) $ (22,414) $ (6,108) $ 14,246
- ---------------------------------------------------------------------------------------------------------------------------------
Income (loss) per share-basic $ (0.41) $ (0.41) $ (0.62) $ (0.20) $ 0.47
Income (loss) per share-diluted $ (0.41) $ (0.41) $ (0.62) $ (0.20) $ 0.45
- ---------------------------------------------------------------------------------------------------------------------------------
Shares used in per share calculation-basic 35,817 36,628 36,179 30,922 30,171
Shares used in per share calculation-diluted 35,817 36,628 36,179 30,922 31,941
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
September 30,
--------------------------------------------------------------------
(In thousands) 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Working capital $ 33,320 $ 46,164 $ 61,935 $ 60,539 $ 77,291
Total assets 132,683 146,665 166,807 131,870 138,574
Long-term obligations 13,126 9,545 9,332 7,521 1,084
Shareholders' equity 60,135 81,462 101,581 82,182 89,644
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
SCO's mission is to be the software provider 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 40%, and worldwide market share
of 80% for 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 Network Computing 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 continues 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 contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
reflect management's expectations 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 $171.9 million in fiscal 1998, an 11% decrease from $193.7
million in fiscal 1997, which in turn was a decrease of 7% from fiscal 1996
revenues of $207.9 million. Revenues are net of a provision for estimated future
returns for stock balancing and excess quantities above levels the Company
believes are appropriate in its distribution channels. The fiscal 1998 decline
was directly related to the Company's decision to eliminate channel inventories
and record a reserve for the return of remaining channel stock in connection
with its preparations for electronic licensing and distribution. The fiscal 1996
to 1997 license revenue decrease resulted from a planned reduction in channel
inventories across all product lines in the third quarter of that year. For the
fiscal years ended September 30, 1998, 1997 and 1996, no single customer
accounted for greater than 10% of the Company's license revenues.
International revenues continue to be a significant portion of net revenues,
comprising 51% of the revenues for fiscal 1998 and 55% and 53% for 1997 and 1996
respectively.
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
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 revenues as a percentage of net revenues decreased to 27% in fiscal 1998
from 29% in fiscal 1997 and increased from 26% in fiscal 1996. Reduced royalty
rates, including a significant retroactive royalty credit, coupled with reduced
technology costs were partially offset by stable fixed costs over lower unit
<PAGE> 3
sales volume to net to the 2% decline from 1997 to 1998, while stable fixed
costs over lower unit sales volume caused the 3% increase from 1996 to 1997.
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 service revenues includes
documentation, consulting and personnel related expenses associated with
providing such services.
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 decreased 10% to $41.4 million in fiscal 1998 from $46.1 million in
fiscal 1997. In fiscal 1997, research and development expenses increased 18%
from fiscal 1996 total expenditures of $39.0 million.
Research and development expenses represented 24% of net revenues for both
fiscal 1998 and 1997 and 19% in fiscal 1996. The 1998 decrease in research and
development expenses in absolute dollars was primarily attributable to reducing
staffing levels in conjunction with the restructuring of operations. The 1997
spending increase was primarily attributable to personnel costs relating to
accelerated development of next generation operating systems and technology
focused on Internet-enabled products.
SALES AND MARKETING
Sales and marketing expenses, at $79.6 million, remained relatively constant
with 1997 spending of $79.5 million and 1996 spending of $79.4 million. Sales
and marketing expenses represented 46%, 41% and 38% of total net revenues in
fiscal 1998, 1997 and 1996, respectively. While flat in absolute terms, the
Company retargeted 1998 and 1997 marketing spending towards reseller training,
independent software vendor recruitment and higher corporate brand awareness.
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased by 11% to $18.6 million in fiscal
1998 from $20.9 million in fiscal 1997. In fiscal 1997, general and
administrative expenses increased by 3% from $20.3 million in fiscal 1996.
General and administrative expenses represented 11% of total net revenues for
fiscal 1998, fiscal 1997 and 10% for fiscal 1996. Reduced headcount, lower legal
expenses and lower discretionary spending resulted in the fiscal 1998 decline in
absolute dollars. The increased spending in fiscal 1997 was primarily
attributable to a one-time charge for settlement of litigation.
NON-RECURRING CHARGES
A worldwide restructuring during the third quarter of fiscal 1997 resulted in a
one-time charge of $8.4 million or 4% of 1997 revenues. The charge includes a
10% reduction in headcount of $3.4 million, elimination of lease obligations for
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. In fiscal 1996,
non-recurring charges were $38.4 million representing 18% of total revenues. The
charges related primarily to the writeoff of UnixWare products for which
technological feasibility had not been established and for which there was no
alternative future use.
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 remained constant at $2.3 million for fiscal years 1998, 1997 and 1996.
Other income was $0.2 million for fiscal 1998, an expense of $0.9 million in
fiscal 1997, and an expense of $0.4 million in fiscal 1996. The change in 1998
was principally due to foreign exchange gains earned in the Company's European
subsidiaries, while 1997's expense was primarily due to a $0.6 million loss
associated with the settlement on an intercompany loan with the U.K.
<PAGE> 4
INCOME TAXES
In fiscal 1998, 1997 and 1996, the Company's effective income tax rates were
(32)%, 0% and (3)%, respectively, and primarily reflect losses and expenses
without tax benefit, and for which a valuation allowance has been established.
For an analysis of income taxes, see Note 12 of Notes to Consolidated Financial
Statements.
NET PROFIT (LOSS)
The Company reported net losses of $14.7 million, $15.2 million and $22.4
million in fiscal 1998, 1997 and 1996, respectively. The fiscal 1998, 1997 and
1996 net losses were primarily attributable to lower revenues, absolute
increases in operating expense 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.
<PAGE> 5
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. Revenues are 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.
The Company depends on information received from external sources in evaluating
the inventory levels at distribution partners in the determination of reserves
for the return of materials not sold, stock rotation and price protection.
Significant effort has gone into developing systems and procedures for
determining the appropriate reserve level.
Realization of the net deferred tax assets is dependent upon generating
sufficient taxable income prior to the expiration of loss carryforwards.
Although realization is not assured, management believes that it is more likely
than not that all of the net deferred tax assets will be realized. In the event
that the Company does not show profitability in the subsequent fiscal quarters,
the Company may be required to write off portions of the net deferred tax assets
previously recognized up to the entire amount of $7.8 million.
Substantial portions of the Company's revenues are derived from sales to
customers outside the United States. Trade sales to international customers
represented 51%, 55% and 53% of total revenues for fiscal 1998, 1997 and 1996,
respectively. A substantial portion of these international revenues are
denominated in the U.K. pound sterling, and operating results can vary with
changes in the U.S. dollar exchange rate for such currency. The Company's
revenues can also be affected by general economic conditions in the United
States, Europe and other international markets. The Company's operating strategy
and pricing take into account changes in exchange rates over time. However, the
Company's results of operations may be significantly affected in the short term
by fluctuations in foreign currency exchange rates.
The Company'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.
<PAGE> 6
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.
The Company is aware of the issues associated with the forthcoming changes in
Europe aimed at forming a European economic and monetary union (the "EMU"). One
of the changes resulting from this union will require EMU member states to
irrevocably fix their respective currencies to a new currency, the Euro, on
January 1, 1999. On that day, the Euro will become a functional legal currency
within these countries. During the next three years, business in the EMU member
states will be conducted in both the 25 existing national currencies, such as
the Franc or Deutsche Mark, and the Euro. As a result, companies operating in or
conducting business in EMU member states will need to ensure that their
financial and other software systems are capable of processing transactions and
properly handling these currencies, including the Euro. The Company is still
assessing the impact the EMU formation will have on both its internal systems
and the products it sells. The Company will take appropriate corrective actions
based on the results of such assessment. The Company has not yet determined the
cost related to addressing this issue, and there can be no assurance that this
issue and its related costs will not have a materially adverse affect on the
company's business, operating results and financial condition.
YEAR 2000 ISSUES
Background. The approach of Year 2000 is causing a great deal of concern and
discussion in the computer industry. There are many varieties of Year 2000
problems. One major concern is the accurate dating of files and transactions
after January 1, 2000. For many years, software has represented dates using the
MM/DD/YY format (or some variant), which allows for the display of only the last
two digits of the year. With the upcoming transition from 99 to 00, dating
problems may occur on systems that interpret a YY value of 00 incorrectly. The
Company must address the millenium issues from a perspective of both developing
and selling software products and also maintaining internal Company operations.
Actions Taken. The Company has taken steps to mitigate operating system date
processing errors that might occur with the onset of the Year 2000 (Y2K). The
Company has:
- - issued a Year 2000 Date Processing Limited Warranty for Designated Software
that defines how we expect our products to perform when processing dates in
the Year 2000;
- - produced an SCO Year 2000 White Paper detailing how Year 2000 affects SCO
products and what products are covered by the Year 2000 Date Processing
Limited Warranty;
- - performed Year 2000 testing of all current SCO products;
- - issued fixes for Year 2000 problems that we have detected in current SCO
supported products;
- - created a project team to maintain consistent Year 2000 policy for our
customers and to coordinate cross functional activities;
- - created a Year 2000 committee to test, verify or upgrade internal systems
and third party vendor software to insure continued operation of our
infrastructure.
Software Sold to Customers. SCO believes that it has substantially identified
and resolved all potential Year 2000 problems in software products under
warranty that it develops and markets. However, management also believes that it
is not possible to determine with complete certainty that all Year 2000 problems
affecting the Company's software products have been identified or corrected due
to 1) the complexity of these products, 2) the fact that these products interact
with other third party vendor products and 3) the operation on computer systems
which are not under the Company's control.
<PAGE> 7
Internal Infrastructure. The Company believes that it has identified
substantially all of the major computers, software applications, and related
equipment used in connection with its internal operations that must be modified,
upgraded, or replaced to minimize the possibility of a material disruption to
its business. The Company has commenced modifying, upgrading, and replacing
major systems that have been identified as adversely affected, and expects to
complete this process by mid 1999.
Suppliers. The Company has initiated communications with third party suppliers
of the major computers, software, and other equipment used, operated, or
maintained by the Company to identify and, to the extent possible, to resolve
issues involving the Year 2000 problem. However, the Company has limited or no
control over the actions of these third party suppliers. Thus, while the Company
expects that it will be able to resolve any significant Year 2000 problems with
these systems, there can be no assurance that these suppliers will resolve any
or all Year 2000 problems with these systems before the occurrence of a material
disruption to the business of the Company or any of its customers. Any failure
of these third parties to resolve Year 2000 problems with their systems in a
timely manner could have a material adverse effect on the Company's business,
financial condition, and results of operation.
Assessment of Consequences. The Company expects to identify and resolve all Year
2000 problems that could materially adversely affect its business operations and
products. The exposure on the product side is possible provision of free upgrade
software to a few customers. However, management believes that it is not
possible to determine with complete certainty that all Year 2000 problems
affecting the Company have been identified or corrected. The number of devices
and permutations are too numerous. The Company is prepared for the likelihood of
a few operational inconveniences and diversion of attention from ordinary
business. However, the Company feels confident that there will be no adverse
material effect on the Company's business or results of operations.
Disclaimer. The discussion of the Company's efforts, and management's
expectations, relating the Year 2000 compliance are forward-looking statements.
The Company's ability to achieve Year 2000 readiness and the level of
incremental costs associated therewith, could be adversely impacted by, among
other things, the availability and cost of programming and testing resources,
vendor's ability to modify proprietary software, and unanticipated problems
identified in the ongoing review.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations through a combination 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, 1998, the
Company's principal sources of liquidity included cash and short-term
investments of $51.1 million and available bank lines of credit. The Company may
borrow an amount equal to 75% of eligible accounts receivable, subject to a
total of approximately $15.7 million against which the Company had $0.6 million
in outstanding borrowings. Effective December 11, 1998, the maximum available
credit lines were reduced by the Company to approximately $0.7 million. The
Company does not believe it will require borrowing capacity greater than the
amount available under this line of credit for at least the next twelve months.
See Notes 2, 3 and 7 of Notes to 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 $9.5 million in fiscal 1998, $15.0 million in fiscal
1997 and $25.3 million in fiscal 1996. Cash used for investing activity during
fiscal 1998, 1997 and 1996 was $3.2 million, $14.8 million and $19.7 million,
respectively. In fiscal 1998, 1997 and 1996, cash provided by operations was
used to fund purchases of technology, property and equipment, common stock
repurchases and short-term investments. Cash used for financing activities was
$6.2 million, $10.0 million and $5.3 million for fiscal 1998, 1997 and 1996,
respectively. In fiscal 1998, 1997 and 1996, proceeds from the sale of Common
Stock were more than offset by the Company's stock repurchases and payments on
capital lease obligations.
<PAGE> 8
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 1999.
QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET-RATE SENSITIVE INSTRUMENTS AND RISK MANAGEMENT
The following discussion about the Company's risk-management activities includes
"forward-looking statements" that involve risk and uncertainties. Actual results
could differ materially from those projected in the forward-looking statements.
The following tables summarize the financial instruments and derivative
commodity instruments held by the Company at September 30, 1998, which are
sensitive to changes in interest rates and foreign exchange rates. The Company
uses forward foreign exchange contracts to manage these primary market exposures
associated with underlying assets, liabilities, and anticipated transactions.
The Company uses these instruments to reduce risk by essentially creating
offsetting market exposures. The instruments held by the Company are not
leveraged and are held for purposes other than trading.
In the normal course of business, the Company also faces risks that are either
nonfinancial or nonquantifiable. Such risks principally include country risk,
credit risk, and legal risk, and are not represented in the following tables.
INTEREST-RATE RISK
This table presents descriptions of the financial instruments that are held by
the Company at September 30, 1998 and which are sensitive to changes in interest
rates.
Maturity Date for Short-Term Investments
Year Ended September 30,
<TABLE>
<CAPTION>
Fair
(In thousands) 1999 2000 2001 Total Value
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Treasury notes $ 1,753 $1,562 $ 763 $ 4,078 $ 4,118
Government agency bonds 2,458 2,198 2,497 7,153 7,191
Corporate bonds 7,608 5,180 3,299 16,087 16,094
-------------------------------------------------------
$11,819 $8,940 $6,559 $27,318 $27,403
Average interest rate 5.67% 6.06% 5.81%
- ----------------------------------------------------------------------------------
</TABLE>
FOREIGN-EXCHANGE RISK
The table below provides information about derivative financial instruments that
are sensitive to foreign currency exchange rates. The information is presented
in U.S. dollar equivalents, the reporting currency of the Company. The Company
purchases foreign-exchange contracts to hedge foreign currency exposure for
underlying assets, liabilities and other obligations. The purpose of the
Company's foreign-currency hedging activities is to protect the Company from the
risk that the eventual net cash resulting from foreign denominated transactions
will be adversely affected by changes in exchange rates. The table below
presents the contract amounts, foreign exchange strike rate and the contract
term.
<PAGE> 9
Forward Contracts
September 30, 1998
<TABLE>
<CAPTION>
(In thousands) Contract 1 Contract 2
- --------------------------------------------------------------------------------
<S> <C> <C>
Purchased two forward contracts
Premium paid: 2 1
Contract amount: 500 1,000
Forward strike rate (USD/GBP): 1.6293 1.6757
Term of contract: 4 months 2 months
- --------------------------------------------------------------------------------
</TABLE>
<PAGE> 10
THE SANTA CRUZ OPERATION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------
(In thousands, except per share data) 1998 1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net revenues $ 171,900 $ 193,660 $ 207,890
Cost of revenues 45,898 55,315 54,402
- -------------------------------------------------------------------------------------------------
Gross margin 126,002 138,345 153,488
- -------------------------------------------------------------------------------------------------
Operating expenses:
Research and development 41,393 46,130 39,009
Sales and marketing 79,644 79,536 79,359
General and administrative 18,558 20,900 20,338
Non-recurring charges -- 8,373 38,363
- -------------------------------------------------------------------------------------------------
Total operating expenses 139,595 154,939 177,069
- -------------------------------------------------------------------------------------------------
Operating loss (13,593) (16,594) (23,581)
Other income (expense):
Interest income, net 2,261 2,291 2,302
Other income (expense), net 226 (866) (394)
- -------------------------------------------------------------------------------------------------
Loss before income taxes (11,106) (15,169) (21,673)
- -------------------------------------------------------------------------------------------------
Income taxes 3,559 1 741
- -------------------------------------------------------------------------------------------------
Net loss $ (14,665) $ (15,170) $ (22,414)
- -------------------------------------------------------------------------------------------------
Net loss per share:
Basic $ (0.41) $ (0.41) $ (0.62)
Diluted $ (0.41) $ (0.41) $ (0.62)
- -------------------------------------------------------------------------------------------------
Shares used in loss per share calculation:
Basic 35,817 36,628 36,179
Diluted 35,817 36,628 36,179
- -------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 11
THE SANTA CRUZ OPERATION, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
-----------------------------
(In thousands, except for share data) 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 23,758 $ 23,225
Short-term investments 27,318 28,486
Receivables, net 29,038 36,546
Deferred tax assets 3,487 6,631
Other current assets 9,141 6,934
- ------------------------------------------------------------------------------------------------------------------
Total current assets 92,742 101,822
- ------------------------------------------------------------------------------------------------------------------
Property and equipment, net 12,929 13,666
Purchased software and technology licenses, net 13,013 16,523
Other assets 13,999 14,654
- ------------------------------------------------------------------------------------------------------------------
Total assets $132,683 $146,665
- ------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Royalties payable $ 5,062 $ 11,262
Trade accounts payable 9,450 8,600
Income taxes payable 1,876 1,101
Accrued expenses and other current liabilities 26,796 27,230
Deferred revenues 16,238 7,465
- ------------------------------------------------------------------------------------------------------------------
Total current liabilities 59,422 55,658
- ------------------------------------------------------------------------------------------------------------------
Other long-term liabilities 13,126 9,545
- ------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (note 10) Shareholders' equity:
Common stock, no par value, net of notes receivable of $92 and $88 from an
officer of the Company, authorized 100,000,000 shares
Issued and outstanding 35,048,916 and 36,450,115 shares 111,972 119,287
Cumulative translation adjustment 1,292 639
Accumulated deficit (53,129) (38,464)
- ------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 60,135 81,462
- ------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $132,683 $146,665
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 12
THE SANTA CRUZ OPERATION, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Note
Common Stock Receivable Cumulative Total
----------------------- from Translation Accumulated Shareholders'
(In thousands) Shares Amount Officer Adjustment Deficit Equity
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, SEPTEMBER 30, 1995 30,844 $ 83,225 $(79) $ (84) $ (880) $ 82,182
Issuance under stock option and
purchase plans 823 2,739 -- -- -- 2,739
Common stock repurchases (689) (4,744) -- -- -- (4,744)
UNIX asset purchase 6,128 43,773 -- -- -- 43,773
Interest on loans -- -- (5) -- -- (5)
Stock option income tax benefit -- 263 -- -- -- 263
Translation adjustment -- -- -- (213) -- (213)
Net loss -- -- -- -- (22,414) (22,414)
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCES, SEPTEMBER 30, 1996 37,106 $ 125,256 $(84) $ (297) $(23,294) $ 101,581
Issuance under stock option and
purchase plans 872 2,985 -- -- -- 2,985
Common stock repurchases (1,528) (9,110) -- -- -- (9,110)
Interest on loans -- -- (4) -- -- (4)
Stock option income tax benefit -- 244 -- -- -- 244
Translation adjustment -- -- -- 936 -- 936
Net loss -- -- -- -- (15,170) (15,170)
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCES, SEPTEMBER 30, 1997 36,450 $ 119,375 $(88) $ 639 $(38,464) $ 81,462
Issuance under stock option and
purchase plans 659 1,960 -- -- -- 1,960
Common stock repurchases (2,060) (9,271) -- -- -- (9,271)
Interest on loans -- -- (4) -- -- (4)
Translation adjustment -- -- -- 653 -- 653
Net loss -- -- -- -- (14,665) (14,665)
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCES, SEPTEMBER 30, 1998 35,049 $ 112,064 $(92) $ 1,292 $(53,129) $ 60,135
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 13
THE SANTA CRUZ OPERATION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------
(In thousands) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(14,665) $(15,170) $(22,414)
Adjustments to reconcile net loss to net cash
provided by operating activities -
Depreciation and amortization 14,363 17,084 16,840
Charge for purchased research and development -- -- 38,363
Deferred tax assets 205 (1,017) (1,842)
Exchange gain (605) -- --
Stock option income tax benefit -- 244 263
Changes in operating assets and liabilities-
Receivables 8,147 10,630 (2,167)
Other current assets (2,024) 2,736 (336)
Other assets 2,362 857 (2,410)
Royalties payable (6,197) 618 5,002
Trade accounts payable 608 (4,155) 2,548
Income taxes payable 703 (1,132) 423
Accrued expenses and other current liabilities (1,977) 3,714 (7,333)
Deferred revenues 8,555 627 (1,673)
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 9,475 15,036 25,264
- ---------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,410) (1,796) (4,874)
Purchases of software and technology licenses (2,995) (5,188) (5,953)
Sales of short-term investments 31,514 17,006 15,514
Purchases of short-term investments (30,346) (22,726) (23,464)
Changes in other assets 25 (2,128) (937)
- ---------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (3,212) (14,832) (19,714)
- ---------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital leases (2,759) (1,627) (3,924)
Net proceeds from sale of common stock 1,960 2,985 2,739
Repurchases of common stock (9,271) (9,110) (4,752)
Changes in other long-term liabilities 3,883 (2,224) 588
- ---------------------------------------------------------------------------------------------------------------
Net cash used for financing activities (6,187) (9,976) (5,349)
- ---------------------------------------------------------------------------------------------------------------
Effects of exchange rate changes on cash and cash equivalents 457 932 (210)
- ---------------------------------------------------------------------------------------------------------------
Change in cash and cash equivalents 533 (8,840) (9)
Cash and cash equivalents at beginning of year 23,225 32,065 32,074
- ---------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 23,758 $ 23,225 $ 32,065
- ---------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid -
Income taxes $ 2,192 $ 2,168 $ 1,955
Interest 766 643 147
Non-cash financing and investing activities -
Assets recorded under capital leases $ 4,701 $ 4,063 $ 2,676
Assets written off against restructuring reserve 568 125 --
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> 14
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, 1998 and 1997, 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. Capitalized costs are then amortized
on a straight-line basis over the estimated product life, or on the ratio
<PAGE> 15
of current revenues to total projected product revenues, whichever is greater.
Through September 30, 1998, 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 may 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 1998, 1997 and 1996 cooperative advertising expense totaled
approximately $9.2 million, $8.6 million and $8.2 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.
COMPUTATION OF NET LOSS PER SHARE The Company has adopted the provisions of
Statement of Financial Accounting Standards No. 128 (SFAS 128) 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
shareholders by the weighted average number of common shares outstanding for the
period. Diluted EPS is computed by giving effect to all dilutive potential
common shares that were outstanding during the period. For the Company, dilutive
potential common shares consist of the incremental common shares issuable upon
the exercise of stock options for all periods. In accordance with SFAS 128, all
prior period earnings per share amounts have been restated to reflect this
method of calculation.
RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued Statement of
Financial Accounting Standards No. 133, (SFAS 133), Accounting for Derivative
Instruments and Hedging Activities, which establishes accounting and reporting
standards for derivative instruments and hedging activities. It requires that an
entity recognizes all derivatives as either assets or liabilities in the
statement of financial position and measures those instruments at fair value.
Management has not yet evaluated the effects of this change
<PAGE> 16
on its operations. The Company will adopt SFAS 133 as required for its first
quarterly filing of fiscal year 2000.
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 does not anticipate that the adoption of
SOP 97-2 will have a material impact on the Company's financial position or
results of operations.
In June 1997, the Financial Accounting Standards Board, (FASB), issued Statement
of Financial Accounting Standards No. 130 (SFAS 130), Reporting Comprehensive
Income. This statement establishes requirements for disclosure of comprehensive
income and becomes effective for the Company for fiscal years beginning after
December 15, 1997, with reclassification of earlier financial statements for
comparative purposes. Comprehensive income generally represents all changes in
shareholders' equity except those resulting from investments or contributions by
shareholders. The Company does not expect this pronouncement to materially
impact the Company's results of operations.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, (SFAS 131), Disclosures about Segments of an Enterprise and Related
Information. This statement establishes standards for disclosure about operating
segments in annual financial statements and selected information in interim
financial reports. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. This statement
supersedes Statement of Financial Accounting Standards No. 14, Financial
Reporting for Segments of a Business Enterprise. The new standard becomes
effective for fiscal years beginning after December 15, 1997, and requires that
comparative information from earlier years be restated to conform to the
requirements of this standard. The Company does not anticipate that the adoption
of SFAS 131 will significantly alter the Company's current reporting and
disclosures.
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 U.S. 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 resulting from translation of intercompany accounts 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
<PAGE> 17
foreign currency forward exchange contracts. At September 30, 1998, the Company
had foreign exchange contracts, all having maturities of 90 days or less, to
sell approximately $1,500,000 in U.S. dollars.
The fair value of these contracts at September 30, 1998 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.
NOTE 2 - CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
September 30,
--------------------------
(In thousands) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Bank demand deposits $ 1,035 $ --
Certificates of deposit -- 2,173
Money market accounts 20,660 21,052
Corporate bonds 2,063 --
- --------------------------------------------------------------------------------
$23,758 $23,225
- --------------------------------------------------------------------------------
</TABLE>
NOTE 3 - SHORT-TERM INVESTMENTS
<TABLE>
<CAPTION>
September 30,
--------------------------
(In thousands) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
U.S. Treasury notes $ 4,078 $ 4,643
Certificates of deposit -- 1,145
Government agency bonds 7,153 10,351
Corporate bonds 16,087 12,347
- --------------------------------------------------------------------------------
$27,318 $28,486
- --------------------------------------------------------------------------------
</TABLE>
At September 30, 1998, investments with maturity dates ranging from 91 days to
one year totaled $5.2 million, and investments with maturity dates ranging from
one year to three years totaled $22.1 million.
NOTE 4 - RECEIVABLES
<TABLE>
<CAPTION>
September 30,
---------------------------
(In thousands) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Trade accounts receivable $ 40,826 $ 47,425
Less allowance for returns and
doubtful accounts (11,788) (10,879)
- --------------------------------------------------------------------------------
$ 29,038 $ 36,546
- --------------------------------------------------------------------------------
</TABLE>
The Company generates a significant portion of its revenues through distributors
of 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, 1998, 1997 and 1996, no one customer's
balance exceeded 10% of trade receivables or accounted for greater than 10% of
the Company's revenues.
<PAGE> 18
NOTE 5 - PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
September 30,
---------------------------
(In thousands) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Computer and office equipment $ 43,218 $ 39,098
Furniture and fixtures 8,467 7,469
Leasehold improvements 8,001 7,540
- --------------------------------------------------------------------------------
59,686 54,107
Less accumulated depreciation and
amortization (46,757) (40,441)
- --------------------------------------------------------------------------------
$ 12,929 $ 13,666
- --------------------------------------------------------------------------------
</TABLE>
Depreciation and amortization expense was $6.9 million, $7.5 million, and $7.1
million during fiscal 1998, 1997 and 1996, respectively.
NOTE 6 - PURCHASED SOFTWARE AND TECHNOLOGY LICENSES
<TABLE>
<CAPTION>
September 30,
----------------------------
(In thousands) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Purchased software and
technology licenses, at cost $ 33,791 $ 34,121
Less accumulated amortization (20,778) (17,598)
- --------------------------------------------------------------------------------
$ 13,013 $ 16,523
- --------------------------------------------------------------------------------
</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 was paid in three
equal installments of $3.0 million in each of fiscal 1996, 1997 and 1998. The
present value of the license is included in purchased software and technology
licenses in the Company's consolidated balance sheet. Amortization expense for
this license of $1.4 million in 1998 and 1997 and $1.0 million in 1996 is
included in cost of license revenues in the Company's consolidated statements of
operations.
Amortization expense was $6.6 million, $7.8 million, and $5.6 million during
fiscal 1998, 1997 and 1996, respectively.
NOTE 7 - BANK LINE OF CREDIT
At September 30, 1998, the Company had available lines of credit of
approximately $15.7 million. The domestic credit agreement provided 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 was the prime rate and borrowings were unsecured. The line of credit
required that the Company maintain certain financial ratios with which the
company was not in compliance as of September 30, 1998, and received a waiver
for the specific violation. However, this line of credit was not used during
fiscal 1998 and was terminated by the Company as of December 11, 1998. The
Company maintains a $0.7 million line of credit internationally under which the
Company had $0.6 million in outstanding borrowings at September 30, 1998. The
interest rate on borrowings made against this line of credit during fiscal 1998
was 2.125%.
<PAGE> 19
NOTE 8 - ROYALTIES PAYABLE
Royalties payable represent obligations to pay authors of certain software
products under licensing agreements. Two corporate shareholders accounted for
$0.6 million and $8.3 million of the royalties payable balance at September 30,
1998 and 1997 respectively, and $(2.1) million, $4.2 million and $4.1 million of
royalty (income) expense for fiscal 1998, 1997 and 1996, respectively.
NOTE 9 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
<TABLE>
<CAPTION>
September 30,
-------------------------
(In thousands) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Accrued wages, commissions, bonuses $ 8,153 $ 7,236
Accrued advertising 4,459 3,829
Accrued fringe benefits 2,489 2,488
Other accrued expenses 11,695 13,677
- --------------------------------------------------------------------------------
$26,796 $27,230
- --------------------------------------------------------------------------------
</TABLE>
NOTE 10 - COMMITMENTS AND CONTINGENCIES
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, 1998 were as follows:
<TABLE>
<CAPTION>
Capital Operating
(In thousands) Leases Leases
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Year Ending September 30,
1999 $3,917 $ 8,023
2000 2,510 7,160
2001 1,096 6,416
2002 27 5,846
2003 -- 4,738
Later years, through 2020 -- 20,799
------ --------
Total minimum lease payments 7,550 $ 52,982
========
Less amount representing interest 618
------
Present value of net minimum capital lease payments 6,932
Less current installments of
obligations under capital leases 3,427
- ----------------------------------------------------------------------------------------
Obligations under capital leases,
excluding current installments $3,505
- ----------------------------------------------------------------------------------------
</TABLE>
The cost of assets recorded under capital leases was $11.5 million and $7.4
million at September 30, 1998 and 1997, respectively. Accumulated amortization
on those dates was $4.5 million and $2.2 million, respectively.
<PAGE> 20
Rent expense amounted to approximately $8.1 million, $8.6 million and $8.2
million in fiscal 1998, 1997 and 1996, respectively.
Included in the Company's operating lease commitments are facilities leased from
Encinal Partners, a partnership which includes both the Company President and
Chief Executive Officer and a principal shareholder. 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 seven years.
Rent expense for these facilities amounted to approximately $1.4 million in each
of fiscal 1998, 1997 and 1996.
NOTE 11 - SHAREHOLDERS' EQUITY
PREFERRED STOCK The Company is authorized to issue 20,000,000 shares of
Preferred Stock. As of September 30, 1998, 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 1998, 1997 and 1996, employees purchased 567,647, 431,351 and
317,722 shares at an average per share price of $3.07, $4.81 and $5.47,
respectively. The number of shares reserved for issuance under the Purchase Plan
increased by 750,000 shares in February 1998. As of September 30, 1998,
1,200,117 shares were reserved for future issuance.
1994 INCENTIVE STOCK OPTION PLAN As of September 30, 1998, the Company had
authorized 15,013,665 shares of Common Stock for issuance under the 1994
Incentive Stock Option Plan (the "Option Plan"). 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 non-employee
directors of the Company and is administered by the Board of Directors. In
February of 1998, the number of shares available for issuance under the Director
Plan was increased by 200,000 shares from 750,000 shares to 950,000 shares.
A summary of the status of the Company's stock option plans as of September 30,
1998, 1997 and 1996, and changes during the years then ended on those dates is
presented below:
<PAGE> 21
(In thousands, except per share data)
<TABLE>
<CAPTION>
1998 1997 1996
------------------------- ------------------------- ------------------------
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 8,558 $ 5.25 6,419 $ 6.93 6,244 $ 6.60
Granted 3,102 3.87 8,345 5.43 1,424 7.03
Exercised (91) 2.37 (441) 2.08 (506) 1.96
Cancelled (1,220) 5.80 (5,765) 7.62 (743) 7.73
------- ------- -----
Outstanding at end of year 10,349 4.80 8,558 5.25 6,419 6.93
======= ======= =====
Options exercisable at year-end 3,484 $ 5.17 1,678 $ 5.54 2,468 $ 5.73
Weighted-average fair value of
options granted during the year $ 2.19 $ 2.13 $ 3.48
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes information about stock options outstanding at
September 30,1998:
(In thousands)
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ ------------------------------
Number Weighted-Avg Number
Range of Outstanding Remaining Weighted-Avg Exercisable Weighted-Avg
Exercise Price at 9/30/98 Contractual Life Exercise Price at 9/30/98 Exercise Price
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0.41 - 0.41 9 0.7 years $ 0.41 9 $ 0.41
1.25 - 1.50 197 1.9 1.37 197 1.37
2.00 - 3.00 558 8.7 2.54 110 2.38
3.19 - 4.75 3,351 9.1 4.08 672 4.17
4.81 - 7.15 5,967 7.6 5.34 2,281 5.57
7.25 - 10.50 224 6.1 8.53 172 8.52
12.00 - 12.00 43 4.6 12.00 43 12.00
$ .41 - 12.00 10,349 8.0 $ 4.80 3,484 $ 5.17
====== =====
- -------------------------------------------------------------------------------------------------------
</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 its employee stock options and other stock-based compensation
granted subsequent to September 30, 1996 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 1998, 1997 and 1996: risk-free interest rate of 5.45% for 1998,
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 65% for 1998 and 55%
for 1997 and 1996, respectively; an average turnover rate of 15%
<PAGE> 22
for options granted to employees and a four year and five year expected life for
options granted to employees and executives, respectively.
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 1998, 1997 and 1996: risk-free interest rates of
5.31%, 5.31% and 5.34%, respectively; dividend yield of 0%; volatility factors
of 65% for 1998 and 55% for 1997 and 1996; and six month expected life. The
weighted average fair value of the ESPP rights granted in 1998, 1997 and 1996
was $ 1.27, $1.71 and $2.01, respectively.
(In thousands, except per share price)
<TABLE>
<CAPTION>
Fiscal Year Ended
September 30,
-------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Pro forma net loss (20,664) (18,625) (23,376)
Pro forma loss per share, basic and diluted (0.58) (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, 1998, 1997, and 1996,
the purchases and retirements of common stock under the systematic plan were
1,115,000 shares, 843,000 shares and 601,000 shares, respectively. Under the
non-systematic repurchase plan, the Company may repurchase up to 6,000,000
shares of its common stock. During the fiscal years ended September 30, 1998,
1997 and 1996, 945,050, 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 1999.
SHAREHOLDER RIGHTS In September 1997, the Company adopted a Shareholder Rights
Plan which provides existing shareholders 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 takeover attempts not approved by the Company's
Board of Directors. The rights expire in September 2007.
NOTE 12 - INCOME TAXES
Loss before income taxes for fiscal 1998, 1997, and 1996 include foreign pretax
profit (loss) of approximately $(3.0) million, $2.2 million and $2.2 million,
respectively. The components of income taxes are as follows:
<PAGE> 23
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
--------------------------------------
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ -- $ (846) $ 301
State 20 (774) 814
Foreign 3,334 2,394 1,205
- --------------------------------------------------------------------------------
Total current 3,354 774 2,320
- --------------------------------------------------------------------------------
Deferred:
Federal -- 1,450 (1,684)
State -- (308) (568)
Foreign 205 (2,159) 410
- --------------------------------------------------------------------------------
Total deferred 205 (1,017) (1,842)
- --------------------------------------------------------------------------------
Charge in lieu of income
tax expense related to
employee stock options -- 244 263
- --------------------------------------------------------------------------------
$3,559 $ 1 $ 741
- --------------------------------------------------------------------------------
</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) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal income
benefit at 34% $(3,776) $(5,157) $(7,369)
State income tax (benefit),
net of federal effect (338) (714) 162
Foreign taxes less related tax
benefit, if any 3,659 502 577
Losses and expenses without
tax benefit 4,014 5,836 7,379
Other, net -- (466) (8)
- --------------------------------------------------------------------------------
$ 3,559 $ 1 $ 741
- --------------------------------------------------------------------------------
</TABLE>
The tax effect of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are as follows:
<PAGE> 24
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
---------------------------------------
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred tax assets:
Accruals and reserve
accounts $ 9,732 $ 6,130 $ 7,685
Property and equipment 1,477 2,696 142
Purchased software -- -- 5,005
Net operating loss carryforward 18,550 9,644 --
Research credit 7,105 6,715 4,593
Other credits 1,020 1,986 --
- --------------------------------------------------------------------------------
Total gross deferred tax assets 37,884 27,171 17,425
Less valuation allowance (26,330) (17,452) (9,598)
- --------------------------------------------------------------------------------
Net deferred tax assets 11,554 9,719 7,827
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Purchased software 3,730 1,690 815
- --------------------------------------------------------------------------------
Total deferred tax liabilities 3,730 1,690 815
- --------------------------------------------------------------------------------
Net tax assets and liabilities $ 7,824 $ 8,029 $ 7,012
- --------------------------------------------------------------------------------
</TABLE>
The net change in the total valuation allowance for the years ended September
30, 1998, 1997 and 1996 was an increase of approximately $8.9 million, $7.9
million and $5.4 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, 1998, the Company has net operating loss carryforwards of
approximately $53.0 million which expire in fiscal years 2012 through 2013, and
foreign tax credit and research credit carryforwards of approximately $0.6
million and $7.3 million, respectively, which expire in fiscal 1999 through
2013.
At September 30, 1998, the cumulative unremitted foreign earnings of the Company
were not material. The Company 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 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 restructuring charge payable and payments against it can be summarized as
follows:
<PAGE> 25
<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
Fiscal 1997 payments / write-offs (2,551) (485) (1,433) (1,055) (5,524)
- ----------------------------------------------------------------------------------------------------
Accrual at end of fiscal 1997 808 1,440 -- 601 2,849
Fiscal 1998 payments / write-offs (798) (758) -- (601) (2,157)
- ----------------------------------------------------------------------------------------------------
Accrual at end of fiscal 1998 $ 10 $ 682 $ -- $ - $ 692
- ----------------------------------------------------------------------------------------------------
</TABLE>
NOTE 14 - ACQUISITIONS
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 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 for which technological feasibility had not been established and
for which there was no alternative future use. 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 February 18, 1999, 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 March 31, 1999.
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, 2000, 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 accrued as of July 1, 1998 was paid in July 1998.
Interest accrued subsequent to July 1, 1998 on the outstanding borrowing is due
and payable at the loan's maturity.
At September 30, 1998, the Company had accounts receivable outstanding with the
related parties of $1.5 million. The September 30, 1997 outstanding accounts
receivable with the related parties was $3.9 million. Sales to the related
parties were $18.6 million for fiscal 1998 and $18.3 million for fiscal 1997.
One of the parties accounted for receivables of $1.6 million as of September 30,
1996, and sales of $7.7 million for fiscal 1996.
<PAGE> 26
NOTE 16 - INFORMATION BY GEOGRAPHIC AREA
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
---------------------------------------------
(In thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET REVENUES:
United States $ 108,482 $ 113,328 $ 125,759
Europe 61,191 77,931 80,603
Other international operations 2,227 2,401 1,528
- ----------------------------------------------------------------------------------------
Total net revenues $ 171,900 $ 193,660 $ 207,890
========================================================================================
TRANSFERS BETWEEN GEOGRAPHIC AREAS:
United States $ 11,620 $ 13,205 $ 16,894
Europe 1,865 2,136 916
- ----------------------------------------------------------------------------------------
Total transfers $ 13,485 $ 15,341 $ 17,810
========================================================================================
OPERATING INCOME (LOSS):
United States $ (10,966) $ (17,496) $ (29,017)
Europe (2,932) 1,999 2,864
Other international operations 305 189 120
Eliminations -- (1,286) 2,452
- ----------------------------------------------------------------------------------------
Operating loss $ (13,593) $ (16,594) $ (23,581)
========================================================================================
IDENTIFIABLE ASSETS:
United States $ 102,825 $ 117,068 $ 135,040
Europe 27,914 32,816 31,930
Other international operations 1,643 3,728 3,860
Eliminations 301 (6,947) (4,023)
- ----------------------------------------------------------------------------------------
Total assets $ 132,683 $ 146,665 $ 166,807
========================================================================================
</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 - EMPLOYEE BENEFIT PLAN
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 20% of their pre-tax salary, but not more than the
statutory limits. The Company matches 50% of employee contributions up to the
lower of 6% of the employee's annual salary or $3,000. For fiscal 1998, 1997 and
1996, the Company's total contributions towards the 401(k) plan amounted to $0.9
million, $0.9 million and $0.5 million, respectively.
<PAGE> 27
REPORTS OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of The Santa Cruz Operation, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statement of operations, of shareholders' equity (deficit) and of
cash flows present fairly, in all material respects, the financial position of
The Santa Cruz Operation, Inc. and its subsidiaries at September 30, 1998, and
the results of their operations and their cash flows for the year then ended, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
San Jose, California
October 23, 1998 except for Note 7 which is as of December 11, 1998
To 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 the related
consolidated statements of operations, shareholders' equity (deficit), and cash
flows for each of the years in the two-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 the results of
their operations and their cash flows for each of the years in the two-year
period ended September 30, 1997, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
San Jose, California
October 22, 1997
<PAGE> 28
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) 1998 1998 1998 1997 1997 1997 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues $48,622 $ 25,241 $ 50,540 $47,497 $51,799 $ 31,166 $ 54,087 $ 56,608
Cost of revenues 10,473 10,126 12,953 12,346 13,800 12,826 15,027 13,662
- -----------------------------------------------------------------------------------------------------------------------------------
Gross margin 38,149 15,115 37,587 35,151 37,999 18,340 39,060 42,946
- -----------------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Research and
development 10,066 10,157 10,411 10,759 10,825 11,055 12,284 11,966
Sales and marketing 20,393 20,445 19,187 19,619 17,868 20,197 20,695 20,776
General and
administrative 5,078 4,626 4,250 4,604 4,776 5,523 5,365 5,236
Non-recurring charges -- -- -- -- -- 8,373 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total operating
expenses 35,537 35,228 33,848 34,982 33,469 45,148 38,344 37,978
- -----------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 2,612 (20,113) 3,739 169 4,530 (26,808) 716 4,968
Other income (expense):
Interest income, net 637 679 470 475 630 396 628 637
Other income (expense), net 230 (53) (52) 101 157 (661) (45) (317)
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before
income taxes 3,479 (19,487) 4,157 745 5,317 (27,073) 1,299 5,288
- -----------------------------------------------------------------------------------------------------------------------------------
Income taxes 800 1,482 956 321 798 (2,444) 325 1,322
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 2,679 ($20,969) $ 3,201 $ 424 $ 4,519 ($24,629) $ 974 $ 3,966
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) per share:
Basic $ 0.08 ($ 0.59) $ 0.09 $ 0.01 $ 0.12 ($ 0.67) $ 0.03 $ 0.11
Diluted $ 0.08 ($ 0.59) $ 0.09 $ 0.01 $ 0.12 ($ 0.67) $ 0.03 $ 0.11
- -----------------------------------------------------------------------------------------------------------------------------------
Shares used in income (loss)
per share calculation:
Basic 35,221 35,611 36,094 36,345 36,443 36,547 36,611 36,909
Diluted 35,408 35,611 36,431 37,094 37,220 36,547 37,522 37,683
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 29
DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
BOARD OF DIRECTORS CORPORATE OFFICERS DIVISIONAL OFFICERS
<S> <C> <C>
NINIAN EADIE+# DOUG MICHELS*+ MICK ADAMSON
President and Chief Executive Officer Vice President and General Manager,
JEAN-FRANCOIS HEITZ+# Tarantella Business Unit
RAY ANDERSON+
RONALD LACHMAN+ Senior Vice President, Marketing SHEILA BAKER
Vice President, US Channel Sales
ROBERT MCCLURE+# JOHN LUHTALA*+
Senior Vice President, Operations, WAYNE BERGLAND
and Chief Financial Officer
DOUG MICHELS+ Vice President, US Field Sales
ALOK MOHAN+, CHAIRMAN DAVID MCCRABB+ JOHN BONDI
Executive Vice President, Vice President, Server Product Marketing
GLENN RICART+# Worldwide Sales and Field Operations
RANDY BRESEE
R. DUFF THOMPSON+ JACK MOYER+ Vice President, Corporate Controller
Senior Vice President, Human
Resources
GIL WILLIAMSON+ JIM CLARK
STEVE SABBATH*+ Vice President, Asia/Pacific Operations
Senior Vice President,
Law and Corporate Affairs, and EDMUNDO COSTA
Secretary
Vice President,
GEOFF SEABROOK+ OEM and Alliance Management
Senior Vice President,
Corporate Development DAVE CUSS
Regional Vice President,
JAMES WILT (Nordic, Benelux, Iberia,
Senior Vice President, Products Middle East, and Africa)
CHRIS FLYNN
Regional Vice President,
#Member of Audit Committee * Elected by Board of Directors (Germany, France, UK and India)
+ Affiliate or Executive Officer
subject to the provisions of
Section 16(b) of the Securities NIMER MAABADI
Exchange Act of 1934 Vice President, Canada and Latin America
HELENE MANN-BOUCHARD
Vice President,
Worldwide Customer Delivery Systems
LISA OZIMEK
Vice President, UNIX Systems Group
ANTONIO PRIVITERA
Regional Vice President,
(Italy, Greece, Turkey, Eastern Europe,
And Central Asia)
RON RASMUSSEN
Vice President, Server Products Group
CHRIS SCHEYBELER
Vice President,
Client Integration Development
DAVID TAYLOR
Vice President,
World Wide Field Programs
and Professional Services
RICHARD TREADWAY
Vice President,
Segment Business Development
</TABLE>
<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, Australia
SCO Canada, Company Nova Scotia, Canada
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 annual report on Form 10-K of
The Santa Cruz Operation, Inc. of our reports dated October 23, 1998, except for
Note 7 which is as of December 11, 1998, relating to the consolidated balance
sheet of The Santa Cruz Operation, Inc. and subsidiaries as of September 30,
1998, and the related consolidated statements of operations, shareholders'
equity (deficit) and cash flows for the year ended September 30, 1998, and the
related schedule, which reports appear or are incorporated by reference in the
September 30, 1998 annual report on Form 10-K of The Santa Cruz Operation, Inc.
/s/ PricewaterhouseCoopers LLP
San Jose, California
December 23, 1998
The Board of Directors and Shareholders
The Santa Cruz Operation, Inc.:
We consent to incorporation by reference in the registration statement (No.
333-52299) on Form S-8 of The Santa Cruz Operation, Inc. of our report dated
October 22, 1997, relating to the consolidated balance sheets of The Santa Cruz
Operation, Inc. and subsidiaries as of September 30, 1997, and the related
consolidated statements of operations, shareholders' equity (deficit) and cash
flows for each of the years in the two-year period ended September 30, 1997, and
the related schedule, which reports appear or are incorporated by reference in
the September 30, 1998 annual report on Form 10-K of The Santa Cruz Operation,
Inc.
/s/ KPMG Peat Marwick LLP
Mountain View, California
December 17, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 23,758
<SECURITIES> 27,318
<RECEIVABLES> 40,826
<ALLOWANCES> (11,788)
<INVENTORY> 1,087
<CURRENT-ASSETS> 92,742
<PP&E> 59,686
<DEPRECIATION> (46,757)
<TOTAL-ASSETS> 132,683
<CURRENT-LIABILITIES> 59,422
<BONDS> 0
0
0
<COMMON> 111,972
<OTHER-SE> (51,837)
<TOTAL-LIABILITY-AND-EQUITY> 132,683
<SALES> 156,707
<TOTAL-REVENUES> 171,900
<CGS> 29,193
<TOTAL-COSTS> 45,898
<OTHER-EXPENSES> 139,595
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,487
<INCOME-PRETAX> (11,106)
<INCOME-TAX> 3,559
<INCOME-CONTINUING> (14,665)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,665)
<EPS-PRIMARY> (0.41)
<EPS-DILUTED> (0.41)
</TABLE>
