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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, 1999
[ ] 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 (I.R.S. Employer
of incorporation Identification No.)
or organization)
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
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, 1999 as reported on the Nasdaq National Market was approximately
$497,522,629. 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, 1999, registrant had 35,045,770 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1999 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, 2000 to
be delivered to shareholders in connection with the Annual Meeting of
Shareholders to be held February 22, 2000 are incorporated by reference into
Part III.
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THE SANTA CRUZ OPERATION, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I PAGE NUMBER
<S> <C>
Item 1. Business 1
Item 2. Properties 15
Item 3. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Executive Officers of the Registrant 16
PART II
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters 19
Item 6. Selected Financial Data 19
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 19
Item 8. Financial Statements and Supplementary Data 19
Item 9. Changes in and Disagreement with Accountants on Accounting
and Financial Disclosures 20
PART III
Item 10. Directors and Executive Officers of the Registrant 21
Item 11. Executive Compensation 21
Item 12. Security Ownership of Certain Beneficial Owners
and Management 21
Item 13. Certain Relationships and Related Transactions 21
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports
on Form 8-K 22
Signatures 24
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PART I
ITEM 1. BUSINESS
NOTE: 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.
INTRODUCTION
Founded in 1979, SCO went public on the Nasdaq Stock Exchange (Nasdaq: SCOC) in
1993. SCO is a global developer and provider of server software for networked
business computing. The Company is the world's leading provider of UNIX(R)
server operating systems, and creator of the award-winning Tarantella(R)
software, which provides users with instant web-browser access to applications
running on a wide range of networked servers, including mainframes,
minicomputers, Windows(R) NT(TM), and UNIX System servers. SCO also provides a
full range of Professional Consulting and Engineering Services for audits,
deployment, and maintenance. SCO Professional Services are available for SCO
OpenServer, UnixWare, Tarantella, Linux and Open Source systems.
SCO has 20 years of experience developing UNIX system, open system, and open
source software. SCO owns the intellectual property for UNIX system technology
and Tarantella web-enabling software. Headquartered in Santa Cruz, California,
SCO has sales representatives in more than 80 countries. SCO products are sold
and distributed worldwide by more than 15,000 resellers, distributors, systems
integrators and computer manufacturers.
VISION AND MISSION: SERVER-BASED NETWORK COMPUTING
SCO's vision is that server-based network computing powers all enterprises.
SCO's mission is to create, market, and support the server software that system
builders choose for networked business computing.
IMPORTANCE OF SERVER-BASED NETWORK COMPUTING
A major drawback of today's PC-centric client/server model is the high cost of
system administration, maintenance, and software updates. When businesses move
to a server-based network computing model, they can administer and update client
software from the server, saving inordinate amounts of time and money. Companies
that adopt a server-based computing model can understand their customers better,
reach wider potential markets, bring products to market faster, and improve
their overall customer satisfaction levels.
COMPANY STRATEGY
SCO's business strategy is threefold: 1) to provide the leading UNIX server
software for high-volume Intel processor based servers; 2) to web-enable
existing and new applications with server-based software across multiple
platforms; and 3) to provide technical expertise to companies via its
Professional Services organization.
ADVANTAGES OF SCO SERVER SYSTEMS
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
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 low cost, 4) support for multiple users
performing multiple tasks, 5) high-level security, 6) reliability and
manageability, 7) support for a wide
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range of client devices, including not only Microsoft Windows PC desktops and
laptops, but also UNIX workstations, thin clients, and the browser-based network
computers known as NCs, and 8) expert service and support.
BENEFITS TO CUSTOMERS
SCO products deliver four key advantages to customers:
- - Server-based Computing - SCO server software makes it easier to deploy,
secure, manage, and grow applications and information systems.
- - Client Independence - SCO server software supports many kinds of client
devices, so that businesses can choose the device that best suits a task.
- - Evolutionary Systems - SCO server software protects current hardware and
software investments while enabling businesses to adopt the latest
technological advances.
- - Global Services - SCO delivers the expert consulting, training, and
technical support services that businesses worldwide require.
IMPORTANCE OF INTEL PROCESSORS
SCO has focused primarily on Intel processor based servers because of Intel's
dominant position in the microprocessor-based computer market and the potential
of Intel processor based servers in the growing market for server-based network
computing. Intel processor based servers offer price-performance value that
derives from their high volume, relatively low cost, and global availability
from numerous competing system vendors. Industry analysts generally agree that,
as Intel processor based servers continue to provide increasingly greater
performance at an affordable price, they will increasingly displace the more
costly RISC processor based servers that currently dominate high-end server
environments.
SCO has supported each successive generation of Intel processors, beginning in
1983, delivering an extensive line of highly reliable and stable UNIX operating
system products over the past 17 years. During that period, SCO has also
developed optional layered and Internet software products for the Intel
platform, as well as new Tarantella web-enabling software that runs on many
different kinds of servers, including not only Intel processor based servers,
but also RISC processor based servers.
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 most recent Pentium, Pentium II
and Pentium Pro(R) processors. Looking to the future, SCO and IBM are
cooperatively developing a new high-volume enterprise UNIX System for Intel's
next generation of 64-bit processors, the first of which is called Itanium(TM).
SCO software is compatible with Intel processor based servers 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.
IMPORTANCE OF UNIX OPERATING SYSTEMS
SCO bases its server operating system software on the UNIX System, which has
been in use since the 1970s. The UNIX System is a native multi-user,
multi-tasking technology that allows application programs to be separated from
operating system tasks such as control of peripheral devices, communications,
memory management and file management. This provides a standardized, protected
environment in which the applications operate. This results in much higher
reliability, because multiple applications and users cannot interfere with each
other. It also simplifies application development because the operating system
handles many complex functions that might otherwise have to be delegated to the
application.
UNIX Systems are well known for their reliability, availability, scalability,
and security features. Reliability and availability refer to the extremely high
mean time between failures on UNIX Systems, and to the UNIX System's ability to
"failover" to a backup system without shutting down operations. Scalability
refers to the UNIX operating system's ability to scale easily up from
uni-processor to multi-processor systems, including clustered systems of
multiple processors each. Security refers to the UNIX
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System's ability to resist access by unauthorized persons over a network, or
over the Internet, for example. UNIX Systems from SCO meet US government-level
C2 and B2 security requirements.
SCO believes that UNIX System technology is only the beginning of the solution,
and that considerable value must be added to the basic technology 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 UNIX Systems that have in the
past dominated the technical and scientific workstation market are unacceptable.
These proprietary versions of UNIX systems run on proprietary, RISC
processor-based, hardware architectures that are more expensive than Intel
processor based architectures. Because these versions of the UNIX System are
tied to particular hardware vendors, they can lock customers into a long-term
business relationship with a single vendor. Vendor lock-in can make it difficult
for customers to introduce new technology from other vendors into their
information systems without disrupting their current operations and having to
replace hardware and software at great cost. Applications that run on these
proprietary UNIX Systems usually come from the same vendor as well, or must be
developed specifically for these proprietary systems. Business and government
organizations require broad availability of third-party application 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 that make it easier to
produce and deploy these applications across multiple hardware architectures. In
addition, these customers require a high level of support, including consulting
services and training, as well as continual product enhancements to incorporate
new technology and industry standards.
This is why SCO has committed itself to building its systems on open system
technologies (standards-based technologies that support multiple hardware and
software systems in a networked environment) that run on Intel processor based
servers. SCO has a long tradition of integrating leading-edge technologies from
other vendors into its own UNIX operating systems, providing customers with
best-of-breed solutions. In addition, SCO acquired ownership of UNIX System
technology in fiscal year 1996 from Novell Corporation, which had earlier
acquired it from AT&T's UNIX System Laboratories, the original developer. SCO
therefore now controls the source UNIX system technology, enabling the Company
to continue developing new versions of the UNIX System for high-volume Intel
processor based systems that compete successfully against proprietary RISC based
systems on performance and price. Because these Intel processor based servers
are available from multiple hardware vendors around the world, customers
preserve their freedom to choose their system providers.
TARGET 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. Key targeted industries include
retail and telecommunications.
The Company continues to drive the Small and Medium Business (SMB) 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. 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 delivers high-end editions of UnixWare 7 and
UnixWare 7 NonStop Clusters.
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Meanwhile, SCO is also accelerating its growth into the enterprise computing
market with Tarantella. Tarantella provides virtually any client device on the
network with secure, Web browser access to any server application on the
network.
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, and network computers or NCs. The goal of
this strategy is to enable organizations to take full advantage of
cost-effective client devices that can run the new Java-based applications and
exchange information across the Internet and corporate intranets.
SCO continues 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 2K Suite.
In addition, SCO offers Tarantella, the Company's web-enabling software.
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, a NC, a character terminal or a PC.
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 processor-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, Computer Associates, Informix, Lotus, Microsoft,
Oracle, Novell, Progress, and Sybase. In total, over 15,000 independent software
vendors (ISVs), representing over 15,000 business-critical applications support
SCO UNIX Systems.
DELIVERING COMPREHENSIVE SUPPORT SERVICES
SCO continues to expand its delivery of support services to meet the needs of
customers using complex, multivendor computer systems. The Professional Services
division of SCO offers a series of Linux-related services to help enterprise
customers evaluate and manage the cost, benefits and risk of Open Source
technologies. These new services are part of SCO's ongoing strategy to fully
support the increasingly popular network computing model, which favors
heterogeneous client devices and application environments from multiple vendors.
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 (www.sco.com).
PROVIDING TRUE OPEN SYSTEMS PRODUCTS
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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 that allow competing
implementations. Because these standards are open, competitors can readily
access the technology to include in their products. Industry standards offer the
customer a cost-effective computing solution by providing a high degree of
compatibility and interoperability among hardware, software, network and
peripheral products. Based on published directories listing vendors and
applications, the Company believes there are currently over 15,000
business-critical software solutions compatible with SCO's products.
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 16 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.
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.
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, India, 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.
BRIEF HISTORY OF SCO PRODUCTS
- - 1983 - SCO(R) XENIX(R) System V, a packaged version of the
UNIX(R)operating system.
- - 1985 - SCO XENIX 286, its first operating system for the 32-bit Intel(R)
microprocessor environment.
- - 1987 - SCO XENIX 386.
- - 1989 - SCO UNIX System V/386, its first UNIX trademarked commercial
product for Intel processor based platforms.
- - 1990 - SCO Open Desktop(R), a graphical version of SCO UNIX System
V/386.
- - 1993 - SCO OpenServer(TM) software family, a complete line of advanced
server.
- - 1993 - SCO Open Desktop family, a complete line of advanced workstation
(client) operating systems.
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- - 1995 - SCO OpenServer family, which integrated SCO OpenServer and SCO
Open Desktop product lines.
- - 1995 - SCO Vision family of client-integration products, which integrate
Windows(R) PCs with UNIX servers from all major UNIX system vendors.
- - 1995 - SCO created an Optional Services Products division which provides
middleware to enhance the capabilities of SCO OpenServer Systems, as
well as UNIX Servers from other vendors.
- - 1995 - SCO acquired the UnixWare(R)product line and UNIX system
technology from Novell, Inc.
- - 1997 - Tarantella web-enabling software.
- - 1998 - UnixWare 7 Operating System.
- - 1998 - SCO joined with IBM to begin developing new high-volume
enterprise UNIX System for 64-bit processor servers, called "Project
Monterey." This product line is designed to run on Intel IA-32, Intel
IA-64 and IBM microprocessor systems that range from entry-level servers
to large enterprise environments.
- - 1999 - UnixWare 7 Release 7.1 Operating System, featuring SCO's new
Webtop technology based on Tarantella software.
- - 1999 - New series of Linux-related Professional Services offerings to
assist enterprise customers evaluate and manage the cost, benefits and
risk of Open Source technologies.
CURRENT PRODUCTS
The Company offers three categories of products: (1) UNIX server operating
system products, which include optional server products, (2) Tarantella
software, and (3) SCO Vision 2K Suite.
UNIX SERVER OPERATING SYSTEM PRODUCTS
UNIXWARE 7
UnixWare(R) 7 has been built from the ground up to support distributed network
computing on cost-efficient Intel(R) processor-based servers. Running on the new
generation of "enterprise-class" Intel processors, UnixWare 7 delivers a new
level of power, value and versatility to businesses of all sizes. Now customers
can dramatically simplify and increase their business operations and better
understand their customers' to gain a powerful competitive advantage in their
markets. 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, 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.
UnixWare 7 features the industry's first integrated Webtop, based on the
award-winning SCO(R) Tarantella(TM) technology. Now applications can be
instantly Web-enabled, taking businesses swiftly into the Internet age.
UnixWare 7 NonStop Clusters greatly extends the record-breaking availability and
scalability of the UnixWare 7 operating system by creating a computing
environment made up of nodes (individual servers) that communicate via a
high-speed interconnect. These "clusters" of nodes enable massive scaling of
applications and provide a reliable fail-over environment should one of the
nodes become disabled.
UNIXWARE 7 EDITIONS
UnixWare 7 Base Edition - Base-line services for building dedicated or
specialized server environments, such as telecommunications equipment and other
embedded systems. It also excels as a powerful graphical workstation.
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UnixWare 7 Business Edition - For small businesses or workgroups requiring file
and print services, reliable access to diverse applications, and the ability to
expand system capability as the organization grows.
UnixWare 7 Departmental Edition - For departmental servers in medium or large
organizations to run applications and reliably share business critical
information with any client including PCs, NCs, terminals and any Java-enabled
browser client.
UnixWare 7 Enterprise Edition - For medium-to-high-end enterprise servers to run
large-scale business applications and databases for decision support and on-line
transaction processing.
UnixWare 7 Data Center Edition - For the highest-end multi-purpose servers
demanding 24x7x365 availability, supporting hundreds or thousands of end-users
by supplying access to a wide range of applications from a variety of clients.
UNIXWARE 7 NONSTOP CLUSTERS RELEASE 7.1
UnixWare 7 NonStop Clusters provide totally dependable access to your
business-critical data and applications. UnixWare 7 NonStop Clusters software
links individual "nodes" - whole computers, each running its own copy of the
operating system - such that they act and appear as a single system. If one node
goes down, or if an application fails on a particular node, processes are
actively migrated and resumed. If a node needs to be taken off-line, for
maintenance or upgrading, the rest of the cluster continues to service its
users. Other nodes in the cluster take care of new connections or instances of
applications. In this way, downtime, planned or unplanned, is eliminated.
UNIXWARE 7 ReliantHA 1.1
UnixWare 7 ReliantHA extends the high performance, Reliability, Availability and
Scalability (RAS) characteristics of the UnixWare 7 server operating system
editions to provide continuous monitoring and fault detection of applications,
resources and entire nodes. In the event of a failure, automated recovery
scripts are initiated to enable rapid or transparent restoration of services,
depending on the application.
PROJECT MONTEREY - THE HIGH-VOLUME ENTERPRISE UNIX PLATFORM
SCO has joined with IBM, with support from Intel, to deliver the leading
high-volume, enterprise UNIX system for the 21st century. With more OEM backing
than any other commercial UNIX system being developed for Intel's forthcoming
Itanium(TM) 64-bit processor, Project Monterey continues to gain ISV support and
customer acceptance as the next UNIX system standard. As part of Project
Monterey, IBM supports UnixWare 7 as its standard commercial UNIX for Intel
IA-32 environments, further enhancing SCO's overall market visibility (see
www.projectmonterey.com).
SCO OPENSERVER
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 - In addition to the critical business
applications, SCO OpenServer Enterprise System reliably provides a variety of
network services including file and print services for both UNIX(R) and Windows
systems, E-Mail services, web services, Internet connectivity, and calendar
services.
SCO OpenServer Host System - The SCO OpenServer Host System is an excellent
platform for delivering highly reliable, non-networked multi-user solutions.
SCO OpenServer Development System - The SCO OpenServer Development System is
comprised of a core set of development tools that can be easily augmented with
over 200 third-party products to create the most robust and efficient
development environment.
SCO OpenServer Desktop System - The Desktop System excels at running
client-side, transaction-based applications, accessing databases and networked
information, and providing file/resource sharing and communications across a
range of peer, server and host environments.
SCO OPTIONAL SERVICES PRODUCTS
SCO Optional Services Products provide enhancements to extend the SCO OpenServer
or UnixWare 7 product standard configurations with services that support
customers' unique environment and needs.
SCO OPTIONAL SERVICES PRODUCTS FOR UNIXWARE 7
NetWare Services 4.10 - With NetWare Services a UnixWare application server can
easily and transparently be accessed by NetWare clients, enabling seamless
integration into existing Novell environments.
SCO Advanced File and Print Services - SCO Advanced File and Print Server 4.0
enables enterprise-wide, scalable file and printer sharing with PCs running
Microsoft Windows 95, Windows 98, Windows NT, Windows 3.x, OS/2 and MS-DOS.
SCO Merge - SCO Merge runs Windows and DOS applications on SCO OpenServer and
UnixWare 7 systems. Windows 95,Windows 3.1, and DOS applications run
simultaneously with business critical UNIX applications. A common filesystem
allows Windows, DOS, and UNIX users to share data. Windows, DOS, and UNIX users
simultaneously share printers and other standard PC peripherals.
SCO VisionFS - SCO VisionFS for UnixWare 7 and SCO OpenServer provides
high-performance robust SMB file and printer sharing from UNIX(R) Systems to PC
clients running Windows, and provides basic access to server applications.
SCO ARCserveIT6.6 from Computer Associates - A comprehensive, network backup,
restore and data management system for enterprise networks. It is an ideal
system for managing the backup of large servers and heterogeneous networks.
UnixWare 7 Online Data Manager - This is a cost-effective, enterprise-class
storage management solution for high availability and online volume management.
It provides software RAID Levels 0, 1, 5, 10 (striping, mirroring, striping
distributed parity and striped mirroring) as well as disk spanning capabilities.
UnixWare 7 Disk Mirroring - UnixWare 7 Disk Mirroring provides increased data
availability by providing fault tolerance against failures and faster access via
software RAID Level 1 (simple disk mirroring).
SCO OPTIONAL SERVICES PRODUCTS FOR SCO OPENSERVER 5
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
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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.
SCO ARCserve/Open from Cheyenne - Multi-platform Network Backup and Restore. -
ARCserve/Open is an easy-to-use, high-performance, comprehensive data management
tool for enterprise networks. ARCserve/Open provides the robust feature set that
administrators require and the simplicity necessary for end-users to do their
own backups.
SCO Doctor and SCO Doctor for Networks(TM) - The SCO Doctor and SCO Doctor for
Networks are advanced systems management tools that address the many UNIX system
configurations in use today. SCO Doctor incorporates advanced process
monitoring, accurate diagnosis and automatic problem correction. Notification of
alerts can be communicated to the administrator via pop-ups on the Doctor
console, the built-in pager support, or by e-mail notices. Alerts, in turn,
invoke intelligent action programs to automatically correct the problem or
notify the system administrator that intervention is required.
SCO Merge - SCO Merge runs Windows and DOS applications on SCO OpenServer and
UnixWare 7 systems. Windows 95,Windows 3.1, and DOS applications run
simultaneously with business critical UNIX applications. A common filesystem
allows Windows, DOS, and UNIX users to share data. Windows, DOS, and UNIX users
simultaneously share printers and other standard PC peripherals.
SCO VisionFS - SCO VisionFS for UnixWare 7 and SCO OpenServer provides
high-performance robust SMB file and printer sharing from UNIX(R) Systems to PC
clients running Windows, and provides basic access to server applications.
TARANTELLA
Tarantella is software that provides centralized deployment and management of
server-based applications. It is designed for IT professionals who need to
provide users with instant access to applications and services, and provides
centralized deployment and management of server-based applications. Unlike some
competing products, (for example, Citrix products) Tarantella enables
centralized management of application access.
Tarantella uses standard protocols and leverages Internet standards. It is a
non-invasive technology, and has a customizable Webtop. A low-risk, drop-in
solution, Tarantella continually monitors and optimizes performance and provides
a single access point for all of a user's 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 VISION2K SUITE
The SCO Vision2K Suite 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, Windows 95, and Windows 98. It's also available on
many UNIX platforms, including Sun Solaris, HP-UX, IBM AIX, UnixWare and SCO
OpenServer.
SCO Vision2K - Bringing together Windows, UNIX and the Internet - SCO Vision2K
is a new generation of best of breed Windows to UNIX integration products. Going
beyond simply accessing UNIX applications, SCO Vision2K adopts the principles of
centralized management, server deployment and Internet integration and cuts the
cost of ownership of your existing PC networks. Individual products offer
Windows access to X applications (SCO XVision Eclipse) and character-based
applications (SCO TermVision) server-based file and print sharing (SCO VisionFS)
and database connectivity (SCO SQL-
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Retriever). Together they form a tightly integrated suite that meets all your
Windows to UNIX connectivity needs.
SCO SuperVision - Remote Management of Windows Desktops - SCO(R) SuperVision(TM)
is supplied with SCO XVision Eclipse, SCO TermVision and SCO SQL-Retriever. It
provides centralized management functionality. From a central location, system
administrators can make configuration changes or control which applications
users have access to and then distribute updates from a UNIX server to a large
community of PCs in a single stroke. These changes can be made immediately, on
demand or the next time the PC is connected to the network. SCO SuperVision also
works over modem links allowing administrators to manage remote users just as
easily as those on the LAN.
SCO VisionFS - Server-Based 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) Eclipse is a proven 32-bit PC X server that exploits the strengths of
Windows(R) and the UNIX(R) system to give fast, intuitive access to X
applications. It is Internet ready and delivers X applications across the
enterprise via the intranet. SCO(R) XVision(R) Eclipse 3D is used for displaying
3D imaging applications on a Windows PC.
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.
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
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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 third fiscal quarter of 1998, the Company made a 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. This decision adversely affected the Company's
operating results for fiscal 1998. 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 (SMB). 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. SCO also has a dedicated account team that manages the
relationships with government agencies in the U.S., while Government sales
outside the U.S. are managed by SCO regional management or by OEMs, major
distributors or major resellers.
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 - includes 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 - consists 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 - includes technical advisory and support services as well as
access to early product releases for application developers; and
Engineering Services - consists 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
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electronically. SCO also supports end users via Authorized Support Centers and
Premier Service Centers. The Company also provides its support services to
distributors, VARs, OEMs and integrators.
PRODUCT DEVELOPMENT
Since its inception, the Company has focused considerable resources on the
development and integration of UNIX systems and open systems software
technologies and standards for Intel processor-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 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, Pentium Pro(R)
and the forthcoming 64-bit Itanium processor. 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:
- - made ongoing updates of information and resources available at its Year
2000 website (www.sco.com/year2000);
- - 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 Whitepaper 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 currently offered SCO products;
- - issued fixes for Year 2000 problems that have been detected in currently
SCO supported products;
- - created a project team to maintain a 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;
- - provided an email service where customers can subscribe to receive
notice of Year 2000 information updates;
- - developed an on-line Year 2000 Discussion Forum newsgroup; and
- - developed a Year 2000 support coverage schedule advertising our services
and the mechanism for accessing this schedule.
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
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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 Vision2K Suite of products, and develop Tarantella products, which
extend SCO's "any-client" proposition to server-centric 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.
The Company anticipates new releases of products in the fiscal year ending
September 30, 2000. 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 Hewlett-Packard, IBM, Olivetti and Sun Microsystems, which offer
their own versions of the UNIX System on a variety of RISC and Intel CPU-based
hardware. Competition from companies selling versions of the Linux Operating
System has also increased. Many 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.
Competitive systems not based on Intel microprocessors are offered by
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
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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 servers. The market for Microsoft Windows on personal
computers for personal productivity is substantially larger than the market for
UNIX Systems on Intel computers. Because the Company competes in a smaller
market than the personal productivity market addressed by 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 the server-centric model. 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 dependent 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.
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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.
EMPLOYEES
As of September 30, 1999, the Company had 1,207 employees, including 359 in
product development, 454 in sales and marketing, 151 in customer support
services, and 243 in finance, manufacturing and distribution services and
administration.
The Company's success depends in part on its executive officers, none of which
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.
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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, India, Canada, Brazil 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 1999.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company as of September 30, 1999 were as follows:
<TABLE>
<CAPTION>
Name Age Position with the Company
- ---- --- --------------------------
<S> <C> <C>
Douglas L. Michels 45 President and Chief Executive Officer
Ray Anderson 41 Senior Vice President, New Ventures
John Luhtala(1) 56 Senior Vice President, Operations, and Chief
Financial Officer
David McCrabb 51 Executive Vice President, Worldwide Sales and
Field Operations
Jack Moyer 50 Senior Vice President, Human Resources
Mike Orr 48 Senior Vice President, Worldwide Marketing
Steve Sabbath 52 Senior Vice President, Law and Corporate Affairs,
and Secretary
Geoff Seabrook 51 Senior Vice President, Corporate Development
Jenny Twaddle(1) 35 Corporate Controller and Acting Chief Financial
Officer
James Wilt 53 Senior Vice President, Products
</TABLE>
- --------
(1) Mr. Luhtala left the Company in December 1999. Ms. Twaddle, Corporate
Controller, was named Acting Chief Financial Officer at his departure.
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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, New Ventures in July 1999. Between
April 1998 and July 1999, he served as Senior Vice President, Marketing. 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. Orr was named Senior Vice President, Worldwide Marketing in July 1999. Prior
to joining the Company, between June 1998 and June 1999, Mr. Orr served as Vice
President, Sales and Marketing at Splash Technology. From August 1988 to June
1998, Mr. Orr served in various senior management positions at Amdahl. From
August 1974 to August 1988, Mr. Orr served in various management positions at
IBM.
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.
Ms. Twaddle was named Acting Chief Financial Officer in December 1999. Ms.
Twaddle has served as the Corporate Controller since April 1999. Between August
1997 and April 1999 she served as Assistant Corporate Controller and between
March 1997 and August 1997 she served as the Americas Controller.
17
<PAGE> 20
Prior to joining the Company, between June 1993 and March 1997, Ms Twaddle
served as Corporate Controller for Information Storage Devices.
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.
18
<PAGE> 21
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 1998:
First Quarter 4.00 6.38
Second Quarter 3.38 5.31
Third Quarter 3.88 6.38
Fourth Quarter 2.75 4.94
Fiscal 1999:
First Quarter 3.25 5.59
Second Quarter 4.00 5.88
Third Quarter 5.38 7.06
Fourth Quarter 6.44 14.13
</TABLE>
On December 15, 1999, there were approximately 8,900 holders of the Company's
Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
The information set forth on page 12 of the 1999 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 13 through 20 of the 1999 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 21 through
39 of the 1999 Annual Report to Shareholders are incorporated herein by
reference.
- - Consolidated Statements of Operations for each of the years in the
three-year period ended September 30, 1999
- - Consolidated Balance Sheets as of September 30, 1999 and 1998
- - Consolidated Statements of Shareholders' Equity (Deficit) for each of
the years in the three-year period ended September 30, 1999
- - Consolidated Statements of Cash Flows for each of the years in the
three-year period ended September 30, 1999
- - Notes to Consolidated Financial Statements
- - Reports of Independent Accountants
- - Quarterly Financial Information
19
<PAGE> 22
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 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 years ended September 30, 1999 and 1998.
20
<PAGE> 23
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 22, 2000 (the "Proxy Statement"). Such
information is incorporated herein by reference. Information with respect to
Executive Officers and Officers may be found on pages 16 through 18 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.
21
<PAGE> 24
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 26
</TABLE>
The independent auditors' reports with respect to the
above-listed financial statement schedule appears on page 25 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> <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)(8)
10.20 1994 Incentive Stock Option Plan and form of
Incentive Stock Option Agreement. (3)(8)
10.21 401(k) Plan, as amended. (1) (8)
10.23 Revised 1993 Employee Stock Purchase Plan. (5) (8)
</TABLE>
22
<PAGE> 25
<TABLE>
<S> <C>
10.24 1993 Director Stock Option Plan. (1) (8)
10.34 Shareholders' Rights Agreement. (6)
10.35 Change-in-control agreement between the Company and
certain key management. (8)
10.36 Employment Agreement with Alok Mohan. (7)
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) Incorporated by reference to the Form 10-K filed on December 23, 1998.
(8) 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
1999.
23
<PAGE> 26
THE SANTA CRUZ OPERATIONS, INC.
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/ Jenny Twaddle By: /s/ Steven M. Sabbath
---------------------------------- -----------------------
Jenny Twaddle Steven M. Sabbath
Corporate Controller and Acting Senior Vice President,
Chief Financial Officer Law and Corporate Affairs
Date: December 27, 1999 & Secretary
Date: December 27, 1999
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 27, 1999
/s/ Alok Mohan /s/ Robert M. McClure
- --------------------------------- ------------------------------
Alok Mohan Robert M. McClure
Chairman of the Board of Directors Director
Date: December 27, 1999 Date: December 27, 1999
/s/ Gilbert P. Williamson /s/ R. Duff Thompson
- --------------------------------- ------------------------------
Gilbert P. Williamson R. Duff Thompson
Director Director
Date: December 27, 1999 Date: December 27, 1999
/s/ Ronald Lachman /s/ Ninian Eadie
- --------------------------------- ------------------------------
Ronald Lachman Ninian Eadie
Director Director
Date: December 27, 1999 Date: December 27, 1999
24
<PAGE> 27
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders of The Santa Cruz Operation, Inc.:
Under date of October 22, 1999, except for Note 17, which is as of December 1,
1999, we reported on the consolidated balance sheets of The Santa Cruz
Operation, Inc. and subsidiaries as of September 30, 1999 and 1998, and the
related consolidated statements of operations, shareholders' equity (deficit),
and cash flows for the years then ended, as contained in the 1999 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
1999. In connection with our audits of the aforementioned consolidated financial
statements, we also have audited the related financial statement schedule as
listed in the accompanying index. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
/s/ PricewaterhouseCoopers LLP
San Jose, California
October 22, 1999
The Board of Directors and Shareholders of The Santa Cruz Operation, Inc.:
Under date of October 22, 1997, we reported on the consolidated statements of
operations, shareholders' equity (deficit), and cash flows of The Santa Cruz
Operation, Inc. and subsidiaries for the year 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 1999. In connection
with our audit of the aforementioned consolidated financial statements, we also
audited the related financial statement schedule for the year ended September
30, 1997, as listed under Item 14(a) 2. 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 audit.
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, for the
year ended September 30, 1997.
/s/ KPMG LLP
Mountain View, California
October 22, 1997
25
<PAGE> 28
THE SANTA CRUZ OPERATION, INC.
SCHEDULE II/RULE 5-04
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
(In thousands)
<TABLE>
<CAPTION>
BALANCE CHARGED
AT TO BALANCE
BEGINNING REVENUES AT END
OF OR OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
--------- -------- ---------- -------
<S> <C> <C> <C> <C>
Year Ended September 30, 1999
Allowance for returns $10,637 $ 9,505 $13,034 $ 7,108
Allowance for doubtful accounts 1,545 209 640 1,114
------- -------- ------- -------
Total allowance $12,182 $ 9,714 $13,674 $ 8,222
======= ======== ======= =======
Year Ended September 30, 1998
Allowance for returns $ 9,136 $ 18,200 $16,699 $10,637
Allowance for doubtful accounts 1,743 (132) 66 1,545
------- -------- ------- -------
Total allowance $10,879 $ 18,068 $16,765 $12,182
======= ======== ======= =======
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
======= ======== ======= =======
</TABLE>
26
<PAGE> 29
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
-------- -----------
<S> <C> <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)(8)
10.20 1994 Incentive Stock Option Plan and form of
Incentive Stock Option Agreement. (3)(8)
10.21 401(k) Plan, as amended. (1) (8)
10.23 Revised 1993 Employee Stock Purchase Plan. (5) (8)
10.24 1993 Director Stock Option Plan. (1) (8)
10.34 Shareholders' Rights Agreement. (6)
10.35 Change-in-control agreement between the Company and
certain key management. (8)
10.36 Employment Agreement with Alok Mohan. (7)
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) Incorporated by reference to the Form 10-K filed on December 23, 1998.
(8) Designates management contracts or compensatory plans, contracts or
arrangements.
<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) 1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net revenues $ 223,624 $ 171,900 $ 193,660 $ 207,890 $ 199,329
Cost of revenues 48,603 45,898 55,315 54,402 54,133
-------- -------- -------- -------- --------
Gross margin 175,021 126,002 138,345 153,488 145,196
Operating expenses 158,648 139,595 154,939 177,069 151,688
-------- -------- -------- -------- --------
Operating income (loss) 16,373 (13,593) (16,594) (23,581) (6,492)
Other income (expense):
Interest income, net 1,942 2,261 2,291 2,302 2,703
Other income (expense), net 1,939 226 (866) (394) (363)
-------- -------- -------- -------- --------
Income (loss) before income taxes 20,254 (11,106) (15,169) (21,673) (4,152)
Income taxes 3,396 3,559 1 741 1,956
-------- -------- -------- -------- --------
Net income (loss) 16,858 (14,665) (15,170) (22,414) (6,108)
Other comprehensive income (loss), net of tax (884) 653 936 (213) 264
-------- -------- -------- -------- --------
Comprehensive income (loss) $ 15,974 $(14,012) $(14,234) $(22,627) $ (5,844)
-------- -------- -------- -------- --------
Earnings (loss) per share-basic $ 0.49 $ (0.41) $ (0.41) $ (0.62) $ (0.20)
Earnings (loss) per share-diluted $ 0.46 $ (0.41) $ (0.41) $ (0.62) $ (0.20)
-------- -------- -------- -------- --------
Shares used in per share calculation-basic 34,232 35,817 36,628 36,179 30,922
Shares used in per share calculation-diluted 36,402 35,817 36,628 36,179 30,922
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
September 30,
---------------------------------------------------
(In thousands) 1999 1998 1997 1996 1995
-------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Cash, equivalents and short-term investments $ 62,844 $ 51,076 $ 51,711 $ 54,831 $ 46,890
Working capital 42,242 32,221 46,164 61,935 60,539
Total assets 139,284 131,189 146,665 166,807 131,870
Long-term liabilities 8,523 12,027 9,545 9,332 7,521
Shareholders' equity 70,338 60,135 81,462 101,581 82,182
======== ======== ======== ======== ========
</TABLE>
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
SCO is a global leader in server software for networked business computing, and
the world's leading provider of UNIX(R) server operating systems. SCO is also
the creator of the award-winning Tarantella(R) software, which provides instant
Web-browser access to applications running on a wide range of networked servers.
SCO sells and supports its products through a worldwide network of more than
15,000 distributors, resellers, system integrators and OEMs.
SCO's mission is to create, market and support the server software that system
builders choose for networked business computing. SCO believes that server-based
network computing, which is based on Internet and web technologies, enables
businesses to dramatically improve their customer information flow and business
transaction efficiencies. Companies that adopt a server-based network computing
model can understand their customers better, reach wider potential markets,
bring products to market faster and improve their overall customer satisfaction
levels. With server-based computing and SCO products and services, IT
professionals can immediately leverage their existing investments, deploy
applications faster and dramatically cut the cost of systems administration and
management.
In addition to historical information contained herein, this Discussion and
Analysis contains forward-looking statements. These statements involve risks and
uncertainties and can be identified by the use of forward-looking terminology
such as "estimates," "projects," "anticipates," "plans," "future," "may,"
"will," "should," "predicts," "potential," "continue," "expects," "intends,"
"believes," and similar expressions. Examples of forward looking statements
include those relating to Year 2000 compliance, financial risk management
activities and the adequacy of financial resources for operations. These and
other forward-looking statements are only estimates and predictions. While the
Company believes that the expectations reflected in the forward-looking
statements are reasonable, 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 software licenses and fees for
services, which include engineering services, consulting, custom engineering,
support and training.
Net revenues were $223.6 million in fiscal 1999, an increase of 30% from $171.9
million in fiscal 1998. In fiscal 1998, net revenues decreased by 11% from
$193.7 million in fiscal 1997. 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 stronger
revenue performance across all geographies is attributable to several factors
including the ease of electronic licensing, increased customer contacts as a
result of added sales resources and Y2K upgrade sales. 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. For the fiscal
years ended September 30, 1999, 1998 and 1997, no single customer accounted for
greater than 10% of the Company's license revenues.
<PAGE> 3
International revenues continue to be a significant portion of net revenues,
comprising 56% of the revenues for fiscal 1999 and 51% and 55% for 1998 and
1997, respectively.
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,
geographic regions and 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 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 22% in fiscal 1999
from 27% in fiscal 1998, which in turn was a decrease from 29% in fiscal 1997.
The 5% decline from 1999 to 1998 resulted from reduced royalty rates and reduced
technology costs together with the impact of stable fixed costs over higher unit
sales volume. In addition, material costs are declining as a result of
increasing e-commerce trade. Reduced royalty rates, including a significant
retroactive royalty credit, coupled with reduced technology costs were partially
offset by stable fixed costs over lower unit sales volume to net to the two
percentage point decline in cost from 1997 to 1998.
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 2% to $40.8 million in fiscal 1999 from $41.4 million in
fiscal 1998, which was a decrease of 10% from the fiscal 1997 spending of $46.1
million. Research and development expenses represented 18% of net revenues for
fiscal 1999 and 24% of net revenues for both fiscal 1998 and 1997. The decrease
in research and development expenses during 1999 can be attributed to lower
depreciation and hardware expenses. The 1998 decrease in research and
development expenses in absolute dollars was primarily attributable to reducing
staffing levels in conjunction with a restructuring of operations.
SALES AND MARKETING
Sales and marketing expenses increased 22% to $97.1 million for fiscal 1999,
compared to $79.6 million in fiscal 1998 and $79.5 million in fiscal 1997. Sales
and marketing expenses represented 43%, 46% and 41% of total net revenues in
fiscal 1999, 1998 and 1997, respectively. The increase is due principally to an
increase in the size of our direct sales force and commissions as well as sales
program costs that vary directly with increased sales. 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 increased 12% in fiscal 1999 to $20.8
million compared to $18.6 million in fiscal 1998. In fiscal 1998, general and
administrative expenses decreased by 11% from $20.9 million in fiscal 1997.
General and administrative expenses represented 9% of total net revenues for
fiscal 1999 and 11% for fiscal 1998 and fiscal 1997. The fiscal 1999 increase
was due to increased corporate bonuses as a result of exceeding Company
performance goals and a movement of certain staff from other functions. Reduced
headcount, lower legal expenses and lower discretionary spending resulted in the
fiscal 1998 decline in absolute dollars.
<PAGE> 4
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.
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 decreased in fiscal 1999 to $1.9 million compared to $2.3 million for
fiscal years 1998 and 1997. Other income was $1.9 million for fiscal 1999, $0.2
million for fiscal 1998 and an expense of $0.9 million in fiscal 1997. The
fiscal 1999 growth in other income was primarily due to the gain on the sale of
an investment position in a domestic channel distribution partner of $3.3
million, net of an asset impairment in another investment position of $1.0
million. The change in 1998 was principally due to foreign exchange gains earned
in the Company's European subsidiaries.
INCOME TAXES
In fiscal 1999, 1998 and 1997, the Company's effective income tax rates were
17%, (32)% and 0%, respectively. The fiscal 1999 tax primarily reflects foreign
income taxes, while the prior years reflect losses and expenses without tax
benefit for which a valuation allowance has been established. For an analysis of
income taxes, see Note 12 of Notes to Consolidated Financial Statements.
NET INCOME (LOSS)
The Company reported net income of $16.9 million in fiscal 1999 and net losses
of $14.7 million and $15.2 million in fiscal 1998 and 1997, respectively. The
positive trend in fiscal 1999 is driven by strong revenue performance, which is
directly related to the increasing importance of server-based computing. The
fiscal 1998 and 1997 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's staffing and operating
<PAGE> 5
expense levels are based on an operating plan and are relatively fixed
throughout the quarter. As a result, if revenues are not realized in the quarter
as expected, the Company's expected operating results could be adversely
affected, and such effect could be substantial and could result in an operating
loss.
The Company experiences seasonality of revenues for both the European and the
U.S. federal government markets. European revenues during the quarter ending
June 30 are historically lower or relatively flat compared to the prior quarter.
This reflects a reduction of customer purchases in anticipation of reduced
selling activity during the summer months. Sales to the U.S. federal government
generally increase during the quarter ending September 30. This seasonal
increase is primarily attributable to increased purchasing activity by the U.S.
federal government prior to the close of its fiscal year. Additionally, net
revenues for the first quarter of the fiscal year are typically lower or
relatively flat compared to net revenues of the prior quarter.
The overall cost of revenues may be affected by changes in the mix of net
revenue contribution between licenses and services, product families,
geographical regions and channels of distribution, as the costs associated with
these revenues may have substantially different characteristics. The Company may
also experience a change in margin as net revenues increase or decrease since
technology costs, service costs and production costs are fixed within certain
volume ranges.
The Company's results of operations could be adversely affected if it were to
lower its prices significantly. In the event the Company reduced its prices, the
Company's standard terms for selected distributors provide credit for inventory
ordered in the previous 180 days, such credits to be applied against future
purchases. The Company, as a matter of policy, does not allow product returns
for refund. Product returns are generally allowances for stock balancing and are
accompanied by compensating and offsetting orders. 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 and credit
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 sufficient 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 56%, 51% and 55% of total revenues for fiscal 1999, 1998 and 1997,
respectively. A substantial portion of the international revenues of the
Company's U.K. subsidiary are denominated in U.S. dollars, and operating results
can vary with changes in the U.S. dollar exchange rate to the U.K. pound
sterling. 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
<PAGE> 6
the product, or both will be reduced significantly in the near future. As a
result, the carrying amount of the Company's purchased software and technology
licenses may be reduced materially in the near future and, therefore, could
create an adverse impact on the Company's future reported earnings.
The Company continually evaluates potential acquisition candidates. Such
candidates are selected based on products or markets which are complementary to
those of the Company's. Acquisitions involve a number of special risks,
including the successful combination of the companies in an efficient and timely
manner, the coordination of research and development and sales efforts, the
retention of key personnel, the integration of the acquired products, the
diversion of management's attention to assimilation of the operations and
personnel of the acquired companies, and the difficulty of presenting a unified
corporate image. The Company's operations and financial results could be
significantly affected by such an acquisition.
The Company's continued success depends to a significant extent on senior
management and other key employees. None of these individuals is subject to a
long-term employment contract or a non-competition agreement. Competition for
qualified people in the software industry is intense. The loss of one or more
key employees or the Company's inability to attract and retain other key
employees could have a material adverse effect on the Company.
The stock market in general, and the market for shares of technology companies
in particular, have experienced extreme price fluctuations, which have often
been unrelated to the operating performance of the affected companies. In
addition, factors such as new product introductions by the Company or its
competitors may have a significant impact on the market price of the Company's
Common Stock. Furthermore, quarter-to-quarter fluctuations in the Company's
results of operations caused by changes in customer demand may have a
significant impact on the market price of the Company's stock. These conditions,
as well as factors which generally affect the market for stocks of high
technology companies, could cause the price of the Company's stock to fluctuate
substantially over short periods.
The Company is aware of the issues associated with the new European economic and
monetary union (the "EMU"). One of the changes resulting from this union
required EMU member states to irrevocably fix their respective currencies to a
new currency, the Euro, on January 1, 1999. On that day, the Euro became a
functional legal currency within these countries. During the next two 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 has done a preliminary assessment of the impact the EMU
formation will have on both its internal systems and the products it sells and
has commenced appropriate actions. The Company has not yet determined all of 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
beginning 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 millennium 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:
<PAGE> 7
- - made ongoing updates of information and resources available at its Year
2000 website (http://www.sco.com/year2000);
- - 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 currently offered SCO products;
- - issued fixes for Year 2000 problems that we have detected in currently
SCO supported products;
- - created a project team to maintain a 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;
- - provided an email service where customers can subscribe to receive
notice of Year 2000 information updates;
- - developed an on-line Year 2000 Discussion Forum newsgroup; and
- - developed a Year 2000 support coverage schedule advertising our services
and the mechanism for accessing this schedule.
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.
Internal Infrastructure. The Company has created an Information Management Year
2000 Program, which addresses the Company's internal business operations and
represents all of the Company's information management functions. The Company
has a dedicated Year 2000 team to manage our worldwide operations as we prepare
for the transition to the next millennium. The Company believes that it has
identified, modified, upgraded and replaced substantially all of the major
computers, telephone and networking equipment, software applications and related
equipment used in connection with its internal operations to minimize the
possibility of a material disruption to its business.
Suppliers. The Company has ongoing 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, resolve issues involving
the Year 2000 problem. The Company believes that all key issues related to the
Year 2000 have been identified. 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.
Costs. We do not separately account for Year 2000 related expenses but estimate
that our expenses incurred to date to address Year 2000 issues have been $0.7
million. We expect that we may incur additional compliance related expenses of
up to $0.2 million. If these costs are higher than we anticipate, it could
adversely impact our operating results.
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
<PAGE> 8
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 believes that there will be no adverse material effect on the Company's
business or results of operations.
Contingency Plans. The Company is in the process of developing contingency plans
in the event that the Company's systems or products prove to not be Year 2000
compliant. The Company is currently reviewing its key business activities to
develop plans to support ongoing business operations in the event of a
disruption and expects these plans to be in place at the end of the calendar
year. However, the Company cannot give any assurance that these contingency
plans will be effective in preventing Year 2000 related disruptions in the
business which could have a material adverse impact on the Company's business,
operating results and financial condition.
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
Cash, cash equivalents and short-term investments were $62.8 million at
September 30, 1999, an increase of $11.8 million from September 30, 1998. The
increase is primarily a result of cash generated by operations. The Company's
operating activities provided cash of $28.3 million in fiscal 1999, $9.5 million
in fiscal 1998 and $15.0 million in fiscal 1997. Cash used for investing
activities during fiscal 1999, 1998 and 1997 was $7.2 million, $3.2 million and
$14.8 million, respectively. In fiscal 1999, 1998 and 1997, cash was used to
fund purchases of technology, property and equipment, common stock repurchases
and short-term investments. Cash used for financing activities was $10.4
million, $6.2 million and $10.0 million for fiscal 1999, 1998 and 1997,
respectively. In fiscal 1999, 1998 and 1997, proceeds from the issuance of
common stock were more than offset by the Company's stock repurchases and
payments on capital lease obligations.
At September 30, 1999, the Company's principal sources of liquidity included
cash and short-term investments and available bank lines of credit of
approximately $15.9 million against which the Company had $0.5 million in
outstanding borrowings. The Company does not believe it will require borrowing
capacity greater than the amount available under these lines of credit for at
least the next twelve months. See Notes 2, 3 and 7 of Notes to the Consolidated
Financial Statements.
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 2000.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1998, the Accounting Standards Executive Committee issued Statement
of Position 98-9 (SOP 98-9), Modification of SOP 97-2 Software Revenue
Recognition. SOP 98-9 amends SOP 97-2 to require that an entity recognize
revenue for multiple element arrangements by means of the "residual method" when
(1) there is vendor-specific objective evidence ("VSOE") of the fair values of
all the undelivered elements that are not accounted for by means of long-term
contract accounting, (2) VSOE of fair value does not exist for one or more of
the delivered elements, and (3) all revenue recognition criteria of SOP 97-2
(other than the requirement for VSOE of the fair value of each delivered
element) are satisfied. The provisions of SOP 98-9 that extend the deferral of
certain paragraphs of SOP 97-2 became effective December 15, 1998. These
paragraphs of SOP 97-2 and SOP 98-9 were effective for transactions entered into
for fiscal years beginning after March 15, 1999. Retroactive application is
prohibited. We do
<PAGE> 9
not expect the provisions of SOP 98-9 to have a significant impact on our
current revenue recognition policies.
In June 1998, the Financial Accounting Standards Board 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 recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
Management has not yet evaluated the effects of this change on its operations.
Implementation of this standard has recently been delayed by the FASB for a
12-month period. The Company will adopt SFAS 133 as required for its first
quarterly filing of fiscal year 2001.
In April 1998, the Accounting Standards Executive Committee issued SOP 98-5,
Reporting on the Costs of Start-Up Activities. This standard requires companies
to expense the costs of start-up activities and organization costs as incurred.
In general, SOP 98-5 is effective for fiscal years beginning after December 15,
1998. The adoption of SOP 98-5 does not have a material impact on our financial
statements.
In March 1998, the Accounting Standards Executive Committee issued SOP 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for Internal
Use, which provides guidance on accounting for the cost of computer software
developed or obtained for internal use. SOP 98-1 is effective for financial
statements for fiscal years beginning after December 15, 1998. The adoption of
SOP 98-1 does not have a material impact on our financial statements.
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, 1999, which are
sensitive to changes in interest rates and foreign exchange rates. The Company
uses forward foreign exchange contracts to manage these foreign exchange
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 technology risk,
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, 1999 and which are sensitive to changes in interest
rates. Such securities are anticipated to be used for current operations and
are, therefore, classified as current assets, even though maturities may extend
beyond one year. The fair value of these instruments approximates the carrying
costs.
<PAGE> 10
Maturity Date for Short-Term Investments
Year Ended September 30,
<TABLE>
<CAPTION>
(In thousands) 2000 2001 2002 Total
------- ------ ----- ------
<S> <C> <C> <C> <C>
U.S. Treasury notes $ 751 $ 836 $1,451 $ 3,038
Government agency bonds - 2,001 203 2,204
Corporate bonds 14,397 4,433 5,089 23,919
------- ------ ------ -------
$15,148 $7,270 $6,743 $29,161
Average interest rate 5.74% 6.21% 5.53%
------- ------ ------ -------
</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.
Forward Contracts
September 30, 1999
<TABLE>
<CAPTION>
(In thousands) Contract 1 Contract 2 Contract 3
---------- ---------- ----------
<S> <C> <C> <C>
Purchased three forward contracts
Premium paid: $ 30 $ 31 $ 5
Contract amount: 2,000 2,000 2,206
Forward strike rate (USD/GBP): 1.6140 1.6150
Forward strike rate (ITL/GBP): 2,938
Term of contract: 2 months 3 months 3 months
-------- -------- --------
</TABLE>
<PAGE> 11
THE SANTA CRUZ OPERATION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------
(In thousands, except per share data) 1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Net revenues $ 223,624 $ 171,900 $ 193,660
Cost of revenues 48,603 45,898 55,315
--------- --------- ---------
Gross margin 175,021 126,002 138,345
--------- --------- ---------
Operating expenses:
Research and development 40,770 41,393 46,130
Sales and marketing 97,079 79,644 79,536
General and administrative 20,799 18,558 20,900
Non-recurring charges - - 8,373
--------- --------- ---------
Total operating expenses 158,648 139,595 154,939
--------- --------- ---------
Operating income (loss) 16,373 (13,593) (16,594)
Other income (expense):
Interest income, net 1,942 2,261 2,291
Other income (expense), net 1,939 226 (866)
--------- --------- ---------
Income (loss) before income taxes 20,254 (11,106) (15,169)
Income taxes 3,396 3,559 1
--------- --------- ---------
Net income (loss) 16,858 (14,665) (15,170)
Other comprehensive income (loss), net of tax
Foreign currency translation adjustment (884) 653 936
--------- --------- ---------
Comprehensive income (loss) $ 15,974 $ (14,012) $ (14,234)
--------- --------- ---------
Earnings (loss) per share:
Basic $ 0.49 $ (0.41) $ (0.41)
Diluted $ 0.46 $ (0.41) $ (0.41)
--------- --------- ---------
Shares used in earnings (loss)
per share calculation:
Basic 34,232 35,817 36,628
Diluted 36,402 35,817 36,628
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 12
THE SANTA CRUZ OPERATION, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
-----------------------------
(In thousands) 1999 1998
--------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 33,683 $ 23,758
Short-term investments 29,161 27,318
Receivables, net 32,309 28,633
Deferred tax assets 1,202 3,487
Other current assets 6,310 8,052
--------- ---------
Total current assets 102,665 91,248
--------- ---------
Property and equipment, net 12,234 12,929
Purchased software and technology licenses, net 10,431 13,013
Other assets 13,954 13,999
--------- ---------
Total assets $ 139,284 $ 131,189
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Royalties payable $ 7,217 $ 5,062
Trade accounts payable 7,482 7,655
Income taxes payable 1,983 1,876
Accrued expenses and other current liabilities 32,314 28,590
Deferred revenues 11,427 15,844
--------- ---------
Total current liabilities 60,423 59,027
--------- ---------
Long-term lease obligations 2,332 3,427
Other long-term liabilities 6,191 8,600
--------- ---------
Total long-term liabilities 8,523 12,027
--------- ---------
Commitments and contingencies (note 10)
Shareholders' equity:
Common stock, no par value, net of note receivable of $97 and $92 from an
officer of the Company, authorized 100,000 shares
Issued and outstanding 34,346 and 35,049 shares 106,201 111,972
Accumulated other comprehensive income 408 1,292
Accumulated deficit (36,271) (53,129)
--------- ---------
Total shareholders' equity 70,338 60,135
--------- ---------
Total liabilities and shareholders' equity $ 139,284 $ 131,189
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 13
THE SANTA CRUZ OPERATION, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Note Other Total
Common Stock Receivable Comprehensive Accumulated Shareholders'
(In thousands) Shares Amount from Officer Income Deficit Equity
------------ ---------- ------------ ------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
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 note -- -- (4) -- -- (4)
Stock option income tax benefit -- 244 -- -- -- 244
Other comprehensive income -- -- -- 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 note -- -- (4) -- -- (4)
Other comprehensive income -- -- -- 653 -- 653
Net loss -- -- -- -- (14,665) (14,665)
--------- --------- ---- ------ -------- --------
BALANCES, SEPTEMBER 30, 1998 35,049 $ 112,064 $(92) $1,292 $(53,129) $ 60,135
Issuance under stock option and
purchase plans 1,721 7,107 -- -- -- 7,107
Common stock repurchases (2,424) (14,034) -- -- -- (14,034)
Interest on note -- -- (5) -- -- (5)
Stock option income tax benefit -- 1,161 -- -- -- 1,161
Other comprehensive loss -- -- -- (884) -- (884)
Net income -- -- -- -- 16,858 16,858
--------- --------- ---- ------ -------- --------
BALANCES, SEPTEMBER 30, 1999 34,346 $ 106,298 $(97) $ 408 $(36,271) $ 70,338
========== ========= ==== ====== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 14
THE SANTA CRUZ OPERATION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------
(In thousands) 1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 16,858 $ (14,665) $ (15,170)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities -
Depreciation and amortization 12,140 14,363 17,084
Deferred tax assets -- 205 (1,017)
Exchange (gain) loss 20 (605) --
Stock option income tax benefit 1,161 -- 244
Changes in operating assets and liabilities-
Receivables (4,971) 8,147 10,630
Other current assets 2,545 (2,024) 2,736
Other assets 502 2,362 857
Royalties payable 2,135 (6,197) 618
Trade accounts payable (15) 608 (4,155)
Income taxes payable 176 703 (1,132)
Accrued expenses and other current liabilities 4,158 (1,977) 3,714
Deferred revenues (6,409) 8,555 627
-------- -------- --------
Net cash provided by operating activities 28,300 9,475 15,036
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (3,816) (1,410) (1,796)
Purchases of software and technology licenses (2,633) (2,995) (5,188)
Sales of short-term investments 26,811 31,514 17,006
Purchases of short-term investments (28,654) (30,346) (22,726)
Changes in other assets 1,058 25 (2,128)
-------- -------- --------
Net cash used for investing activities (7,234) (3,212) (14,832)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital leases (3,626) (2,759) (1,627)
Net proceeds from issuance of common stock 7,107 1,960 2,985
Repurchases of common stock (14,034) (9,271) (9,110)
Changes in other long-term liabilities 158 3,883 (2,224)
-------- -------- --------
Net cash used for financing activities (10,395) (6,187) (9,976)
-------- -------- --------
Effects of exchange rate changes on cash and cash equivalents (746) 457 932
-------- -------- --------
Change in cash and cash equivalents 9,925 533 (8,840)
Cash and cash equivalents at beginning of year 23,758 23,225 32,065
-------- -------- --------
Cash and cash equivalents at end of year $ 33,683 $ 23,758 $ 23,225
-------- -------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid -
Income taxes $ 3,319 $ 2,192 $ 2,168
Interest 544 766 643
Non-cash financing and investing activities -
Assets recorded under capital leases $ 1,978 $ 4,701 $ 4,063
Assets written off against restructuring reserve -- 568 125
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY The Santa Cruz Operation, Inc. (SCO), or the Company, is a global
leader in server software for networked business computing, and the world's
leading provider of UNIX(R) server operating systems. 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 with less than 20% ownership 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. Such estimates include the allowances for bad debt, product
returns and certain accrued expenses and liabilities, and the valuation
allowance for deferred tax assets. 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 included in other comprehensive income. As of
September 30, 1999 and 1998, unrealized gains or losses on such investments were
not significant. Realized gains and losses, which are calculated based on the
specific identification method, are recorded in operations as incurred.
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 owned by the Company. Technology licenses represent
payments for the rights to use and integrate 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 value of the asset exceeds the projected discounted
future operating cash flows.
<PAGE> 16
SOFTWARE DEVELOPMENT COSTS Statement of Financial Accounting Standards No. 86
provides for the capitalization of certain software development costs once
technological feasibility is established. Capitalized costs are then amortized
on a straight-line basis over the estimated product life, or on the ratio of
current revenues to total projected product revenues, whichever is greater.
Through September 30, 1999, 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 The Company's revenue is derived primarily from two sources,
across many industries: (i) products license revenue, derived primarily from
product sales to resellers and end users, including large scale enterprises and
royalty revenue, derived primarily from initial license fees and ongoing
royalties from product sales by source code OEMs; and (ii) service and support
revenue, derived primarily from providing software updates, support and
education and consulting services to end users.
The Company adopted the provisions of Statement of Position 97-2, or SOP 97-2,
Software Revenue Recognition, as amended by Statement of Position 98-4, Deferral
of the Effective Date of Certain Provisions of SOP 97-2, effective October 1,
1998. SOP 97-2 supercedes Statement of Position 91-1, Software Revenue
Recognition, and delineates the accounting for software product and maintenance
revenue. Under SOP 97-2, the Company recognizes product revenue upon shipment if
a signed contract exists, the fee is fixed and determinable, collection of
resulting receivables is probable and product returns are reasonably estimable,
except for sales to distributors, which are recognized upon sale by the
distributor to resellers or end users. Estimated product returns are recorded
upon recognition of revenue from customers having rights of return, including
exchange rights for unsold products and product upgrades. In 1998 and 1997, the
Company's revenue recognition policy was the same as set forth above.
For contracts with multiple obligations (e.g. deliverable and undeliverable
products, maintenance and other services), the Company allocates revenue to each
component of the contract based on objective evidence of its fair value, which
is specific to the Company, or for products not being sold separately, the price
established by management. The Company recognizes revenue allocated to
undelivered products when the criteria for product revenue set forth above are
met. The Company recognizes revenue from maintenance fees for ongoing customer
support and product updates ratably over the period of the maintenance contract.
Payments for maintenance fees are generally made in advance and are
non-refundable. For revenue allocated to education and consulting services or
derived from the separate sale of such services, the Company recognizes revenue
as the related services are performed. In 1998 and 1997, the revenue recognition
policy for maintenance, education and consulting services was the same as set
forth above.
The Company recognizes product revenue from royalty payments upon receipt of
quarterly royalty reports from OEMs related to their product sales.
The Company performs ongoing credit evaluations of its customers' financial
condition and does not require collateral. The Company maintains allowances for
potential credit losses and such losses have been within management's
expectations.
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 1999, 1998 and 1997, cooperative advertising expense totaled
approximately $10.5 million, $9.2 million and $8.6 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.
<PAGE> 17
COMPUTATION OF EARNINGS PER SHARE The Company has adopted the provisions of
Statement of Financial Accounting Standards No. 128 (SFAS 128), Earnings Per
Share, effective December 31, 1997. SFAS 128 requires the presentation of basic
and diluted earnings per share. Basic EPS is computed by dividing income
available to common 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. A reconciliation of the
numerator and denominator used in the calculation of basic and diluted earnings
per share is provided as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
------------------------------------
1999 1998 1997
------- ----------- --------
<S> <C> <C> <C>
Numerator - Earnings (loss) per share, basic and diluted
Net income (loss) $16,858 $ (14,665) $(15,170)
======= ========== ========
Denominator - Earnings (loss) per share, basic
Weighted average common shares outstanding 34,232 35,817 36,628
======= ========== ========
Earnings (loss) per share - basic $ 0.49 $ (0.41) $ (0.41)
======= ========== ========
Denominator - Earnings (loss) per share, diluted
Weighted average common shares outstanding 34,232 35,817 36,628
Effect of dilutive securities - common stock options
and warrants 2,170 -- --
------- ---------- --------
Shares used in per share calculation 36,402 35,817 36,628
======= ========== ========
Earnings (loss) per share - diluted $ 0.46 $ (0.41) $ (0.41)
======= ========== ========
</TABLE>
Certain shares of common stock issuable upon exercise of stock options were
excluded from the calculation of diluted earnings per share because the options'
exercise price was greater than the average market price of the common shares.
For fiscal 1999, 1998 and 1997 these excluded options were 3,190,168, 10,345,506
and 8,545,517, respectively. The price range of the excluded options was $6.06
to $12.00 for 1999 and $0.41 to $12.00 for 1998 and 1997, respectively.
COMPREHENSIVE INCOME In the first quarter of fiscal 1999, the Company adopted
SFAS No. 130, Reporting Comprehensive Income. Under SFAS 130 the Company is
required to report comprehensive income, which includes the Company's net
income, as well as changes in equity from other sources. In the Company's case,
the only change in equity included in comprehensive income is the foreign
currency cumulative translation adjustment. The adoption of SFAS 130 had no
impact on the Company's net income, balance sheet or shareholders' equity.
SEGMENT INFORMATION In 1999, the Company adopted Statement of Financial
Accounting Standards No. 131, Disclosures about Segments of an Enterprise and
Related Information. SFAS 131 supercedes SFAS 14, Financial Reporting for
Segments of a Business Enterprise. Under the new standard the Company is
required to use the "management" approach to reporting its segments. The
management approach designates the internal organization used by management for
making operating decisions and assessing performance as the source of the
Company's segments. The adoption of SFAS 131 had no impact on the Company's net
income, balance sheet or shareholders' equity.
RECENT ACCOUNTING PRONOUNCEMENTS In December 1998, the Accounting Standards
Executive Committee issued Statement of Position 98-9 (SOP 98-9), Modification
of SOP 97-2 Software Revenue Recognition. SOP 98-9 amends SOP 97-2 to require
that an entity recognize revenue for multiple element arrangements by means of
the "residual method" when (1) there is vendor-specific objective evidence
("VSOE") of the fair values of all the undelivered elements that are not
accounted for by means of long-term contract accounting, (2) VSOE of fair value
does not exist for one or more of the delivered elements, and (3) all revenue
recognition criteria of SOP 97-2 (other than the requirement for VSOE of the
fair value of each
<PAGE> 18
delivered element) are satisfied. The provisions of SOP 98-9 that extend the
deferral of certain paragraphs of SOP 97-2 became effective December 15, 1998.
These paragraphs of SOP 97-2 and SOP 98-9 were effective for transactions
entered into for fiscal years beginning after March 15, 1999. Retroactive
application is prohibited. We do not expect the provisions of SOP 98-9 to have a
significant impact on our current revenue recognition policies.
In June 1998, the Financial Accounting Standards Board 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 on its operations.
Implementation of this standard has recently been delayed by the FASB for a
12-month period. The Company will adopt SFAS 133 as required for its first
quarterly filing of fiscal year 2001.
In April 1998, the Accounting Standards Executive Committee issued SOP 98-5,
Reporting on the Costs of Start-Up Activities. This standard requires companies
to expense the costs of start-up activities and organization costs as incurred.
In general, SOP 98-5 is effective for fiscal years beginning after December 15,
1998. The adoption of SOP 98-5 does not have a material impact on our financial
statements.
In March 1998, the Accounting Standards Executive Committee issued SOP 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for Internal
Use, which provides guidance on accounting for the cost of computer software
developed or obtained for internal use. SOP 98-1 is effective for financial
statements for fiscal years beginning after December 15, 1998. The adoption of
SOP 98-1 does not have a material impact on our financial statements.
STOCK-BASED COMPENSATION The Company accounts for its stock-based compensation
plans using the intrinsic value method. As such, compensation expense would be
recorded on the date of grant only if the current market price of the underlying
stock exceeded the exercise price.
FOREIGN CURRENCY TRANSLATION The functional currency of the Company's foreign
subsidiaries is the local foreign currency. All assets and liabilities
denominated in foreign currencies are translated into 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 foreign currency forward exchange
contracts. At September 30, 1999, the Company had foreign exchange contracts,
all having maturities of 90 days or less, to sell approximately $6,206,000 in
U.S. dollars.
<PAGE> 19
The fair value of these contracts at September 30, 1999 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS Carrying amounts of certain of the Company's
financial instruments, including cash and cash equivalents, accrued payroll and
other accrued liabilities, approximate fair value because of their short
maturities. The fair values of investments are determined using quoted market
prices for those securities or similar financial instruments.
NOTE 2 - CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
September 30,
-------------------
(In thousands) 1999 1998
------- --------
<S> <C> <C>
Bank demand deposits $ 6,859 $ 1,035
Money market accounts 26,524 20,660
Corporate bonds 300 2,063
-------- --------
$ 33,683 $ 23,758
======== ========
</TABLE>
NOTE 3 - SHORT-TERM INVESTMENTS
<TABLE>
<CAPTION>
September 30,
--------------------
(In thousands) 1999 1998
-------- --------
<S> <C> <C>
U.S. Treasury notes $ 3,038 $ 4,078
Government agency bonds 2,204 7,153
Corporate bonds 23,919 16,087
-------- --------
$ 29,161 $ 27,318
======== ========
</TABLE>
At September 30, 1999, investments with maturity dates ranging from 91 days to
one year totaled $9.4 million, and investments with maturity dates ranging from
one year to three years totaled $19.8 million.
NOTE 4 - RECEIVABLES
<TABLE>
<CAPTION>
September 30,
--------------------
(In thousands) 1999 1998
-------- --------
<S> <C> <C>
Trade accounts receivable $ 40,531 $ 40,815
Less allowance for returns and
doubtful accounts (8,222) (12,182)
-------- --------
$ 32,309 $ 28,633
======== ========
</TABLE>
The Company generates a significant portion of its revenues through distributors
of computer software in North America, Europe, South America 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 fiscal 1999, 1998 and 1997, no one customer's
balance exceeded 10% of trade receivables or accounted for greater than 10% of
the Company's revenues.
<PAGE> 20
NOTE 5 - PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
September 30,
--------------------
(In thousands) 1999 1998
-------- --------
<S> <C> <C>
Computer and office equipment $ 41,146 $ 43,218
Furniture and fixtures 8,516 8,467
Leasehold improvements 8,472 8,001
-------- --------
58,134 59,686
Less accumulated depreciation and
amortization (45,900) (46,757)
-------- --------
$ 12,234 $ 12,929
========= ========
</TABLE>
Depreciation and amortization expense was $6.4 million, $6.9 million and $7.5
million during fiscal 1999, 1998 and 1997, respectively.
NOTE 6 - PURCHASED SOFTWARE AND
TECHNOLOGY LICENSES
<TABLE>
<CAPTION>
September 30,
-------------------
(In thousands) 1999 1998
-------- --------
<S> <C> <C>
Purchased software and
technology licenses, at cost $ 35,429 $ 33,791
Less accumulated amortization (24,998) (20,778)
------- --------
$ 10,431 $ 13,013
======== ========
</TABLE>
Amortization expense was $5.3 million, $6.6 million and $7.8 million during
fiscal 1999, 1998 and 1997, respectively.
NOTE 7 - BANK LINE OF CREDIT
At September 30, 1999, the Company had available lines of credit of
approximately $15.9 million. The company signed an agreement for a domestic line
of credit of $15.0 million on September 30, 1999. The agreement provides that
the Company may borrow an amount up to $15.0 million at the prime rate and is
collateralized by accounts receivable. This line of credit was not utilized
during fiscal 1999. The line of credit requires that the Company maintain
certain financial ratios, all of which the Company was in compliance with as of
September 30, 1999. The Company also maintains a $0.9 million line of credit
internationally under which the Company had $0.5 million in outstanding
borrowings at September 30, 1999. The interest rate on borrowings made against
this line of credit during fiscal 1999 was 2.2%.
NOTE 8 - ROYALTIES PAYABLE
Royalties payable represent obligations to pay authors of certain software
products under licensing agreements. Two corporate shareholders accounted for
$0.4 million and $0.6 million of the royalties payable balance at September 30,
1999 and 1998, respectively, and $1.2 million, $(2.1) million and $4.2 million
of royalty expense (income) for fiscal 1999, 1998 and 1997, respectively.
<PAGE> 21
NOTE 9 - ACCRUED EXPENSES AND OTHER
CURRENT LIABILITIES
<TABLE>
<CAPTION>
September 30,
---------------------
(In thousands) 1999 1998
-------- --------
<S> <C> <C>
Accrued wages, commissions, bonuses $ 12,664 $ 9,316
Accrued advertising 6,016 4,531
Accrued fringe benefits 1,898 1,703
Capital lease obligations 2,952 3,505
Other accrued expenses 8,784 9,535
-------- -------
$ 32,314 $28,590
======== =======
</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, 1999 were as follows:
<TABLE>
<CAPTION>
Capital Operating
(In thousands) Leases Leases
--------- -----------
<S> <C> <C>
Year Ending September 30,
2000 $ 3,267 $ 7,664
2001 1,853 6,930
2002 492 6,182
2003 -- 5,009
2004 -- 4,934
Later years, through 2020 -- 14,036
--------- ----------
Total minimum lease payments 5,612 $ 44,755
==========
Less amount representing interest 328
---------
Present value of net minimum capital lease
payments 5,284
Less current installments of
obligations under capital leases 2,952
---------
Obligations under capital leases,
excluding current installments $ 2,332
=========
</TABLE>
The cost of assets recorded under capital leases was $13.0 million and $11.5
million at September 30, 1999 and 1998, respectively. Accumulated amortization
on those dates was $7.9 million and $4.5 million, respectively.
Rent expense amounted to approximately $8.0 million, $8.1 million and $8.6
million in fiscal 1999, 1998 and 1997, 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
<PAGE> 22
facilities is between one and six years. Rent expense for these facilities
amounted to approximately $1.4 million in each of fiscal 1999, 1998 and 1997.
CONTINGENCIES In December 1995, the Company acquired from Novell certain assets
related to UnixWare. As consideration, the Company may be required to make cash
payments periodically to Novell provided certain unit volumes of UNIX
distribution are achieved. To date, distribution unit volume of UNIX has not
reached levels which have required the Company to make cash payments to Novell.
Such payment obligation will terminate at the end of calendar year 2002.
From time to time, the Company and its subsidiaries may experience claims in the
ordinary course of business, including among others employee legal actions and
alleged trademark infringements. Due to the nature of these matters, it is not
possible to either determine the range of loss that may result from them or
their ultimate resolution.
NOTE 11 - SHAREHOLDERS' EQUITY
PREFERRED STOCK The Company is authorized to issue 20,000,000 shares of
Preferred Stock. As of September 30, 1999, 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 1999, 1998 and 1997, employees purchased 589,968, 567,647 and
431,351 shares at an average per share price of $3.52, $3.07 and $4.81,
respectively. The number of shares reserved for issuance under the Purchase Plan
increased by 750,000 shares in February 1999. As of September 30, 1999,
1,360,149 shares were reserved for future issuance.
1994 INCENTIVE STOCK OPTION PLAN As of September 30, 1999, the Company had
authorized 17,013,665 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 stock
option committee of the Company's Board of Directors 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 1999, the number of shares available for issuance under the Director
Plan was increased by 200,000 shares from 950,000 shares to 1,150,000 shares.
A summary of the status of the Company's stock option plans as of September 30,
1999, 1998 and 1997, and changes during the years then ended is presented below:
<PAGE> 23
<TABLE>
<CAPTION>
(In thousands, except 1999 1998 1997
per share data) ------------------------ ----------------------- -------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Option and Director Plans Shares Price Shares Price Shares Price
----------- ---------- ----------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 10,349 $ 4.80 8,558 $ 5.25 6,419 $ 6.93
Granted 3,009 6.50 3,102 3.87 8,345 5.43
Exercised (1,131) 4.44 (91) 2.37 (441) 2.08
Cancelled (736) 5.25 (1,220) 5.80 (5,765) 7.62
----------- ---------- ---------
Outstanding at end of year 11,491 5.25 10,349 4.80 8,558 5.25
=========== ========== =========
Options exercisable at year-end 4,480 $ 5.08 3,484 $ 5.17 1,678 $ 5.54
Weighted-average fair value of
options granted during the year $ 3.61 $ 2.19 $ 2.13
========== ========= ==========
</TABLE>
The following table summarizes information about stock options outstanding at
September 30, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------- --------------------------------------
Number Number
Outstanding Weighted-Avg Exercisable
Range of at 9/30/99 Remaining Weighted-Avg at 9/30/99 Weighted-Avg
Exercise Price (000) Contractual Life Exercise Price (000) Exercise Price
- ------------------------------------------------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C>
$ 1.25 - 1.50 78 1.6 years $ 1.41 78 $ 1.41
2.00 - 3.00 501 8.1 2.55 166 2.49
3.19 - 4.75 3,909 8.4 4.21 1,264 4.15
4.81 - 7.15 6,036 7.6 5.54 2,760 5.45
7.25 - 10.50 924 8.8 9.27 169 8.52
12.00 - 12.00 43 3.6 12.00 43 12.00
--------- ---------
$ 1.25 - 12.00 11,491 8.0 years $ 5.25 4,480 $ 5.08
========= =========
- ------------------------------------------------------------------------------------------------------------------------
</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 1999, 1998 and 1997: risk-free interest rate of 5.27% for 1999,
5.45% for 1998, and 6.19% for 1997; dividend yield of 0%; volatility factor of
the expected market price of the Company's common stock of 65% for 1999 and 1998
and 55% for 1997; an average turnover rate of 15% and a four year and five year
expected life for options granted to employees and executives, respectively.
<PAGE> 24
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 1999, 1998 and 1997: risk-free interest rates of
4.91%, 5.31% and 5.31%, respectively; dividend yield of 0%; volatility factors
of 65% for 1999 and 1998 and 55% for 1997; and six month expected life. The
weighted average fair value of the ESPP rights granted in 1999, 1998 and 1997
was $1.31, $1.27 and $1.71, respectively.
<TABLE>
<CAPTION>
(In thousands, except Fiscal Year Ended
per share price) September 30,
-------------------------------------
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
Pro forma net income (loss) $10,464 $(20,664) $(18,625)
Pro forma earnings (loss) per share
Basic $ 0.31 $ (0.58) $ (0.51)
Diluted $ 0.29 $ (0.58) $ (0.51)
</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, 1999, 1998 and 1997, the
purchases and retirements of common stock under the systematic plan were
1,038,000 shares, 1,115,000 shares and 843,000 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, 1999,
1998 and 1997, 1,386,000, 945,050 and 685,000 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 2000.
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
Income (loss) before income taxes for fiscal 1999, 1998 and 1997 include foreign
pretax profit (loss) of approximately $6.6 million, $(3.0) million and $2.2
million, respectively. The components of income taxes are as follows:
<PAGE> 25
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
-------------------------------
(In thousands) 1999 1998 1997
------ ------ -------
<S> <C> <C> <C>
Current:
Federal $ 500 $ - $ (846)
State 20 20 (774)
Foreign 2,876 3,334 2,394
------ ------ -------
Total current 3,396 3,354 774
------ ------ -------
Deferred:
Federal - - 1,450
State - - (308)
Foreign - 205 (2,159)
------ ------ -------
Total deferred - 205 (1,017)
------ ------ -------
Charge in lieu of income
tax expense related to
employee stock options - - 244
------ ------ -------
$3,396 $3,559 $ 1
====== ====== =======
</TABLE>
Income taxes differ from the amount computed by applying the statutory federal
income tax rate to income (loss) before income taxes as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
-----------------------------------
(In thousands) 1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Statutory federal income tax
(benefit) at 34% $ 6,887 $(3,776) $(5,157)
State income tax (benefit),
net of federal effect 247 (338) (714)
Foreign taxes less related tax
benefit, if any 669 3,659 502
Losses and expenses without
tax benefit - 4,014 5,836
Current utilization of losses (4,407) - -
Other, net - - (466)
------- ------- -------
$ 3,396 $ 3,559 $ 1
======= ======= =======
</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> 26
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
------------------------------------
(In thousands) 1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Deferred tax assets:
Accruals and reserve
accounts $ 7,613 $ 9,732 $ 6,130
Property and equipment 1,641 1,477 2,696
Net operating loss carryforward 7,032 18,550 9,644
Research credit 7,602 7,105 6,715
Foreign tax and other credits 12,346 1,020 1,986
-------- -------- --------
Total gross deferred tax assets 36,234 37,884 27,171
Less valuation allowance (26,885) (26,330) (17,452)
-------- -------- --------
Net deferred tax assets 9,349 11,554 9,719
-------- -------- --------
Deferred tax liabilities:
Amortization 1,525 3,730 1,690
-------- -------- --------
Total deferred tax liabilities 1,525 3,730 1,690
-------- -------- --------
Net tax assets and liabilities $ 7,824 $ 7,824 $ 8,029
======== ======== ========
</TABLE>
The net change in the total valuation allowance for the years ended September
30, 1999, 1998 and 1997, was an increase of approximately $0.6 million, $8.9
million and $7.9 million, respectively. Subsequently recognized tax benefits
relating to the valuation allowance for deferred tax assets as of September 30,
1999 will be allocated to income tax benefit and additional paid in capital in
the amounts of $25.8 million and $1.1 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, 1999, the Company has net operating loss carryforwards of
approximately $22.0 million which expire in fiscal years 2012 through 2018, and
foreign tax credit and research credit carryforwards of approximately $11.3
million and $6.4 million, respectively, which expire in fiscal 2000 through
2013.
At September 30, 1999, 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 were outsourced and elements of general and administration functions
were consolidated.
The restructuring charge payable and payments against it can be summarized as
follows:
<PAGE> 27
<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
Fiscal 1999 payments / write-offs (10) (682) - - (692)
------- ------- ------- ------- -------
Accrual at end of fiscal 1999 $ - $ - $ - $ - $ -
======= ======= ======= ======= =======
</TABLE>
NOTE 14 - INVESTMENTS
In November 1996, the Company purchased $2.0 million of convertible debentures
of a domestic distribution channel partner. In February 1999, the Company
elected to convert, in its entirety, the debenture into shares of preferred
stock. In the event the partner has not consummated an underwritten public
offering or other liquidity event by March 2001 which returns to the Company its
entire $2.0 million investment, the Company shall be entitled to redeem the
preferred shares for $2.0 million plus 6% per annum per year on such amount
commencing March 1999. Said sum may be paid immediately upon redemption or may
be paid in up to six equal quarterly installments of principal plus interest, at
an interest rate equal to the prime rate, adjusted quarterly. In accordance with
FAS 121, the Company recorded an impairment of this asset at September 30, 1999
based on estimated discounted cash flows.
In January 1995, the Company purchased 10% of the preferred stock of Rainmaker
Systems, Inc. ("Rainmaker"), another of the Company's domestic distribution
partners, in exchange for cash, product and equipment valued at $1.0 million. In
addition, the Company loaned $1.0 million to Rainmaker in exchange for
convertible debentures. In February 1999, the Company exchanged the preferred
stock and debentures for shares of Series D Convertible Participating Preferred
Stock (the "Series D Preferred"). The Company sold a portion of these shares and
this investment is valued at $1.4 million at September 30, 1999. On August 30,
1999 the Company entered into a "Put and Call" agreement which allows it to sell
up to 307,692 shares of Rainmaker stock at a price of $6.50 per share. As of
September 30, 1999 there were no exercises against this agreement.
At September 30, 1999 and 1998, the Company had accounts receivable outstanding
with these related parties of $3.2 million and $1.5 million, respectively. Sales
to the related parties were $24.8 million for fiscal 1999, $18.6 million for
fiscal 1998 and $18.3 million for fiscal 1997.
NOTE 15 - INDUSTRY AND GEOGRAPHIC SEGMENT INFORMATION
The Company has adopted the Financial Accounting Standards Board's Statement of
Financial Accounting Standards No. 131 (SFAS 131), Disclosures about Segments of
an Enterprise and Related Information, effective for fiscal years beginning
after December 31, 1997. SFAS 131 supercedes SFAS 14, Financial Reporting for
Segments of a Business Enterprise. SFAS 131 changes current practice under SFAS
14 by establishing a new framework on which to base segment reporting and also
requires interim reporting of segment information.
The Company reviews performance on the basis of geographical segments. The
Company uses analysis of segment revenues and gross margin in order to make
preliminary decisions of resource allocation. No information on total assets by
segment is reviewed. The accounting policies used by each segment comply with
the policies used in the consolidated financial statements.
<PAGE> 28
Each segment markets the Company's software products to companies in a number of
industries including telecommunications, manufacturing and government bodies.
These products are either sold directly by each segment's sales force or are
sold to end users through distributors or OEMs.
The following table presents information about reportable segments as well as
information on long lived assets by geography. Revenue is allocated to segments
based on the location from which the sale is satisfied and long-lived asset
information is based on the physical location of the asset.
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
------------------------------------
(In thousands) 1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
NET REVENUES:
United States $ 96,809 $ 83,037 $ 84,483
CLA 12,606 9,801 9,660
EMEIA 95,270 63,379 78,370
Asia Pacific 18,161 14,471 18,751
Corporate Adjustments 778 1,212 2,396
-------- -------- --------
Total net revenues $223,624 $171,900 $193,660
======== ======== ========
GROSS MARGIN: (1)
United States $ 73,576
CLA 9,276
EMEIA 76,943
Asia Pacific 14,615
Corporate Adjustments 611
--------
Total gross margin $175,021
========
LONG-LIVED ASSETS
United States $ 31,058 $ 34,779 $ 40,264
CLA 122 15 37
EMEIA 5,234 4,897 4,177
Asia Pacific 155 200 315
Other international operations 50 50 50
-------- -------- --------
Total long-lived assets $ 36,619 $ 39,941 $ 44,843
======== ======== ========
</TABLE>
(1) Gross margin by geography was not tracked by the Company prior to fiscal
year 1999.
In 1999, 1998 and 1997 no single customer accounted for 10% or more of the
Company's net revenues.
NOTE 16 - EMPLOYEE BENEFIT PLAN
SAVINGS PLAN The Company maintains an employee 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, up to certain
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 1999, 1998 and
1997, the Company's total contributions towards the 401(k) plan amounted to $1.0
million, $0.9 million and $0.9 million, respectively.
<PAGE> 29
NOTE 17 - SUBSEQUENT EVENTS
On November 17, 1999, Rainmaker completed an initial public offering of its
common stock. On such date, the shares of Series D Preferred held by the Company
automatically converted into shares of Rainmaker's common stock on a one-for-one
basis. In connection with Rainmaker's initial public offering, the Company has
agreed not to sell or otherwise dispose of any of these shares for a period
extending 180 days from the date of the prospectus covering the initial common
stock subject to compliance with securities laws, including volume limitations.
At September 30, 1999, the Company held 4,013,459 shares of Rainmaker's common
stock. Rainmaker's common stock is traded on the Nasdaq National Market under
the symbol "RMKR."
In December 1999, the Company purchased $0.3 million of convertible debentures
of a strategic partner. The Company may convert the debentures at any time prior
to December 2001 into 333,333 shares of preferred stock. The Company has the
right to invest up to an additional $0.7 million in exchange for similar
debentures, such right to expire in June 2000. The Company also has a warrant to
purchase up to 666,666 shares of preferred stock, such warrants to expire
December 2004. If the Company elects not to convert the debentures prior to
December 2001, the strategic partner shall immediately pay the principal sum
owing plus accrued interest.
<PAGE> 30
REPORTS OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of The Santa Cruz Operation, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements 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, 1999 and
1998, and the results of their operations and their cash flows for each of the
years 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 audits. We conducted our audits 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 audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
San Jose, California
October 22, 1999 except for Note 17 which is as of December 1, 1999
To the Board of Directors and Shareholders of The Santa Cruz Operation, Inc.
We have audited the accompanying consolidated statements of operations,
shareholders' equity (deficit) and cash flows of The Santa Cruz Operation, Inc.
and subsidiaries for the year 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
The Santa Cruz Operation, Inc. and subsidiaries for the year ended September 30,
1997, in conformity with generally accepted accounting principles.
KPMG LLP
Mountain View, California
October 22, 1997
<PAGE> 31
THE SANTA CRUZ OPERATION, INC.
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<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) 1999 1999 1999 1998 1998 1998 1998 1997
-------- -------- -------- -------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues $ 58,120 $ 57,060 $ 55,738 $ 52,706 $48,622 $ 25,241 $ 50,540 $47,497
Cost of revenues 11,955 12,353 12,427 11,868 10,473 10,126 12,953 12,346
------ ------ ------ ------ ------ ------ ------ ------
Gross margin 46,165 44,707 43,311 40,838 38,149 15,115 37,587 35,151
------ ------ ------ ------ ------ ------ ------ ------
Operating expenses:
Research and
development 10,328 10,265 10,287 9,890 10,066 10,157 10,411 10,759
Sales and marketing 26,143 24,267 23,612 23,057 20,393 20,445 19,187 19,619
General and
administrative 4,758 5,691 5,777 4,573 5,078 4,626 4,250 4,604
------ ------ ------ ------ ------ ------ ------ ------
Total operating
expenses 41,229 40,223 39,676 37,520 35,537 35,228 33,848 34,982
------ ------ ------ ------ ------ ------ ------ ------
Operating income (loss) 4,936 4,484 3,635 3,318 2,612 (20,113) 3,739 169
Other income (expense):
Interest income, net 410 458 498 576 637 679 470 475
Other income (expense), net 905 598 446 (10) 230 (53) (52) 101
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) before
income taxes 6,251 5,540 4,579 3,884 3,479 (19,487) 4,157 745
Income taxes 876 1,005 735 780 800 1,482 956 321
------ ------ ------ ------ ------ ------ ------ ------
Net income (loss) 5,375 4,535 3,844 3,104 2,679 (20,969) 3,201 424
Other comprehensive income (loss),
net of tax (5) (26) (597) (256) 317 (46) 159 223
------ ------ ------ ------ ------ ------ ------ ------
Comprehensive income (loss) $ 5,370 $ 4,509 $ 3,247 $ 2,848 $ 2,996 ($21,015) $ 3,360 $ 647
------ ------ ------ ------ ------ ------ ------ ------
Earnings (loss) per share:
Basic $ 0.16 $ 0.13 $ 0.11 $ 0.09 $ 0.08 ($ 0.59) $ 0.09 $ 0.01
Diluted $ 0.14 $ 0.13 $ 0.11 $ 0.09 $ 0.08 ($ 0.59) $ 0.09 $ 0.01
------ ------ ------ ------ ------ ------ ------ ------
Shares used in earnings (loss)
per share calculation:
Basic 33,880 33,951 34,339 34,757 35,221 35,611 36,094 36,345
Diluted 38,319 36,082 35,394 35,321 35,408 35,611 36,431 37,094
====== ====== ====== ====== ====== ====== ====== ======
</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 Australia
SCO do Brasil Ltda. Brazil
SCO Canada, Company Canada
The Santa Cruz Operation (France) SARL France
The Santa Cruz Operation (Deutschland) GmbH Germany
The Santa Cruz Operation (Italia) Srl Italy
SCO, Kabushiki Kaisha Japan
Nihon SCO Limited Japan
The Santa Cruz Operation de Mexico, S. DE R.L. DE C.V. Mexico
The Santa Cruz Operation Limited UK
The Santa Cruz Operation (Asia) Ltd. Delaware
The Santa Cruz Operation Latin America, Inc. Delaware
SCO Foreign Sales Corporation U.S. Virgin Islands
</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 report dated October 22, 1999, except for
Note 17, which is as of December 1, 1999, relating to the consolidated balance
sheet of The Santa Cruz Operation, Inc. and subsidiaries as of September 30,
1998 and 1999, and the related consolidated statements of operations,
shareholders' equity (deficit) and cash flows for the years then ended, and the
related schedule, which reports appear or are incorporated by reference in the
September 30, 1999 annual report on Form 10-K of The Santa Cruz Operation, Inc.
/s/ PricewaterhouseCoopers LLP
San Jose, California
December 27, 1999
The Board of Directors
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 reports dated
October 22, 1997, relating to the consolidated statements of operations,
shareholders' equity (deficit) and cash flows of The Santa Cruz Operation, Inc.
and subsidiaries for the year ended September 30, 1997, and the related
schedule, which reports appear or are incorporated by reference in the September
30, 1999, annual report on Form 10-K of The Santa Cruz Operation, Inc.
/s/ KPMG LLP
Mountain View, California
December 22, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<CASH> 33,683
<SECURITIES> 29,161
<RECEIVABLES> 40,531
<ALLOWANCES> (8,222)
<INVENTORY> 796
<CURRENT-ASSETS> 102,665
<PP&E> 58,134
<DEPRECIATION> (45,900)
<TOTAL-ASSETS> 139,284
<CURRENT-LIABILITIES> 60,423
<BONDS> 0
0
0
<COMMON> 106,201
<OTHER-SE> (35,863)
<TOTAL-LIABILITY-AND-EQUITY> 139,284
<SALES> 208,466
<TOTAL-REVENUES> 223,624
<CGS> 30,051
<TOTAL-COSTS> 48,603
<OTHER-EXPENSES> 158,648
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,881
<INCOME-PRETAX> 20,254
<INCOME-TAX> 3,396
<INCOME-CONTINUING> 16,858
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,858
<EPS-BASIC> 0.49
<EPS-DILUTED> 0.46
</TABLE>
