<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO _______________
----------
COMMISSION FILE NUMBER 0-21484
THE SANTA CRUZ OPERATION, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 94-2549086
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 ENCINAL STREET, SANTA CRUZ, CALIFORNIA 95060
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (831) 425-7222
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
PREFERRED SHARE PURCHASE RIGHTS COMMON STOCK, NO PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Registrant became subject to such filing requirements on May 25, 1993 as a
result of its initial public offering.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to
contained to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
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 November 1,
2000 as reported on the Nasdaq National Market was approximately $4.0938 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 November 1, 2000, registrant had 39,441,763 shares
of Common Stock outstanding.
================================================================================
<PAGE> 2
THE SANTA CRUZ OPERATION, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I PAGE NUMBER
<S> <C> <C>
Item 1. Business 1
Item 2. Properties 16
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 20
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations 21
Item 8. Financial Statements and Supplementary Data 32
Item 9. Changes in and Disagreement with Accountants on Accounting and Financial
Disclosures 56
PART III
Item 10. Directors and Executive Officers of the Registrant 57
Item 11. Executive Compensation 60
Item 12. Security Ownership of Certain Beneficial Owners and Management 69
Item 13. Certain Relationships and Related Transactions 71
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K 72
Signatures 74
</TABLE>
<PAGE> 3
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, The Santa Cruz Operation, Inc. (SCO), or the Company, 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.
In August, 2000, SCO and Caldera Systems, Inc., (Nasdaq: CALD), entered into an
agreement in which Caldera Systems would acquire assets from the SCO Server
Software and Professional Services Divisions. The agreement is subject to the
approval of regulatory agencies and The Santa Cruz Operation, Inc. and Caldera
Systems, Inc. stockholders, and is expected to close in January 2001.
SCO will receive 28.6% ownership interest of Caldera, Inc., which is estimated
to be an aggregate of approximately 18.4 million shares of Caldera stock and $7
million in cash. SCO will retain its Tarantella Division, and the SCO OpenServer
revenue stream and intellectual properties.
Caldera will have exclusive distribution rights to SCO OpenServer and has agreed
to service and support the SCO OpenServer customer base. Caldera will receive a
sales commission and reimbursement for SCO OpenServer engineering and marketing
expenses. SCO's operating profit for the SCO OpenServer products will be
approximately 55% of future SCO OpenServer revenues.
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.
1
<PAGE> 4
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 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:
o Server-based Computing - SCO server software makes it easier to deploy,
secure, manage, and grow applications and information systems.
o Client Independence - SCO server software supports many kinds of client
devices, so that businesses can choose the device that best suits a task.
o Evolutionary Systems - SCO server software protects current hardware and
software investments while enabling businesses to adopt the latest
technological advances.
o 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.
2
<PAGE> 5
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 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
3
<PAGE> 6
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.
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
4
<PAGE> 7
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
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.
5
<PAGE> 8
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
o 1983 - SCO(R) XENIX(R) System V, a packaged version of the UNIX(R) operating
system.
o 1985 - SCO XENIX 286, its first operating system for the 32-bit Intel(R)
microprocessor environment.
o 1987 - SCO XENIX 386.
o 1989 - SCO UNIX System V/386, its first UNIX trademarked commercial product
for Intel processor based platforms.
o 1990 - SCO Open Desktop(R), a graphical version of SCO UNIX System V/386.
o 1993 - SCO OpenServer(TM) software family, a complete line of advanced
server.
o 1993 - SCO Open Desktop family, a complete line of advanced workstation
(client) operating systems.
o 1995 - SCO OpenServer family, which integrated SCO OpenServer and SCO Open
Desktop product lines.
o 1995 - SCO Vision family of client-integration products, which integrate
Windows(R) PCs with UNIX servers from all major UNIX system vendors.
o 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.
o 1995 - SCO acquired the UnixWare(R) product line and UNIX system technology
from Novell, Inc.
o 1997 - Tarantella web-enabling software.
o 1998 - UnixWare 7 Operating System.
o 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.
o 1999 - UnixWare 7 Release 7.1 Operating System, featuring SCO's new Webtop
technology based on Tarantella software.
o 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.
o 2000 - SCO entered into an agreement in which Caldera Systems would acquire
assets from the SCO Server Software and Professional Services Divisions,
including a highly skilled products and channel resources.
o 2000 - SCO announced that the company intends to change its name to
Tarantella, Inc.
6
<PAGE> 9
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.
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.
7
<PAGE> 10
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, extensive networking with existing LANs and WANs, easy
integration with Windows desktops, built-in internet access and services,
simplified administration and management, and outstanding scalability for long
term growth.
BASE SCO OPENSERVER OPERATING SYSTEMS
SCO OpenServer Enterprise System - 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.
8
<PAGE> 11
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 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 98, Windows 3.1, and DOS applications run
simultaneously with business critical UNIX applications. A common file system
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 Virtual Disk Manager - SCO Virtual Disk Manager is disk management software
that improves system performance and reliability.
9
<PAGE> 12
TARANTELLA
Tarantella provides a range of web-enabling software technologies that give
immediate internet access to server-based applications, without any alteration
to the application code. 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. Its family
of enterprise software products gives instant web access to applications
running on all leading servers, enabling businesses to deploy, access and
manage information anywhere anytime. Tarantella products give instant access to
existing mainframe, AS/400(R), Microsoft Windows(R), Linux(R) and UNIX(R)
applications, as well answer web applications, and are available today for all
popular RISC and Intel processor-based UNIX servers and selected Linux servers.
The Tarantella solution has a unique three-tier architecture, in which software
resides on the middle tier between an enterprise's application servers and
internet client devices, deploying server-based applications over the network,
via a web interface. This makes Tarantella solutions non-invasive, and
applications can be deployed without any need for modification of the
application or extra load on the application server.
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.
Tarantella makes use of the existing protocols associated with each server
type, allowing for a truly non-invasive solution, while insuring that
application software incompatibilities do not arise. This also means that there
is no need to take any application servers offline to install Tarantella and
overheads associated with adding extra software are minimized. The Tarantella
drop-in approach drastically reduces the time to deliver applications and moves
the management of users and applications back centrally located servers. With
Tarantella, organizations can move their current applications onto the network
without rewriting code or disrupting their current operations.
The Tarantella product line includes Tarantella Enterprise 3(TM) for large
companies and organizations, Tarantella Enterprise 3 ASP Edition(TM) for
Application Service Providers, and Tarantella Express(TM), for workgroup and
departmental environments. (see www.tarantella.com)
Tarantella Enterprise III - Designed to meet the demands of the large
enterprise, this product offers the sealability, stability and reliability
demanded by large organizations. Multiple Tarantella servers can be linked
together to form an array which can support thousands of users. Optimal network
performance is assured at all times, whatever the connection.
Tarantella Express - Specially designed for workgroup and departmental
environments, this product provides a rich sub-set of Tarantella Enterprise III
features.
Tarantella Enterprise III, ASP Edition - Specially designed for workgroup and
departmental environments, this special ASP Edition includes all of the
features of Tarantella Enterprise III packaged within a flexible purchase or
rental plan that includes training, enhanced support and services. Features
specifically designed for ASPs allow sophisticated integration with customer
account systems.
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-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.
10
<PAGE> 13
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 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. 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-
11
<PAGE> 14
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 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.
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
12
<PAGE> 15
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 product development is comprised of one integrated organization that
implements SCO's two product strategies--UNIX servers and Client Integration
products.
The UNIX server development teams are responsible for the core operating systems
and services including SCO OpenServer, SCO UnixWare, and the forthcoming 64-bit
UNIX system, code-named Monterey64. They are also responsible for additional OS
services such as SCO(R) Merge(TM), Virtual Disk Manager and On Line Data Manager
(RAID subsystems), Development Systems, and new technology development projects
that are UNIX kernel-related such as clustering and NUMA support. In addition,
they are responsible for many layered server functions that extend the
capabilities of the core operating systems. These services include file and
print services, system management and backup services, and, most important,
internet services.
The client integration development teams are responsible for SCO's "Windows
integration" and "any-client integration" products and services. SCO's strategy
is to integrate almost any client with almost any UNIX server. The teams build
the SCO 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, 2001. 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
13
<PAGE> 16
from such hardware-independent operating systems as Microsoft Windows NT and
SunSoft's Solaris for Intel. The Company expects Microsoft Windows NT (server
and workstation) to continue to offer significant and increasing competition to
UNIX System products, including SCO products. Many of these competitors and
potential competitors have significantly greater financial resources, more
technical personnel and more extensive marketing and distribution capabilities
than the Company. The major factors that affect the competitive market for the
Company's products include product reliability, availability of user
applications, compliance with industry standards, ease of use, networking
capability, breadth of hardware compatibility, quality of support and customer
services, product performance and price.
Over recent years, operating systems such as GNU, Linux, FreeBSD and others
developed using collaborative and "open source" techniques have gained
popularity with highly technical users, and some integrators. Some of SCO's
competitors may exploit this technology to build competitive products, or the
market for SCO's products may be reduced by either technical users using these
products or the products becoming easier to use and more stable.
In addition, certain competitive products may have advantages compared to
certain SCO products. Microsoft Windows NT has greater name recognition than the
Company's products and is being designed to run on a greater range of
processors. The Company's 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.
14
<PAGE> 17
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, Linux, 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. However, it is possible that client or server vendors could
"close" access to their products to prevent customers from using Tarantella.
Accordingly, SCO announced an agreement this year to license Microsoft Remote
Desktop Protocol (RDP) technologies.
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, 2000, the Company had 901 employees, including 189 in
product development, 370 in sales and marketing, 116 in customer support
services, and 226 in finance, manufacturing and distribution services and
administration.
15
<PAGE> 18
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.
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 2000.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company as of September 30, 2000 were as follows:
<TABLE>
<CAPTION>
Name Age Position with the Company
---- --- -------------------------
<S> <C> <C>
Douglas L. Michels 46 President and Chief Executive Officer
Randall Bresee 52 Senior Vice President and Chief Financial Officer
David McCrabb 52 President Server Division
Jack Moyer 51 Senior Vice President, Human Resources
Mike Orr 49 President, Tarantella Division
Steve Sabbath 53 Senior Vice President, Law and Corporate Affairs,
and Secretary
Geoff Seabrook 52 Senior Vice President, Corporate Development
James Wilt 54 President, Professional Services
</TABLE>
16
<PAGE> 19
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. Bresee was named Senior Vice President and Chief Financial Officer in April
of 2000. Prior to that he was Chief Financial Officer at bamboo.com, serving in
the capacity from April 1999 to April 2000. Between January 1998 and April 1999
he was Vice President and Corporate Controller for SCO and between May 1997 and
January 1998 he served as Americas Controller for SCO. Prior to joining SCO, Mr.
Bresee served as Director of Finance for the Customer Support Division at
Silicon Graphics Incorporated from May 1988 to May 1997.
Mr. McCrabb was named President, Server Division in April 2000. He has served as
Executive vice President, Worldwide Sales and Field Operations since 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 President, Tarantella Division, in April 2000. Between April
2000 and July 1999, he served as Senior Vice President, Worldwide Marketing.
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.
Mr. Wilt was named President, Professional Services in April 2000. Between April
2000 and April 1998, he served as Senior Vice President, Products. 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
17
<PAGE> 20
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 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
Fiscal 2000:
First Quarter 11.25 34.63
Second Quarter 9.38 31.25
Third Quarter 4.19 8.94
Fourth Quarter 2.78 6.13
</TABLE>
On November 1, 2000, there were approximately 23,000 holders of the Company's
Common Stock.
19
<PAGE> 22
ITEM 6. SELECTED FINANCIAL DATA
THE SANTA CRUZ OPERATION, INC.
SELECTED FIVE YEAR FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
-------------------------------------------------------------
(In thousands, except per share data) 2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net revenues $ 148,923 $ 223,624 $ 171,900 $ 193,660 $ 207,890
Cost of revenues 41,796 49,778 47,096 55,315 54,402
--------- --------- --------- --------- ---------
Gross margin 107,127 173,846 124,804 138,345 153,488
Operating expenses 158,360 157,473 138,397 154,939 177,069
--------- --------- --------- --------- ---------
Operating income (loss) (51,233) 16,373 (13,593) (16,594) (23,581)
Other income (expense):
Interest income, net 1,679 1,942 2,261 2,291 2,302
Other income (expense), net 819 1,939 226 (866) (394)
--------- --------- --------- --------- ---------
Income (loss) before income taxes (48,735) 20,254 (11,106) (15,169) (21,673)
Income taxes 8,218 3,396 3,559 1 741
--------- --------- --------- --------- ---------
Net income (loss) (56,953) 16,858 (14,665) (15,170) (22,414)
Other comprehensive income (loss), net of tax
Unrealized gain on available-for-sale equity securities 5,617 -- -- -- --
Foreign currency translation adjustment (539) (884) 653 936 (213)
--------- --------- --------- --------- ---------
Comprehensive income (loss) $ (51,875) $ 15,974 $ (14,012) $ (14,234) $ (22,627)
--------- --------- --------- --------- ---------
Earnings (loss) per share-basic $ (1.59) $ 0.49 $ (0.41) $ (0.41) $ (0.62)
Earnings (loss) per share-diluted $ (1.59) $ 0.46 $ (0.41) $ (0.41) $ (0.62)
--------- --------- --------- --------- ---------
Shares used in per share calculation-basic 35,720 34,232 35,817 36,628 36,179
Shares used in per share calculation-diluted 35,720 36,402 35,817 36,628 36,179
--------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
September 30,
---------------------------------------------------------
(In thousands) 2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Cash, equivalents and short-term investments $ 26,446 $ 62,844 $ 51,076 $ 51,711 $ 54,831
Working capital 16,654 44,813 32,221 46,164 61,935
Total assets 82,202 139,284 131,189 146,665 166,807
Long-term liabilities 5,462 11,094 12,027 9,545 9,332
Shareholders' equity 31,202 70,338 60,135 81,462 101,581
--------- --------- --------- --------- ---------
</TABLE>
20
<PAGE> 23
ITEM 7. 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, 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 $148.9 million in fiscal 2000, a decrease of 33% from $223.6
million in fiscal 1999. In fiscal 1999, net revenues increased by 30% from
$171.9 million in fiscal 1998. The fiscal 2000 decline in revenue performance
was worldwide across most geographies and is attributable to delays in large
project deals as well as customer delays due to Year 2000 issues as well as
other market factors. The recovery of the customer channel from the impact of
Year 2000 has been slower than expected. The fiscal 1998 to 1999 revenue
increase was due to stronger revenue performance across all geographies
attributable to several factors including the ease of electronic licensing,
increased customer contacts as a result of added sales resources and Y2K upgrade
sales. For the fiscal years ended September 30, 2000, 1999 and 1998, no single
customer accounted for greater than 10% of the Company's net revenues.
International revenues continue to be a significant portion of net revenues,
comprising 54% of the revenues for fiscal 2000 and 56% and 51% for 1999 and
1998, respectively.
License Revenues. License revenues were $133.5 million in fiscal 2000 as
compared to $208.5 million in fiscal 1999 and $156.7 million in fiscal 1998,
representing a decrease of 36% in fiscal 2000 over 1999 and
21
<PAGE> 24
an increase of 33% in fiscal 1999 over 1998. License revenues were approximately
90% of total net revenues for fiscal 2000 and 93% and 91% of total net revenues
for fiscal 1999 and 1998, respectively. The fiscal 2000 decline in license
revenues resulted from customer delays due to Year 2000 issues and a slower than
expected recovery of the customer channel from the impact of Y2K. The fiscal
1998 to 1999 license revenue increase was due to several factors including the
ease of electronic licensing, increased customer contacts due to larger sales
resources and Y2K upgrade sales. The fiscal 1999 increase was across all
geographies.
Service Revenues. Revenue from services remained relatively constant in fiscal
2000 at $15.4 million, a 2% increase over the $15.2 million level of fiscal 1999
and the $15.2 million in service revenues in fiscal 1998.
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 License Revenues. Cost of license revenues includes royalties paid to
certain software vendors, amortization of acquired technologies, product
packaging, documentation and all costs associated with the acquisition of
components, assembling of finished products, warehousing and shipping. Cost of
license revenues as a percentage of license revenues increased to 17% in fiscal
2000 from 15% in fiscal 1999, which in turn was a decrease from 19% in fiscal
1998. The 2% increase from 1999 to 2000 was due to the impact of fixed costs
over lower unit sale volume. These fixed costs include technology and overhead
costs. This impact is partially offset by declining material costs resulting
from the continuing growth of e-commerce business. The 4% decline from 1998 to
1999 resulted from the effects of royalty dispute settlement negotiated with a
technology provider during fiscal 1998 and reduced technology costs together
with the impact of stable fixed costs over higher unit sales volume. In
addition, material costs declined as a result of increasing e-commerce trade, or
business conducted over the internet. During the year ended September 30, 1998,
the Company reached a settlement of a royalty dispute with one of its technology
providers which resulted in an element of past royalties being forgiven and an
additional retroactive refund being received. In total, approximately $2.6
million was credited to royalty expense during the year ended September 30,
1998. In addition, the Company received a reduction in both the ongoing royalty
rate and in the number of the Company's products, which are subject to payment
of royalties.
Cost of Service Revenues. Cost of service revenues includes documentation,
consulting and personnel related expenses associated with providing such
services. Costs of service revenues as a percentage of service revenues
decreased to 126% in fiscal 2000 from 128% in fiscal 1999, which in turn was an
increase from 115% in fiscal 1998. The decrease in fiscal 2000 resulted from
relatively constant costs as a percentage of higher fiscal 2000 revenues. The
increase from fiscal 1998 to fiscal 1999 was a result of increased staffing
levels in the professional services area. The higher staffing levels were part
of an effort by the Company to increase the visibility of the professional
services group to customers.
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 6% to $39.7 million in fiscal 2000 from $42.4 million in
fiscal 1999, which was a decrease of 1% from fiscal 1998 spending of $43.0
million. Research and development expenses represented 27% of net revenues for
fiscal 2000, 19% of net revenues for fiscal 1999 and 25% of net revenues for
fiscal 1998. The spending decrease in fiscal 2000 is primarily the result of
lower labor costs driven by lower headcount as a result of a planned
22
<PAGE> 25
reduction in force. The decrease in research and development expenses during
fiscal 1999 can be attributed to lower depreciation and hardware expenses.
SALES AND MARKETING
Sales and marketing expenses decreased 9% to $89.3 million for fiscal 2000,
compared to $98.5 million in fiscal 1999 and $80.5 million in fiscal 1998. Sales
and marketing expenses represented 60%, 44% and 47% of total net revenues in
fiscal 2000, 1999 and 1998, respectively. The decrease in fiscal 2000 is due to
a decline in sales program costs that vary directly with revenue, including
commissions and cooperative advertising. The fiscal 1999 increase was 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.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased 13% in fiscal 2000 to $18.7
million compared to $16.6 million in fiscal 1999. In fiscal 1999, general and
administrative expenses increased by 11% from $15.0 million in fiscal 1998.
General and administrative expenses represented 13% of total net revenues for
fiscal 2000, 7% of total net revenues for fiscal 1999 and 9% of total net
revenues for fiscal 1998. The transfer of certain staff from other functions due
to the creation of the Company's divisions drove the increase in fiscal 2000.
The fiscal 1999 increase was due to increased corporate bonuses as a result of
exceeding Company performance goals.
RESTRUCTURING CHARGES
Non-recurring charges of $10.7 million were incurred in fiscal year 2000 that
related to worldwide restructurings undertaken in the second and fourth quarters
of fiscal 2000, representing 7% of total net revenues for the fiscal year. The
restructurings included a reduction in personnel of 227 employees, write-off of
certain acquired technologies, write-off of certain fixed assets, and
elimination of non-essential facilities. Of the $10.7 million, $9.2 million
related to cash expenditures and $1.5 million related to non-cash charges. The
restructuring charge related to cash expenditures included $7.3 million for
severance costs and $1.9 million for facilities costs. The non-cash charges
related to disposals of fixed assets and write-offs of technology. The disposal
of fixed assets is comprised of computer equipment that will no longer be in use
due to the reduction of personnel. The technology write-offs relates to
technology that will not be used in future product development due to the
reduction in development personnel. This technology was associated with
development of the Unixware product and had been previously capitalized as it
had alternative future use. In conjunction with the restructuring, the personnel
associated with the development of this technology were terminated and this
technology no longer had an alternative future use. The Company has restructured
its business operations into three independent divisions, each with a separate
management team and dedicated development, marketing and sales organizations -
the Server Division, the Tarantella Division and the Professional Services
Division. The Company believes this reorganization creates independent focused
teams that can pursue revenue in their respective markets and was effective
April 1, 2000. As a result of the restructuring plans various regional offices
in the United States, United Kingdom, Latin America and the Asia Pacific region
will be eliminated. The United States regional facilities and the Watford,
United Kingdom leases have been or will be vacated and restored, and
subsequently sub-let or terminated by the second quarter of 2001. The remaining
international offices are expected to be vacated immediately. Of the facilities
closed, the majority relates to the Server Division while a minor portion
relates to the Corporate Division which is comprised primarily of the finance
and general and administrative functions of the Company's United Kingdom
subsidiary. The Company anticipates that all of the payments, except the
facility lease payment, will be made by the end of fiscal 2001. The majority of
the reduction in force was in the Server Software Division. As of September 30,
2000 a total of 140 positions have been eliminated: 114 positions in the Server
Software Division, 21 in the Corporate Division, 4 in the Professional Services
Division and 1 in the Tarantella Division. Together, these cost saving measures
are expected to result in a total annual savings of $23.9 million beginning in
the next fiscal year.
23
<PAGE> 26
OTHER INCOME (EXPENSE)
Other income and expense consists of interest income net of interest expense,
foreign exchange gains and losses, and realized gains and losses on investments,
as well as other miscellaneous income and expense items. Net interest income
decreased in fiscal 2000 to $1.7 million compared to $1.9 million for fiscal
1999 and $2.3 million for fiscal 1998. Other income was $0.8 million for fiscal
2000, $1.9 million for fiscal 1999 and $0.2 million in fiscal 1998. Other income
in fiscal 2000 included a gain on the sale of an equity security investment of
$1.9 million net of an other than temporary decline in another investment
position of $0.7 million. The increase in other income in fiscal 1999 was due to
gains from the partial liquidation of converted debentures of a domestic
distribution channel partner of $3.3 million, net of an other than temporary
decline in another investment position of $1.0 million.
INCOME TAXES
In fiscal 2000, 1999 and 1998, the Company's effective income tax rates
were (17)%, 17% and (32)%, respectively. The fiscal 2000 tax reflects the
recognition of a valuation allowance against deferred tax assets of $7.8 million
and foreign income taxes of $0.4 million. The fiscal 1999 tax provision
primarily reflects foreign income taxes, while the fiscal 1998 tax provision
reflects losses and expenses without tax benefit for which a valuation allowance
has been established. For an analysis of income taxes, see Note 13 of Notes to
Consolidated Financial Statements.
NET INCOME (LOSS)
The Company reported a net loss of $57.0 million in fiscal 2000 compared to net
income of $16.9 million in fiscal 1999 and net losses of $14.7 million in fiscal
1998. The net loss in fiscal 2000 is primarily due to lower revenues,
restructuring charges and the reduction of net deferred tax assets. The net
income in fiscal 1999 was driven by strong revenue performance, which was
directly related to the increasing importance of server-based computing as well
as customers upgrading in preparation for Year 2000.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's future operating results may be affected by various uncertain
trends and factors that 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 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 and cash balances could be adversely affected, and
such effect could be substantial and could result in an operating loss and
depletion of the Company's cash balances. In such event, it may not be possible
for the Company to secure sources of cash to maintain operations.
24
<PAGE> 27
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 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.
As of September 30, 1999 the Company established a partial valuation allowance
against its gross deferred tax assets to reduce such asset to the amount that
was deemed, more likely than not, to be recoverable prior to expiration. The
Company considered, amongst other factors, the historical profitability, prior
to one off charges, of the Company, projections for future profits and the
ability of the Company deferred tax assets against these future profits prior
to expiration of these assets, the ability of the Company's foreign subsidiaries
to utilize their deferred tax assets, and the tax effects of one time charges.
As at September 30, 2000 the Company reassessed the recoverability of its net
deferred tax assets. This analysis was based on revised earnings projections,
the substantial net operating losses incurred during fiscal 2000 and the effects
of the restructurings undertaken during the year upon the group's tax structure.
As a result of this analysis management determined that it was more likely than
not that the net deferred tax asset recorded as of September 30, 1999 would not
be recoverable against future earnings prior to expiration. Accordingly the
Company has established a full valuation allowance against gross deferred tax
assets as of September 30, 2000. This resulted in a charge of $7.8 million to
the statement of operations during the year ended September 30, 2000.
Substantial portions of the Company's revenues are derived from sales to
customers outside the United States. Trade sales to international customers
represented 54%, 56% and 51% of total revenues for fiscal 2000, 1999 and 1998,
respectively. A substantial portion of the international revenues of the
Company's United Kingdom subsidiary are denominated in the U.S. dollar, 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 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.
25
<PAGE> 28
On August 1, 2000, the Company entered into an agreement with Caldera Systems,
Inc. ("Caldera") in which Caldera will acquire the Company's Server Software
Division and its Professional Services Division. This transaction involves a
number of risks, including but not limited to i) the potential disruption of the
Company's business that might result from employee or customer uncertainty, and
lack of focus following announcement of the transaction in connection with
integrating the operations of Caldera and the Company; ii) the risk that the
announcement of the transaction could result in decisions by customers to defer
purchases of products; iii) the substantial charges to be incurred due to the
transaction; iv) the difficulties of managing geographically dispersed
operations; and v) the possibility that the transactions contemplated in the
agreement with Caldera might not be consummated.
Further, once this transaction is consummated, the ongoing operations of the
company will be significantly altered. The Company's revenues will be derived
from only two product lines - Tarantella products, which have only been recently
introduced by the Company, and OpenServer products, which are mature products to
be distributed on the Company's behalf by Caldera. While the Company believes
that the current level of staffing together with future recruitment plans will
be different for the period following the consummation of the transaction, there
can be no assurance that the company will be able to retain current employees or
recruit the additional employees necessary to meet the company's ongoing plans.
In addition the company may not generate revenues at the levels forecasted and
as a result could find itself in a position of being overstaffed. As a result
the Company may need significant restructuring costs to reduce staffing levels.
Following the close of the transaction, the Company will hold in its treasury a
significant investment in Caldera, the value of which may be subject to
significant fluctuations.
The Company continually evaluates potential acquisition candidates. Such
candidates are selected based on products or markets that 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 is exposed to equity price risk regarding the marketable portion of
equity securities in its portfolio of investments entered into for the promotion
of business and strategic objectives. This risk will increase significantly
after the consummation of the transaction with Caldera. The Company is exposed
to fluctuations in the market values of our portfolio investments. The Company
maintains investment portfolio holdings of various issuers, types and
maturities. These securities are generally classified as available for sale and
consequently, are recorded on the balance sheet at fair value with unrealized
gains or losses reported as a separate component of accumulated other
comprehensive income, net of tax. Part of this portfolio includes minority
equity investments in several publicly traded companies, the values of which are
subject to market price volatility. The Company has also invested in several
privately held companies, many of which can still be considered in the startup
or development stages. These investments are inherently risky as the market for
the technologies or products they have under development are typically in the
early stages and may never materialize. The Company could lose its entire
initial investment in these companies. The Company typically does not attempt to
reduce or eliminate its market exposure pertaining to these equity securities.
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
26
<PAGE> 29
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.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments were $26.4 million at
September 30, 2000, a decrease of $36.4 million from September 30, 1999. The
decrease in fiscal 2000 is due to operating losses, lower revenues and a
decrease in sales linearity, which resulted in lower cash collections. The
Company's operating activities used cash of $40.3 million in fiscal 2000,
compared to cash provided by operating activities of $28.5 million in fiscal
1999 and $13.4 million in fiscal 1998. Cash provided by investing activities
during fiscal 2000 was $18.3 million, compared to cash used for investing
activities during fiscal 1999 and 1998 of $7.2 million and $3.2 million,
respectively. In fiscal 2000, 1999 and 1998, cash was used to fund purchases of
technology, property and equipment, common stock repurchases and short-term
investments. The sales of short-term investments contributed to the cash
provided by investing activities for fiscal 2000. Cash provided by financing
activities was $9.7 million in fiscal 2000, compared to cash used for financing
activities of $10.6 million and $10.1 million for fiscal 1999 and 1998,
respectively. In fiscal 2000, cash provided by financing activities included a
private placement of the Company's stock. In fiscal 1999 and 1998, 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, 2000, the Company's principal sources of liquidity included
cash and short-term investments and available bank lines of credit of
approximately $0.9 million against which the Company had $0.7 million in
outstanding borrowings. The Company does not believe it will require borrowing
capacity greater than the amount available under these lines of credit for at
least the next twelve months. See Notes 2, 3 and 8 of Notes to the Consolidated
Financial Statements.
27
<PAGE> 30
The Company has incurred losses from operations of approximately $51.2 million
in the twelve months ended September 30, 2000 and revenues have declined from
$223.6 million for fiscal 1999 to $148.9 million for fiscal 2000. The Company
recently implemented cost reduction plans in order to reduce operating expenses
to levels consistent with current revenues and is investigating financing
alternatives. There can be no assurance that such financing will be available,
if at all, on terms acceptable to the Company.
On August 1, 2000, the Company entered into an agreement with Caldera Systems,
Inc. in which Caldera Systems, Inc. will acquire the Company's Server Software
and Professional Services Divisions. Caldera Systems, Inc. will form a new
holding company, Caldera, Inc., to acquire assets from the Company's Server
Software Division and the Company's Professional Services Division, including
its employees, products and channel resources. Caldera, Inc. will have exclusive
distribution rights for the SCO OpenServer product line. SCO will receive a
28.6% ownership interest in Caldera, Inc., which is estimated to be an aggregate
of approximately 18.4 million shares of Caldera stock (including approximately
2 million shares reserved for employee options assumed by Caldera, Inc. for
options currently held by SCO employees joining Caldera, Inc.), and $7.0 million
in cash. In conjunction with the acquisition, The Canopy Group, Inc., a major
stockholder of Caldera Systems, Inc., has agreed to loan $18.0 million to the
Company. The terms of this loan are still to be negotiated but both parties have
agreed the terms will be reasonable and customary. Further, Caldera Systems,
Inc. has agreed to loan $7.0 million to the Company in the form of a short-term
note repayable at the consummation of the transaction between SCO and Caldera
Systems, Inc. SCO will retain its Tarantella Division and the SCO OpenServer
revenue stream and intellectual properties. The boards of directors of both
companies have unanimously approved the acquisition which is subject to the
approval of Caldera Systems, Inc. and The Santa Cruz Operation, Inc.
stockholders, and regulatory agencies, as well as meeting certain other closing
conditions. The companies anticipate closing the transaction during the first
calendar quarter of 2001.
There can be no assurance that the transaction with Caldera Systems will be
completed. If the transaction with Caldera Systems is not completed the Company
will need to evaluate ways to further reduce costs in order to generate positive
cash flows in the future or obtain additional financing until cash flows
generated from the sale of the Company's products are sufficient to meet
expenses. These cost reductions could include restructuring the Company to
reduce operating expenses to levels that could be financed by revenues
generated. Such reductions in expenditures may include actions similar or
greater in scope to the cost reduction exercises undertaken in fiscal 2000.
There can be no assurance that such cost reduction measures would be successful
in completely eliminating the difference between expenditures and revenues or
that such actions would not have a harmful effect on the Company's business and
results of operations. In addition, there can be no assurance that if the
Company were to seek additional financing that it would be available at all or
on terms which are acceptable to the Company.
The Company has received a commitment for credit financing of up to $18.0
million from one of the stockholders of Caldera under normal commercial terms
that are currently under discussion. Further, Caldera Systems, Inc., has agreed
to loan $7.0 million to the Company in the form of a short-term note repayable
at the consummation of the transaction between the Company and Caldera
Systems, Inc.
The Company believes that, based on its current plans, which include the
completion of the transaction with Caldera discussed above, 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 fiscal 2001.
28
<PAGE> 31
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
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 balance sheet and measure those instruments
at fair value. In June 1999, the FASB issued SFAS No. 137, Accounting for
Derivative Instruments -- Deferral of the Effective Date of SFAS Statements No.
133 and in June 2000, the FASB issued SFAS No. 138, Accounting for Certain
Derivative Instruments -- an amendment of FAS 133, Accounting for Derivative
instruments and Hedging Activities. As a result of SFAS No. 137, SFAS No. 133
and SFAS No. 138 will be effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. The Company does not expect that the adoption of
this standard will have a material impact on its financial position and results
of operations.
In June 2000, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 138 (FAS 138), Accounting for Certain Derivative
Instruments -- an amendment of FAS 133, Accounting for Derivative Instruments
and Hedging Activities. FAS 138 shall be effective for all fiscal quarters of
all fiscal years beginning after June 15, 2000. The Company does not expect this
to have a material impact on its financial position and results of operations.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation - an Interpretation of APB Opinion No. 25. FIN 44 clarifies the
application of Opinion 25 for (a) the definition of employee for purposes of
applying Opinion 25, (b) the criteria for determining whether a plan qualifies
as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. The Company adopted FIN 44 effective July 1, 2000. The adoption of
the provisions of FIN 44 did not have a material effect on the financial
position or results of operations of the Company.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial
Statements, which provides guidance on the recognition, presentation and
disclosure of revenue in financials filed with the SEC. SAB 101 outlines the
basic criteria that must be met to recognize revenue and provides guidance for
disclosures related to revenue recognition policies. The Company is required to
adopt SAB 101 in the fourth quarter of fiscal 2001. We are in the process of
evaluating the Securities and Exchange Commission's interpretation of SAB 101
but believe that the implementation of SAB 101 will not have a material effect
on the financial position or results of operations of the Company.
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, 2000, 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.
29
<PAGE> 32
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, 2000 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.
Maturity Date for Short-Term Investments
<TABLE>
<CAPTION>
Year Ended September 30,
(In thousands) 2001 2002 2003 Total
------- ------- ------- -------
<S> <C> <C> <C> <C>
Government agency bonds 971 -- -- 971
Corporate bonds 1,496 3,100 4,596
------- ------- ------- -------
$ 2,467 $ 3,100 $ -- $ 5,567
Average interest rate 6.14% 5.15%
</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 as of September 30, 2000 and 1999.
30
<PAGE> 33
Forward Contracts
September 30, 2000
<TABLE>
<CAPTION>
Premium paid / Contract Forward Term of
(In thousands) (Discount received) amount strike rate contract
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Contract 1 2 $1,250 1.50255 (GB Pound/US Dollar) 2 months
Contract 2 3 $1,250 1.503025 (GB Pound/US Dollar) 2.5 months
Contract 3 5 $1,000 1.4568 (GB Pound/US Dollar) 2 months
Contract 4 5 $1,000 1.45705 (GB Pound/US Dollar) 2.5 months
Contract 5 5 $1,000 1.4574 (GB Pound/US Dollar) 3 months
Contract 6 (27) $3,500 1.4391 (GB Pound/US Dollar) 2 months
Contract 7 (38) ($3,500) 1.46598 (US Dollar/GB Pound) 2.5 months
</TABLE>
Forward Contracts
September 30, 1999
<TABLE>
<CAPTION>
Contract Forward Term of
(In thousands) Premium paid amount strike rate contract
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Contract 1 30 $2,000 1.6140 (US Dollar/GB Pound) 2 months
Contract 2 31 $2,000 1.6150 (US Dollar/GB Pound) 3 months
Contract 3 5 $2,206 2,938 (Italian Lira/GB Pound) 3 months
-----------------------------------------------------------------------------------------------------------------
</TABLE>
31
<PAGE> 34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
THE SANTA CRUZ OPERATION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
------------------------------------
(In thousands, except per share data) 2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Net revenues
Licenses $ 133,510 $ 208,466 $ 156,707
Services 15,413 15,158 15,193
--------- --------- ---------
Total net revenues 148,923 223,624 171,900
--------- --------- ---------
Cost of revenues
Licenses 22,366 30,450 29,587
Services 19,430 19,328 17,509
--------- --------- ---------
Total cost of revenues 41,796 49,778 47,096
--------- --------- ---------
Gross margin 107,127 173,846 124,804
--------- --------- ---------
Operating expenses:
Research and development 39,673 42,376 42,957
Sales and marketing 89,313 98,525 80,468
General and administrative 18,691 16,572 14,972
Restructuring charge 10,683 -- --
--------- --------- ---------
Total operating expenses 158,360 157,473 138,397
--------- --------- ---------
Operating income (loss) (51,233) 16,373 (13,593)
Other income (expense):
Interest income, net 1,679 1,942 2,261
Other income (expense), net 819 1,939 226
--------- --------- ---------
Income (loss) before income taxes (48,735) 20,254 (11,106)
Income taxes 8,218 3,396 3,559
--------- --------- ---------
Net income (loss) (56,953) 16,858 (14,665)
Other comprehensive income (loss), net of tax
Unrealized gain on available-for-sale securities 5,617 -- --
Foreign currency translation adjustment (539) (884) 653
--------- --------- ---------
Comprehensive income (loss) $ (51,875) $ 15,974 $ (14,012)
--------- --------- ---------
Earnings (loss) per share:
Basic $ (1.59) $ 0.49 $ (0.41)
Diluted $ (1.59) $ 0.46 $ (0.41)
--------- --------- ---------
Shares used in earnings (loss) per share calculation:
Basic 35,720 34,232 35,817
Diluted 35,720 36,402 35,817
--------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE> 35
THE SANTA CRUZ OPERATION, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
----------------------
(In thousands) 2000 1999
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 20,879 $ 33,683
Short-term investments 5,567 29,161
Receivables, net 24,269 32,309
Available-for-sale equity securities 7,119 --
Deferred tax assets -- 1,202
Other current assets 4,358 6,310
--------- ---------
Total current assets 62,192 102,665
--------- ---------
Property and equipment, net 9,012 12,234
Purchased software and technology licenses, net 5,830 10,431
Long-term deferred tax assets -- 6,622
Other assets 5,168 7,332
--------- ---------
Total assets $ 82,202 $ 139,284
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 5,521 $ 7,482
Royalties payable 4,530 7,217
Income taxes payable 1,964 1,983
Accrued restructuring charges 5,964 --
Accrued expenses and other current liabilities 20,225 32,314
Deferred revenues 7,334 8,856
--------- ---------
Total current liabilities 45,538 57,852
--------- ---------
Long-term lease obligations 545 2,332
Long-term deferred revenues 1,397 2,571
Other long-term liabilities 3,520 6,191
--------- ---------
Total long-term liabilities 5,462 11,094
--------- ---------
Commitments and contingencies (Note 11)
Shareholders' equity:
Common stock, no par value, authorized 100,000 shares;
Issued and outstanding 39,436 and 34,346 shares
in 2000 and 1999, respectively 118,940 106,201
Accumulated other comprehensive income 5,486 408
Accumulated deficit (93,224) (36,271)
--------- ---------
Total shareholders' equity 31,202 70,338
--------- ---------
Total liabilities and shareholders' equity $ 82,202 $ 139,284
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
33
<PAGE> 36
THE SANTA CRUZ OPERATION, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Common Stock Note Other Total
---------------------- Receivable Comprehensive Accumulated Shareholders'
(In thousands) Shares Amount from Officer Income (Loss) Deficit Equity
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
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)
Foreign currency translation -- -- -- 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
Foreign currency translation -- -- -- (884) -- (884)
Net income -- -- -- -- 16,858 16,858
--------- --------- --------- --------- --------- ---------
BALANCES, SEPTEMBER 30, 1999 34,346 $ 106,298 $ (97) $ 408 $ (36,271) $ 70,338
Issuance under stock option and
purchase plans 2,574 12,523 -- -- -- 12,523
Common stock repurchases (759) (12,786) -- -- -- (12,786)
Issuance of common stock in
private placement, net of
issuance costs 3,275 12,769 -- -- -- 12,769
Unrealized gain on investment -- -- -- 5,617 -- 5,617
Repayment of note receivable -- -- 97 -- -- 97
Stock compensation expense -- 136 -- -- -- 136
Foreign currency translation -- -- -- (539) -- (539)
Net loss -- -- -- -- (56,953) (56,953)
--------- --------- --------- --------- --------- ---------
BALANCES, SEPTEMBER 30, 2000 39,436 $ 118,940 $ -- $ 5,486 $ (93,224) $ 31,202
--------- --------- --------- --------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
34
<PAGE> 37
THE SANTA CRUZ OPERATION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
--------------------------------
(In thousands) 2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(56,953) $ 16,858 $(14,665)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities -
Depreciation and amortization 11,302 12,140 14,363
Deferred taxes 7,821 -- 205
Foreign currency exchange (gain) loss (342) 20 (605)
Stock option income tax benefit -- 1,161 --
Changes in operating assets and liabilities-
Receivables 7,309 (4,971) 8,147
Other current assets 1,959 2,545 (2,024)
Other assets 1,893 502 2,362
Trade accounts payable (1,846) (15) 608
Royalties payable (2,695) 2,135 (6,197)
Income taxes payable 171 176 703
Accrued restructuring charges 5,964 -- --
Accrued expenses and other current liabilities (10,679) 4,158 (1,977)
Deferred revenues (2,489) (6,409) 8,555
Cash flows from other long-term liabilities (1,701) 158 3,883
-------- -------- --------
Net cash provided by (used for) operating activities (40,286) 28,458 13,358
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,077) (3,816) (1,410)
Purchases of software and technology licenses (999) (2,633) (2,995)
Sales of short-term investments 35,682 26,811 31,514
Purchases of short-term investments (12,088) (28,654) (30,346)
Cash flows from other assets (2,268) 1,058 25
-------- -------- --------
Net cash provided by (used for) investing activities 18,250 (7,234) (3,212)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations (2,917) (3,626) (2,759)
Net proceeds from issuance of common stock 25,428 7,107 1,960
Repurchases of common stock (12,786) (14,034) (9,271)
-------- -------- --------
Net cash provided by (used for) financing activities 9,725 (10,553) (10,070)
-------- -------- --------
Effects of exchange rate changes on cash and cash equivalents (493) (746) 457
-------- -------- --------
Change in cash and cash equivalents (12,804) 9,925 533
Cash and cash equivalents at beginning of year 33,683 23,758 23,225
-------- -------- --------
Cash and cash equivalents at end of year $ 20,879 $ 33,683 $ 23,758
-------- -------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid -
Income taxes $ 218 $ 3,319 $ 2,192
Interest 344 544 766
Non-cash financing and investing activities -
Unrealized gain on available-for-sale equity securities $ 5,617 $ -- $ --
Assets acquired under capital leases 20 1,978 4,701
Assets written off against restructuring reserve 923 -- 568
-------- -------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
35
<PAGE> 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION
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.
These consolidated financial statements contemplate the realization of assets
and the satisfaction of liabilities in the normal course of business. The
Company has generated significant losses and negative cash flows from operations
in the most recent fiscal year and has an accumulated deficit. Management's
plans to reverse the recent trend of losses are to increase revenues and gross
margins while controlling costs. In addition, the Company has announced a
proposed transaction with Caldera Systems, Inc. ("Caldera") (see Note 14) and
has received a commitment for credit financing of up to $18 million from one of
the stockholders of Caldera under normal commercial terms that are currently
under discussion. If the Company is unable to generate adequate cash flows from
operations, the Company may need to seek additional sources of capital or draw
upon the line of credit available discussed above. There can be no assurance
that the Company will be able to obtain additional funding, if necessary, on
acceptable terms or at all.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS RISKS AND UNCERTAINTIES The Company operates in the software industry,
which is characterized by intense competition, rapid technological advances and
evolving industry standards. Factors that could affect the Company's future
operating results and cause actual results to vary materially from expectations
include, but are not limited to, dependence on an industry that is characterized
by rapid technological changes, fluctuations in end-user demands, evolving
industry standards, competition, and risks associated with foreign currencies.
Failure by the Company to anticipate or respond adequately to technological
developments in its industry, changes in customer or supplier requirements or
changes in industry standards could have a material adverse effect on the
Company's business and operating results.
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the
Company and its wholly-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated.
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, 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 SHORT-TERM INVESTMENTS The Company considers all highly
liquid investments with an original remaining maturity of 90 days or less at the
date of acquisition to be cash equivalents. Investments include instruments with
lives ranging from 91 days to no greater than 1 year must be long term. 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, 2000 and 1999, 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. Investments in companies with less than 20% ownership
are carried at the lower of cost or net realizable value.
36
<PAGE> 39
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 ten
years, or on the ratio of current revenues to total projected product revenues,
whichever results in greater amortization.
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 estimated 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.
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, 2000, 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. In 1998 the Company's revenue recognition
policy was the same as set forth above.
The Company currently sells two types of software product - its UNIX based
operating system software, which is sold under the Unixware and OpenServer
names, and its application broker software sold under the Tarantella name.
The Company has sold Unixware and OpenServer products separately and as a result
for contracts involving the sale of Unixware and OpenServer which contain
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. The fair value of each element is based on the price sold separately.
The Company recognizes revenue allocated to undelivered products when the
criteria for product revenue set forth above are met.
37
<PAGE> 40
For multiple element contracts involving the sale of its Tarantella product the
Company uses the residual value method to allocate revenue to each component.
The fair value of services and post contract support is determined based upon
separate sales and renewal rates set forth in the contract, respectively.
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 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 (original equipment manufacturer) 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
maximum 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 2000, 1999 and 1998, cooperative advertising expense
totaled approximately $7.8 million, $10.5 million and $9.2 million,
respectively.
INCOME TAXES The Company records income taxes using an asset and liability
approach that results in the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been recognized in
the Company's consolidated financial statements or tax returns. In estimating
future tax consequences, all expected future events other than enactment of
changes in tax laws are considered. When necessary, a valuation allowance is
recorded to reduce tax assets to an amount whose realization is more likely than
not. The provision for income taxes represents taxes payable for the current
period, plus the net change in deferred tax amounts.
COMPUTATION OF EARNINGS PER SHARE The Company has adopted the provisions of
Statement of Financial Accounting Standards No. 128 (SFAS 128), Earnings Per
Share. 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 and warrants 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):
38
<PAGE> 41
<TABLE>
<CAPTION>
(In thousands, except per share data) Fiscal Year Ended September 30,
-------------------------------------
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Basic:
Weighted average shares 35,720 34,232 35,817
========== ========== ==========
Net income (loss) $ (56,953) $ 16,858 $ (14,665)
========== ========== ==========
Earnings (loss) per share $ (1.59) $ 0.49 $ (0.41)
========== ========== ==========
Diluted:
Weighted average shares 35,720 34,232 35,817
Common equivalent shares from
stock options and warrants -- 2,170 --
---------- ---------- ----------
Shares used in per share calculation 35,720 36,402 35,817
========== ========== ==========
Net income (loss) $ (56,953) $ 16,858 $ (14,665)
========== ========== ==========
Earnings (loss) per share $ (1.59) $ 0.46 $ (0.41)
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
September 30,
-------------------------------------
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Options outstanding not included in
computation of diluted EPS because
the exercise price was greater than the
average market price -- 3,190 --
Options outstanding not included in
computation of diluted EPS because
their inclusion would have an
anti-dilutive effect 11,866 -- 10,349
Warrants outstanding not included in
computation of diluted EPS because
their inclusion would have an
anti-dilutive effect 12,769 -- --
</TABLE>
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. The components of other
comprehensive income are as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
---------------------------------------------------
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Net income (loss) $ (56,953) $ 16,858 $ (14,665)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment (539) (884) 653
Unrealized gain on available for sale securities
net of tax of $2,119 $ 3,498 -- --
Reversal of valuation allowance on deferred
tax assets 2,119 -- --
----------- ----------- -----------
Total comprehensive income (loss) $ (51,875) $ 15,974 $ (14,012)
=========== =========== ===========
</TABLE>
39
<PAGE> 42
The Company has established a partial valuation allowance against its gross
deferred tax assets and has recorded a deferred tax liability to the extent of
estimated tax on the unrealized gain on its investments. The valuation allowance
has been reduced to the extent of the deferred tax liability with this reduction
being recorded in accumulated other comprehensive income.
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 June 1998, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 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 balance
sheet and measure those instruments at fair value. In June 1999, the FASB issued
SFAS No. 137, Accounting for Derivative Instruments -- Deferral of the Effective
Date of SFAS Statement No. 133 and in June 2000, the FASB issued SFAS No. 138,
Accounting for Certain Derivative Instruments -- an amendment of SFAS 133,
Accounting for Derivative instruments and Hedging Activities. As a result of
SFAS No. 137, SFAS No. 133 and SFAS No. 138 will be effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000. The Company does not
expect that the adoption of this standard will have a material impact on its
financial position and results of operations.
In June 2000, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 138 (FAS 138), Accounting for Certain Derivative
Instruments -- an amendment of FAS 133, Accounting for Derivative instruments
and Hedging Activities. FAS 138 shall be effective for all fiscal quarters of
all fiscal years beginning after June 15, 2000. The Company does not expect this
to have a material impact on its financial position and results of operations.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation - an Interpretation of APB Opinion No. 25. FIN 44 clarifies the
application of Opinion 25 for (a) the definition of employee for purposes of
applying Opinion 25, (b) the criteria for determining whether a plan qualifies
as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. The Company adopted FIN 44 effective July 1, 2000. The adoption of
the provisions of FIN 44 did not have a material effect on the financial
position or results of operations of the Company.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial
Statements, which provides guidance on the recognition, presentation and
disclosure of revenue in financials filed with the SEC. SAB 101 outlines the
basic criteria that must be met to recognize revenue and provides guidance for
disclosures related to revenue recognition policies. The Company is required to
adopt SAB 101 in the fourth quarter of fiscal 2001. We are in the process of
evaluating the Securities and Exchange Commission's interpretation of SAB 101
but believe that the implementation of SAB 101 will not have a material effect
on the financial position or results of operations of the Company.
STOCK-BASED COMPENSATION The Company accounts for its employee 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.
40
<PAGE> 43
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 prevailing 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 the subsidiaries' accounts
are accumulated in accumulated comprehensive income/(loss). 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. At September 30,
2000 and 1999, the Company had foreign exchange contracts, all having maturities
of 90 days or less, to sell approximately $9.0 million and $6.2 million in U.S.
dollars, respectively.
The fair value of these contracts at September 30, 2000 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. As of
September 30, 2000 and 1999 the following contracts were outstanding.
Forward Contracts
September 30, 2000
<TABLE>
<CAPTION>
Premium paid / Contract Forward Term of
(In thousands) (Discount received) amount strike rate contract
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Contract 1 2 $ 1,250 1.50255 (GB Pound/US Dollar) 2 months
Contract 2 3 $ 1,250 1.503025 (GB Pound/US Dollar) 2.5 months
Contract 3 5 $ 1,000 1.4568 (GB Pound/US Dollar) 2 months
Contract 4 5 $ 1,000 1.45705 (GB Pound/US Dollar) 2.5 months
Contract 5 5 $ 1,000 1.4574 (GB Pound/US Dollar) 3 months
Contract 6 (27) $ 3,500 1.4391 (GB Pound/US Dollar) 2 months
Contract 7 (38) $(3,500) 1.46598 (US Dollar/GB Pound) 2.5 months
------------------------------------------------------------------------------------------------------
</TABLE>
41
<PAGE> 44
Forward Contracts
September 30, 1999
<TABLE>
<CAPTION>
Contract Forward Term of
(In thousands) Premium paid amount strike rate contract
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Contract 1 30 $ 2,000 1.6140 (US Dollar/GB Pound) 2 months
Contract 2 31 $ 2,000 1.6150 (US Dollar/GB Pound) 3 months
Contract 3 5 $ 2,206 2,938 (Italian Lira/GB Pound) 3 months
--------------------------------------------------------------------------------------------------------
</TABLE>
FAIR VALUE OF FINANCIAL INSTRUMENTS Carrying amounts of certain of the Company's
financial instruments, including cash and cash equivalents, receivables,
accounts payable, 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. The fair value of other long-term liabilities approximates the
carrying value due to the market interest rates that these obligations bear.
NOTE 3 - CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
September 30,
-------------------------
(In thousands) 2000 1999
----------- -----------
<S> <C> <C>
Bank demand deposits $ 1,819 $ 6,859
Money market accounts 19,060 26,524
Corporate bonds -- 300
----------- -----------
$ 20,879 $ 33,683
----------- -----------
</TABLE>
NOTE 4 - SHORT-TERM INVESTMENTS
<TABLE>
<CAPTION>
September 30,
--------------------------
(In thousands) 2000 1999
----------- -----------
<S> <C> <C>
U.S. Treasury notes $ -- $ 3,038
Government agency bonds 971 2,204
Corporate bonds 4,596 23,919
----------- -----------
$ 5,567 $ 29,161
----------- -----------
</TABLE>
At September 30, 2000, investments with maturity dates ranging from 91 days to
one year totaled $2.5 million, and investments with maturity dates ranging from
one year to three years totaled $3.1 million.
42
<PAGE> 45
NOTE 5 - RECEIVABLES
<TABLE>
<CAPTION>
September 30,
--------------------------
(In thousands) 2000 1999
----------- -----------
<S> <C> <C>
Trade accounts receivable $ 27,461 $ 40,531
Less allowance for returns and
doubtful accounts (3,192) (8,222)
----------- -----------
$ 24,269 $ 32,309
----------- -----------
</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 2000, one customer's balance accounted for
15% of trade receivables. For fiscal 1999 and 1998, no one customer's balance
exceeded 10% of trade receivables. For fiscal 2000, 1999 and 1998, no one
customer accounted for greater than 10% of the Company's revenues.
NOTE 6 - PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
September 30,
---------------------------
(In thousands) 2000 1999
----------- -----------
<S> <C> <C>
Computer and office equipment $ 20,703 $ 41,146
Furniture and fixtures 5,883 8,516
Leasehold improvements 8,143 8,472
----------- -----------
34,729 58,134
Less accumulated depreciation and
amortization (25,717) (45,900)
----------- -----------
$ 9,012 $ 12,234
----------- -----------
</TABLE>
Depreciation and amortization expense was $5.6 million, $6.4 million and $6.9
million during fiscal 2000, 1999 and 1998, respectively.
NOTE 7 - PURCHASED SOFTWARE AND TECHNOLOGY LICENSES
<TABLE>
<CAPTION>
September 30,
--------------------------
(In thousands) 2000 1999
----------- -----------
<S> <C> <C>
Purchased software and
technology licenses, at cost $ 31,588 $ 35,429
Less accumulated amortization (25,758) (24,998)
----------- -----------
$ 5,830 $ 10,431
----------- -----------
</TABLE>
Amortization expense was $4.3 million, $5.3 million and $6.6 million during
fiscal 2000, 1999 and 1998, respectively.
NOTE 8 - LINES OF CREDIT
At September 30, 2000, the Company had available a $0.9 million line of credit
internationally with a bank under which the Company had $0.7 million in
outstanding borrowings at September 30,
43
<PAGE> 46
2000. The interest rate on borrowings made against this line of credit during
fiscal 2000 was 2.7%. The line of credit is secured by a standby letter of
credit issued by the Company's domestic bank.
NOTE 9 - ROYALTIES PAYABLE
Royalties payable represent obligations to pay authors of certain software
products under licensing agreements. Two corporate shareholders accounted for
$0.4 million of the royalties payable balance at September 30, 1999 and $0.6
million, $1.2 million and $(2.1) million of royalty expense (income) for fiscal
2000, 1999 and 1998, respectively. At September 30, 2000 no royalties were
payable to corporate shareholders.
NOTE 10 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
<TABLE>
<CAPTION>
September 30,
-------------------------
(In thousands) 2000 1999
----------- -----------
<S> <C> <C>
Accrued wages, commissions, bonuses $ 6,519 $ 12,664
Accrued advertising 3,147 6,016
Accrued fringe benefits 1,374 1,898
Capital lease obligations 1,803 2,952
Other accrued expenses 7,382 8,784
----------- -----------
$ 20,225 $ 32,314
----------- -----------
</TABLE>
NOTE 11 - 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, 2000 were as follows:
44
<PAGE> 47
<TABLE>
<CAPTION>
Capital Operating
(In thousands) Leases Leases
------------------------------------------------------------------------------------------------
<S> <C> <C>
Year Ending September 30,
2001 $ 1,921 $ 6,928
2002 499 6,133
2003 2 5,035
2004 -- 4,928
2005 -- 4,231
Later years, through 2020 -- 8,808
------------ ------------
Total minimum lease payments 2,422 $36,063
============
Less amount representing interest 74
------------
Present value of net minimum capital lease payments 2,348
Less current installments of
obligations under capital leases 1,803
------------
Obligations under capital leases,
excluding current installments $ 545
============
</TABLE>
The cost of assets recorded under capital leases was $8.2 million and $13.0
million at September 30, 2000 and 1999, respectively. Accumulated amortization
on those dates was $6.1 million and $7.9 million, respectively.
Rent expense amounted to approximately $7.7 million, $8.0 million and $8.1
million in fiscal 2000, 1999 and 1998, respectively.
Included in the Company's operating lease commitments are facilities leased from
Encinal Partners, a partnership which includes the Company President and Chief
Executive Officer. The Company's Board of Directors has reviewed and approved
the lease agreements and determined that the lease agreements entered into by
the Company are equivalent to agreements that would be negotiated with
independent third parties on an "arms-length" basis. The remaining lease term of
these facilities is between one and six years. Rent expense for these facilities
amounted to approximately $1.5 million in fiscal 2000, and $1.4 million in
fiscal 1999 and 1998.
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 would 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.
45
<PAGE> 48
NOTE 12 - SHAREHOLDERS' EQUITY
PREFERRED STOCK The Company is authorized to issue 20,000,000 shares of
Preferred Stock. As of September 30, 2000, 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 2000, 1999 and 1998, employees purchased 493,092, 589,968 and
567,647 shares at an average per share price of $4.31, $3.52 and $3.07,
respectively. The number of shares reserved for issuance under the ESPP was
increased by 750,000 shares in February 2000. As of September 30, 2000,
1,617,057 shares were reserved for future issuance.
1994 INCENTIVE STOCK OPTION PLAN As of September 30, 2000, the Company had
authorized 20,013,665 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 2000, the number of shares available for issuance under the Director
Plan was increased by 250,000 shares from 1,150,000 shares to 1,400,000 shares.
A summary of the status of the Company's stock option plans as of September 30,
2000, 1999 and 1998, and changes during the years then ended is presented below:
46
<PAGE> 49
<TABLE>
<CAPTION>
(In thousands, except 2000 1999 1998
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 11,491 $ 5.25 10,349 $ 4.80 8,558 $ 5.25
Granted 4,164 10.10 3,009 6.50 3,102 3.87
Exercised (2,081) 4.99 (1,131) 4.44 (91) 2.37
Cancelled (1,708) 7.89 (736) 5.25 (1,220) 5.80
------------ ----------- ---------
Outstanding at end of year 11,866 6.60 11,491 5.25 10,349 4.80
============ =========== =========
Options exercisable at end of year 4,821 $ 5.24 4,480 $ 5.08 3,484 $ 5.17
Weighted-average fair value of
options granted during the year $ 6.18 $ 3.61 $ 2.19
-------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes information about stock options outstanding at
September 30, 2000:
<TABLE>
<CAPTION>
(In thousands, except
per share data)
Weighted-Avg
Range of Remaining Weighted-Avg Weighted-Avg
Exercise Price Outstanding Contractual Life Exercise Price Exercisable Exercise Price
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 1.50 - 2.00 32 1.1 years $ 1.76 32 $ 1.76
2.56 - 3.75 1,452 8.4 3.16 446 3.21
3.97 - 5.94 6,241 7.3 4.54 3,146 4.70
6.00 - 9.00 1,847 7.2 6.77 936 6.66
9.06 - 13.19 855 8.7 9.74 247 10.12
14.94 - 20.75 1,424 9.2 16.90 14 17.26
25.31 - 32.00 15 9.3 29.80 0 --
------------- --------------
$ 1.50 - 32.00 11,866 7.7 years $ 6.60 4,821 $ 5.24
============= ==============
--------------------------------------------------------------------------------------------------------
</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 as if the Company had accounted for
its employee stock options and other stock-based compensation under the fair
value method. The fair value of the options granted under the Option Plan and
the Director Plan was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 2000,
1999 and 1998: risk-free interest rate of 6.31% for 2000, 5.27% for 1999, and
5.45% for 1998; dividend yield of 0%; volatility factor of the expected market
price of the Company's
47
<PAGE> 50
common stock of 75% for 2000 and 65% for 1999 and 1998 ; an average turnover
rate of 15% and a four year and five year expected life for options granted to
employees and executives, respectively.
The fair value for the Employee Stock Purchase Plan rights were also estimated
at the date of grant using a Black-Scholes option pricing model with the
following assumptions for 2000, 1999 and 1998: risk-free interest rates of
5.07%, 4.91% and 5.31%, respectively; dividend yield of 0%; volatility factor of
75% for 2000 and 65% for 1999 and 1998; and six month expected life. The
weighted average fair value of the ESPP rights granted in 2000, 1999 and 1998
was $2.86, $1.31 and $1.27, respectively.
<TABLE>
<CAPTION>
(In thousands, except Fiscal Year Ended per
share price) September 30,
-------------------------------------------
2000 1999 1998
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Pro forma net income (loss) $(67,423) $ 10,464 $
(20,664)
Pro forma earnings (loss) per share
Basic $ (1.89) $ 0.31 $ (0.58)
Diluted $ (1.89) $ 0.29 $ (0.58)
---------------------------------------------------------------------------------------
</TABLE>
The pro forma 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, 2000, 1999 and 1998, the
purchases and retirements of common stock under the systematic plan were 758,578
shares, 1,038,000 shares and 1,115,000 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, 2000,
the company did not repurchase any shares under the non-systematic plan, while
in fiscal years ended September 30, 1999 and 1998, 1,386,000 and 945,050 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 2001.
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.
WARRANTS On September 22, 2000 the Company entered into a private placement
agreement where the investors have subscribed for a total of 409,375 units at
$32 per unit. Each unit consists of 8 shares of common stock of the Company and
a warrant to purchase either 2 additional shares of the Company's common stock
at $4 per share or 1 share Caldera common stock at $8 per share. The total fair
value of the SCO common stock plus either of the warrants was in excess of the
$32.00 received. The warrants for the Caldera shares can be exercised only if
the agreement between the Company and Caldera is consummated. In the event that
the transaction is not completed, the investors will only be able to exercise
the warrant for SCO stock. The warrants have a two-year life. Total proceeds
from the private placement, net of issuance costs of $331 were $12,769.
When the transaction with Caldera is consummated, SCO will assess the fair value
of the warrant in Caldera stock and will reclassify an amount equal to this fair
value from equity to liabilities at that date. In addition, SCO will continue to
reassess the fair value of this liability for every reporting period until the
warrants are exercised. Any change in the fair value of this liability will be
recorded into the statement of operations.
Upon the initial issuance, SCO has determined the fair value of the warrants
using the Black-Scholes option pricing model. As of the date of issuance, the
warrants can only be exercised for SCO stock and do not meet any of the
requirements of EITF's 96-13 or 00-07 "Accounting for Derivative Instruments
Indexed to and Potentially Settled in a Company's Own Stock" for classification
as a liability and the value of these warrants have been classified within
equity. On an ongoing basis, upon completion of the transaction, the fair value
of the Caldera warrants will be determined using the Black-Scholes model and the
following assumptions: a two-year exercise period, a 100% volatility rate for
Caldera which is consistent with the rate disclosed in their financial
statements, and a dividend rate of zero. Based on the assumptions above, the
fair value of the warrants to purchase 439,375 shares as of September 30, 2000
was approximately $697,000.
48
<PAGE> 51
NOTE 13 - INCOME TAXES
Income (loss) before income taxes for fiscal 2000, 1999, and 1998 include
foreign pretax profits (losses) of approximately $3.2 million, $6.6 million and
$(3.0) million, respectively. The components of income taxes are as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
----------------------------------------
(In thousands) 2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal $ (147) $ 500 $ --
State 20 20 20
Foreign 521 2,876 3,334
----------- ----------- -----------
Total current 394 3,396 3,354
----------- ----------- -----------
Deferred:
Federal 6,289 -- --
State 139 -- --
Foreign 1,396 -- 205
----------- ----------- -----------
Total deferred 7,824 -- 205
----------- ----------- -----------
$ 8,218 $ 3,396 $ 3,559
----------- ----------- -----------
</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) 2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Statutory federal income tax
(benefit) at 34% $ (16,570) $ 6,887 $ (3,776)
State income tax (benefit),
net of federal effect 159 247 (338)
Foreign taxes less related tax
benefit, if any (229) 669 3,659
Losses and expenses without
tax benefit 17,034 -- 4,014
Current utilization of losses -- (4,407) --
Net deferred tax asset charge 7,824 -- --
----------- ----------- -----------
$ 8,218 $ 3,396 $ 3,559
----------- ----------- -----------
</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:
49
<PAGE> 52
<TABLE>
<CAPTION>
September 30,
------------------------------------------
(In thousands) 2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Deferred tax assets:
Accruals and reserve
accounts $ 7,005 $ 7,613 $ 9,732
Property and equipment 931 1,641 1,477
Net operating loss carryforward 35,580 7,032 18,550
Research credit 9,299 7,602 7,105
Other credits 2,105 12,346 1,020
----------- ----------- -----------
Total gross deferred tax assets 54,920 36,234 37,884
Less valuation allowance (52,801) (26,885) (26,330)
----------- ----------- -----------
Net deferred tax assets 2,119 9,349 11,554
----------- ----------- -----------
Deferred tax liabilities:
Unrealized investment gain 2,119 -- --
Amortization -- 1,525 3,730
----------- ----------- -----------
Total deferred tax liabilities 2,119 1,525 3,730
----------- ----------- -----------
Net tax assets and liabilities $ -- $ 7,824 $ 7,824
----------- ----------- -----------
</TABLE>
The net change in the total valuation allowance for the years ended September
30, 2000, 1999 and 1998, was an increase of approximately $25.9 million, $0.6
million and $8.9 million, respectively. Subsequently recognized tax benefits
relating to the valuation allowance for deferred tax assets at September 30,
2000 will be allocated to income tax benefit and additional paid in capital in
the amounts of $48.8 million and $6.1 million, respectively.
As of September 30, 1999 the Company established a partial valuation allowance
against its gross deferred tax assets to reduce such asset to the amount that
was deemed, more likely than not, to be recoverable prior to expiration. The
Company considered, amongst other factors, the historical profitability, prior
to one off charges, of the Company, projections for future profits and the
ability of the Company deferred tax assets against these future profits prior to
expiration of these assets, the ability of the Company's foreign subsidiaries to
utilize their deferred tax assets, and the tax effects of one time charges.
As at September 30, 2000 the Company reassessed the recoverability of its net
deferred tax assets. This analysis was based on revised earnings projections,
the substantial net operating losses incurred during fiscal 2000 and the effects
of the restructurings undertaken during the year upon the group's tax structure.
As a result of this analysis management determined that it was more likely than
not that the net deferred tax asset recorded as of September 30, 1999 would not
be recoverable against future earnings prior to expiration. Accordingly the
Company has established a full valuation allowance against gross deferred tax
assets as of September 30, 2000. This resulted in a charge of $7.8 million to
the statement of operations during the year ended September 30, 2000.
At September 30, 2000, the Company has net operating loss carryforwards of
approximately $101.7 million which expire in fiscal years 2012 through 2020, and
foreign tax credit and research credit carryforwards of approximately $1.2
million and $9.3 million, respectively, which expire in fiscal years 2001
through 2013. Additionally, the Company has other tax credits of approximately
$0.9 million that have no expiration date.
At September 30, 2000, the cumulative unremitted foreign earnings of the Company
were not material. The Company intends to reinvest these earnings indefinitely.
NOTE 14 -PROPOSED TRANSACTIONS WITH CALDERA SYSTEMS
On August 1, 2000, the Company entered into an agreement with Caldera Systems,
Inc. in which Caldera Systems, Inc. will acquire the Company's Server Software
and Professional Services Divisions. Caldera Systems, Inc. will form a new
holding company, Caldera, Inc., to acquire assets from the Company's Server
Software Division and the Company's Professional Services Division, including
its employees, products and channel resources. Caldera, Inc. will have exclusive
distribution rights for the SCO OpenServer product line. SCO will receive a
28.6% ownership interest in Caldera, Inc., which is estimated to be an aggregate
of approximately 18.4 million shares of Caldera stock (including approximately
2 million shares reserved for employee options assumed by Caldera, Inc. for
options currently held by SCO employees joining Caldera, Inc.), and $7.0 million
in cash. In conjunction with the acquisition, The Canopy Group, Inc., a major
stockholder of Caldera Systems, Inc., has agreed to loan $18.0 million to the
Company. The terms of this loan are still to be negotiated but both parties have
agreed the terms will be reasonable and customary.
50
<PAGE> 53
Further, Caldera Systems, Inc. has agreed to loan $7.0 million to the Company in
the form of a short-term note repayable at the consummation of the transaction
between SCO and Caldera Systems, Inc. SCO will retain its Tarantella Division
and the SCO OpenServer revenue stream and intellectual properties. The boards of
directors of both companies have unanimously approved the acquisition which is
subject to the approval of Caldera Systems, Inc. and The Santa Cruz Operation,
Inc. stockholders, and regulatory agencies, as well as meeting certain other
closing conditions. The companies anticipate closing the transaction during the
first calendar quarter of 2001.
NOTE 15 - RESTRUCTURING CHARGE
Non-recurring charges of $10.7 million were incurred in fiscal year 2000 that
related to worldwide restructurings undertaken in the second and forth quarters
of fiscal 2000, representing 7% of total net revenues for the fiscal year. The
restructurings included a reduction in personnel of 227 employees, write-off of
certain acquired technologies, write-off of certain fixed assets, and
elimination of non-essential facilities. Of the $10.7 million, $9.2 million
related to cash expenditures and $1.5 million related to non-cash charges. The
restructuring charge related to cash expenditures included $7.3 million for
severance costs and $1.9 million for facilities costs. The non-cash charges
related to disposals of fixed assets and write-offs of technology. The disposal
of fixed assets is comprised of computer equipment that will no longer be in use
due to the reduction of personnel. The technology write-off relates to
technology that will not be used in future product development due to the
reduction in development personnel. This technology was associated with
development of the Unixware product and had been previously capitalized as it
had alternative future use. In conjunction with the restructuring, the personnel
associated with the development of this technology were terminated and this
technology no longer had an alternative future use. The Company has restructured
its business operations into three independent divisions, each with a separate
management team and dedicated development, marketing and sales organizations -
the Server Division, the Tarantella Division and the Professional Services
Division. As a result of the restructuring plans various regional offices in the
United States, United Kingdom, Latin America and the Asia Pacific region will be
eliminated. The United States regional facilities and the Watford, United
Kingdom leases have been or will be vacated and restored, and subsequently
sub-let or terminated by the second quarter of 2001. The remaining international
offices are expected to be vacated immediately. Of the facilities closed, the
majority relates to the Server Division while a minor portion relates to the
Corporate Division which is comprised primarily of the finance and general and
administrative functions of the Company's United Kingdom subsidiary. The Company
anticipates that all of the payments, except the facility lease payment, will be
made by the end of fiscal 2001. The majority of the reduction in force was in
the Server Software Division. As of September 30, 2000 a total of 140 positions
have been eliminated: 114 positions in the Server Software Division, 21 in the
Corporate Division, 4 in the Professional Services Division and 1 in the
Tarantella Division. The accrued restructuring charge is summarized as follows:
<TABLE>
<CAPTION>
Reduction Disposal of
(In thousands) in Force Facilities Technology Fixed Assets Total
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Restructuring charge accrued $ 7,318 $ 1,856 $ 667 $ 842 $ 10,683
Payments/utilization of
the accrual (3,702) (94) (667) (256) (4,719)
----------------------------- --------- --------- --------- --------- ---------
Accrual at September 30, 2000 $ 3,616 $ 1,762 $ -- $ 586 $ 5,964
----------------------------- --------- --------- --------- --------- ---------
</TABLE>
51
<PAGE> 54
NOTE 16 - 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. Redemptions may be paid immediately 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. The Company's ownership of
preferred stock in the distribution partner represents approximately 17% of the
distribution company's equity, and the Company has the right to have one Board
member who has observation rights only. The Company accounts for the investment
using the cost method as it is not deemed to exert significant influence. During
fiscal 2000 and fiscal 1999, the Company recorded charges of $0.7 million and
$1.0 million, respectively, representing other than temporary declines in the
value of its investment in the distribution partner.
At September 30, 2000 and 1999, the Company had accounts receivable outstanding
with this domestic distribution channel partner of $1.0 million and $1.1
million, respectively. Sales to this related party was $5.3 million for fiscal
2000, $8.0 million for fiscal 1999 and $4.7 million for fiscal 1998.
Available-for-sale equity securities
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"). During fiscal year 1999, the Company sold
approximately 1,704,011 shares of Series D for $2.26 per share and received cash
proceeds of $3.8 million. The cost basis of the sale was $0.6 million, and
resulted in a realized gain of $3.2 million. The Company's interest of ownership
of Rainmaker before and after the sale was 15.3% and 10.3% respectively. On
November 17, 1999, Rainmaker completed an initial public offering of its common
stock. At which time, 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. At September 30, 2000, the Company held 3,705,767 shares of Rainmaker's
common stock. The Company accounts for these shares as available for sale
securities and records them at fair market value, based on quoted market prices
with any unrealized gains or losses included as part of accumulated other
comprehensive income. During fiscal 2000, the Company sold 307,692 shares of
Rainmaker stock for $6.50 per share, and received cash proceeds of $2.0 million.
The cost basis of the sale was $0.1 million, and the Company realized a gain of
$1.9 million. As of September 30, 2000, the Company owns 9.5% of Rainmaker's
common stock.
At September 30, 2000 and 1999, the Company had accounts receivable outstanding
with Rainmaker for $0.4 million and $2.1 million, respectively. Sales to this
related party was $12.0 million for fiscal 2000, $16.8 million for fiscal 1999
and $13.9 million for fiscal 1998.
Unrealized gains and losses on available for sale investments as of September
30, 2000 are as follows (in thousands):
<TABLE>
<CAPTION>
Gross unrealized
(In thousands) Fair market value Cost gain (loss)
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Rainmaker $ 6,948 $ 1,251 $ 5,697
Corporate entity investments 171 251 (80)
------- ------- -------
$ 7,119 $ 1,502 $ 5,617
------- ------- -------
</TABLE>
Rainmaker's common stock is traded on the Nasdaq National Market under the
symbol "RMKR." The Company does not have a position on the Board of Directors.
52
<PAGE> 55
NOTE 17 - 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.
Beginning in fiscal 2000, the Company reviewed performance on the basis of its
three divisions - the Server Software Division, the Tarantella Division, and the
Professional Services Division. Prior to fiscal 2000, the Company reviewed
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.
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) 2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Net revenues:
Server software division $ 135,433 $ 210,954 $ 157,223
Tarantella division 12,834 10,617 9,180
Professional services division 4,199 3,129 5,497
Corporate adjustments (3,543) (1,076) --
----------- ----------- -----------
Total net revenues $ 148,923 $ 223,624 $ 171,900
=========== =========== ===========
Gross margin:
Server software division 100,120 168,091 $ 117,615
Tarantella division 9,893 8,288 6,565
Professional services division (1,899) (2,533) 624
Corporate adjustments (987) -- --
----------- ----------- -----------
Total gross margin $ 107,127 $ 173,846 $ 124,804
=========== =========== ===========
Operating income (loss):
Server software division $ (28,137) $ 26,987 $ (8,512)
Tarantella division (18,834) (6,889) (4,577)
Professional services division (4,262) (3,725) (504)
----------- ----------- -----------
Total operating income (loss) $ (51,233) $ 16,373 $ (13,593)
=========== =========== ===========
</TABLE>
53
<PAGE> 56
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
---------------------------------------
(In thousands) 2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Net revenues:
United States $ 65,194 $ 96,809 $ 83,037
Canada and Latin America 7,770 12,606 9,801
EMEIA (2) 62,834 95,270 63,379
Asia Pacific 9,697 18,161 14,471
Corporate Adjustments 3,428 778 1,212
----------- ----------- -----------
Total net revenues $ 148,923 $ 223,624 $ 171,900
=========== =========== ===========
Gross margin: (1)
United States $ 42,737 $ 72,401
Canada and Latin America 5,805 9,276
EMEIA (2) 50,049 76,943
Asia Pacific 7,295 14,615
Corporate Adjustments 1,241 611
----------- -----------
Total gross margin $ 107,127 $ 173,846
=========== ===========
Long-lived assets:
United States $ 16,367 $ 31,058 $ 34,779
Canada and Latin America 3,234 122 15
EMEIA (2) 168 5,234 4,897
Asia Pacific 241 155 200
Other international operations -- 50 50
----------- ----------- -----------
Total long-lived assets $ 20,010 $ 36,619 $ 39,941
=========== =========== ===========
</TABLE>
(1) Gross margin by geography was not tracked by the Company prior to fiscal
year 1999.
(2) Europe, Middle East, India and Africa
NOTE 18 - EMPLOYEE BENEFIT 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 2000, 1999 and 1998, the
Company's total contributions towards the 401(k) plan amounted to $1.1 million,
$1.0 million and $0.9 million, respectively.
NOTE 19 - SUBSEQUENT EVENTS (unaudited)
In December 1999, the Company loaned to LinuxMall.com ("LinuxMall"), a strategic
partner, $1.0 million in exchange for convertible debentures and warrants. In
March 2000, the Company loaned LinuxMall an additional $1.0 million in exchange
for convertible debentures and warrants. In October 2000, LinuxMall consummated
a merger with EBIZ Enterprises, Inc. ("EBIZ"), a public company; at which time,
some of the convertible debentures held by the Company automatically converted
into 1,601,533 shares of EBIZ's common stock with the remaining debentures to
convert into 766,466 shares of common stock in January 2001. Further, the
Company has warrants to purchase 1,575,757 shares of EBIZ's common stock at
$1.10; however, said shares may not be sold by Company until October 2002 unless
the price for EBIZ's shares is above $4.00.
54
<PAGE> 57
Report of Independent Accountants
To the Board of Directors and Shareholders
of The Santa Cruz Operation, Inc.:
In our opinion, the consolidated financial statements listed in the
accompanying index(2) present fairly, in all material respects, the financial
position of The Santa Cruz Operation, Inc. and its subsidiaries at September
30, 2000 and 1999, and the results of their operations and their cash flows for
each of the three years in the period ended September 30, 2000 in conformity
with accounting principles generally accepted in the United States of America.
In addition, in our opinion, the financial statement schedule listed in the
index appearing on page 76 present fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedules are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in
the United States of America, 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 our opinion.
/s/ PricewaterhouseCoopers LLP
------------------------------
PricewaterhouseCoopers LLP
San Jose, California
October 23, 2000
55
<PAGE> 58
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, 2000, 1999 and 1998.
56
<PAGE> 59
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to Executive Officers and Officers may be found on
pages 17 and 18 hereof, under the caption "Executive Officers and Officers of
the Registrant."
Directors and Executive Officers
The names of the Company's directors and executive officers and certain
information about them are set forth below:
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE POSITION WITH THE COMPANY SINCE
---- --- ------------------------- --------
<S> <C> <C> <C>
Alok Mohan(1).................. 52 Chairman 1994
Douglas L. Michels............. 46 President, Chief Executive Officer and Director 1979
Robert M. McClure(2)........... 65 Director 1993
Gilbert P. Williamson(1)....... 63 Director 1993
R. Duff Thompson(2)............ 50 Director 1995
Ronald Lachman(1).............. 44 Director 1996
Ninian Eadie(2)................ 63 Director 1996
</TABLE>
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
Mr. Mohan became Chairman of the Board of Directors in April 1998.
Prior to this appointment, he served as President since December 1994 and as
Chief Executive Officer since July 1995 until April 1998. In December 1994, he
was elected as a director and assumed the position of President and Chief
Operating Officer. Prior to this appointment, beginning in May 1994, Mr. Mohan
served as Senior Vice President, Operations and Chief Financial Officer. Prior
to joining the Company, Mr. Mohan was employed with NCR Corporation, where he
served as Vice President and General Manager of the Workstation Products
Division, from January 1990 until July 1993 before assuming the position of Vice
President of Strategic Planning and Controller, with responsibility for
financial planning and analysis as well as worldwide reporting from July 1993 to
May 1994. Mr. Mohan serves as a director of Rainmaker Systems, Inc. and eBiz. He
also serves on the Board of Directors of the following private companies: Jones
Business Systems, Inc., Crystal Graphics, Metering Technology Corporation,
Alpine Microsystems, and Clickguide.
Mr. Michels was named President and Chief Executive Officer in April
1998. Mr. Michels was 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 served as 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)system
user consortium, and served as its President from 1989 to 1990. Mr. Michels
serves on the Board of Directors of FastNet and Arete, Inc.
Dr. McClure became a director of the Company in May 1993. Since 1978 he
has served as President of Unidot, Inc., which he founded to specialize in the
design of sophisticated computer software
57
<PAGE> 60
and hardware for equipment manufacturers worldwide. Dr. McClure serves as a
director of General Automation, Inc., IPT Corporation and Arete, Inc.
Mr. Williamson became a director of the Company in May 1993. From
September 1991 until May 1993, he served as Chairman of the Board and Chief
Executive Officer of NCR Corporation, and also served as a member of the Board
of Directors of AT&T. He retired from NCR and the AT&T board of directors in May
1993. From January 1989 until September 1991, he served as President of NCR and
as a director, and prior to that time served as Executive Vice President for
marketing at NCR for three years. Mr. Williamson is also a director of Fifth
Third Bank (formerly Citizens Federal Bank, F.S.B.) headquartered in Dayton,
Ohio. He also serves on the Board of Directors of two other private companies:
Dean Investments and French Oil Mill Machinery.
Mr. Thompson was appointed as a director of the Company in December
1995. Mr. Thompson is Managing General Partner of EsNet, Ltd., an investment
group which is active in both technology and real estate ventures. From June
1994 to January 1996, he served as Senior Vice President of the Corporate
Development Group of Novell, Inc. Prior to that time, he served as Executive
Vice President and General Counsel for WordPerfect Corporation, and before
joining WordPerfect Corporation in 1986, he was a partner with the Salt Lake
City law firm of Callister, Duncan & Nebeker. Mr. Thompson is a former Chairman
of the Board of the Business Software Alliance, the principal software industry
association dealing with software industry issues, including copyright
protection and public policy. He also serves on the board of Syzygy AG, a Neuer
Markt company (Frankfurt, Germany) and serves on the Board of O2 Exchange, Inc.,
a private company.
Mr. Lachman became a director of the Company in February 1996. He is a
partner of Lachman Goldman Ventures, a venture capital company that helps
co-found and invest in internet infrastructure technology ventures including
Sandpiper/Digital Island, Connected Corporation, UltraDNS, Concillience,
Everfile, Talarian, Nexiv, and a number of other companies. Mr. Lachman has
helped co-found or sits on the board of several of these companies. He founded
Lachman Associates in January 1975 and served as its President from January 1975
until June 1989. In January of 1993 he founded Lachman Technology, serving as
its President from January 1993 until May 1994. Both Lachman companies developed
networking software shipped with most UNIX servers. Mr. Lachman served as
Executive Vice President of Interactive Systems, a Kodak Company, from June 1989
through the end of 1992.
Mr. Eadie became a director of the Company in April 1996. He retired
from International Computers Limited ("ICL") in April 1997. Mr. Eadie served as
ICL's Group Executive Director, Technology, from January 1994 until July 1996,
where he was responsible for research, development, manufacturing and third
party distribution of all ICL products. Prior to that he served as President of
ICL Europe from January 1990 until January 1994 and from May 1988 until January
1990 he served as President, ICL International. Mr. Eadie served on ICL's Board
of Directors from 1984 until 1997, and was a member of ICL's Executive
Management Committee from 1988 until 1997. He was a member of the SCO (UK)
Advisory Board from June 1994 until his appointment to SCO's Board in April
1996.
There is no family relationship between any director or executive
officer of the Company.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange
Act") requires the Company's executive officers and directors, and persons who
own more than ten percent (10%) of a registered class of the Company's equity
securities to file reports of ownership and changes in ownership with the
Securities and Exchange Commission ("SEC") and the National Association of
Securities Dealers, Inc. Executive officers, directors and greater than ten
percent stockholders are required by SEC regulation to furnish the Company with
copies of all Section 16(a) forms they file. Based solely on its review of the
copies of such forms received by the Company, or written representations from
certain reporting persons,
58
<PAGE> 61
the Company believes that all Section 16 filing requirements applicable to its
officer, directors and ten percent (10%) shareholders during the fiscal year
ended September 30, 2000 were complied with.
59
<PAGE> 62
ITEM 11: EXECUTIVE COMPENSATION AND OTHER MATTERS
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation paid by the Company
during the three fiscal years to (i) the Company's Chief Executive Officer, and
(ii) each of the four other most highly compensated executive officers of the
Company, whose salary plus bonus exceeded $100,000 in fiscal year 2000:
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM
COMPENSATION
----------------------------------------- ------------
NAME AND PRINCIPAL YEAR SALARY($)(1) BONUS($)(2) OTHER ANNUAL AWARDS ALL OTHER
POSITION ---- ------------ ----------- COMPENSATION($) SECURITIES COMPENSATION
------------------ --------------- UNDERLYING ($)(3)
OPTIONS(#) ------
----------
<S> <C> <C> <C> <C> <C> <C>
Douglas L. Michels...... 2000 $342,828 $166,599 $6,662(4) 175,000 $3,000
President, Chief 1999 278,343 168,379 560(5) 175,000 3,000
Executive Officer 1998 279,300 68,242 1,901(6) 413,027 4,585
John Moyer.............. 2000 200,230 61,774 2,926(7) -- 3,000
Senior Vice President, 1999 214,365 88,900 260(5) 50,000 3,000
Human Resources 1998 199,288 32,384 -- 35,000 --
Michael Orr(8).......... 2000 235,395 79,036 -- 175,000 4,822
Senior Vice President 1999 102,067 100,000 -- 175,000 1178
and President,
Tarantella, Inc.
Steven M Sabbath......... 2000 213,856 72,195 -- 50,000 3,000
Senior Vice President, 1999 231,800 113,077 4,153(9) 50,000 3,000
Law and Corporate 1998 203,277 48,064 -- 35,000 7,153
Affairs and Secretary
James Wilt.............. 2000 224,903 65,011 -- -- --
Senior Vice President 1999 229,335 102,497 -- 75,000 --
and President, 1998 213,311 44,910 288(10) 245,000 --
Professional Services
Division
</TABLE>
(1) Includes salary earned in the applicable fiscal year but paid or to be
paid in the following fiscal year.
(2) The Company pays bonuses to executive officers as determined by the
Board of Directors. The bonuses for each executive officer are based on
the officer's base salary, the Company's financial performance, and
individual performance during the fiscal year. Includes bonuses earned
in the applicable fiscal year but paid or to be paid in the following
fiscal year.
(3) The dollar amounts in this column include premium payments made by the
Company with respect to insurance policies for the Named Executive
Officers for which the Company is not a beneficiary. In addition, the
dollar amounts in this column include 401(k) contributions for the
following persons in the amount of $3,000 for 2000, 1999, and 1998 paid
by the Company on behalf of Mr. Michels, Mr. Moyer, and Mr. Sabbath;
and 401(k) contributions in the amount of $4,822 for 2000 on behalf of
Mr. Orr.
(4) Includes annual airline club membership fees ($662) and estate planning
services ($6,000).
(5) Represents annual airline club membership fees.
(6) Includes amounts reimbursed for car expenses ($1,676) and airline club
membership ($225).
(7) Represents estate planning services.
(8) Mr. Orr joined the Company in July 1999.
(9) Represents amounts reimbursed for tax consulting services.
(10) Represents amounts reimbursed for an annual Post Office box fee.
60
<PAGE> 63
OPTION GRANTS IN FISCAL YEAR 2000
The following table sets forth each grant of stock options during the
fiscal year ended September 30, 2000 to the Named Executive Officers:
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM(3)
----------------- --------------
PERCENT OF
TOTAL OPTION
SHARES EXERCISE
NUMBER OF GRANTED TO PRICE
OPTION SHARES EMPLOYEES IN ($ PER EXPIRATION
NAME GRANTED(1) FISCAL YEAR(2) SHARE) DATE 5%($) 10%($)
---- ------------- -------------- -------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Douglas L. Michels ............ 29,090 .71% $3.4375 07/31/2005 $16,025 $46,409
145,910 3.55 3.125 07/31/2010 286,756 726,697
John Moyer .................... -- --% -- -- -- --
Michael Orr ................... 32,000 .78 3.125 07/31/2010 62,889 159,374
Steven M. Sabbath ............. 13,626 .33 3.125 07/31/2010 26,779 67,864
36,374 .89 3.125 07/31/2010 71,486 181,159
James Wilt .................... -- -- -- -- -- --
</TABLE>
(1) All options were granted under the Option Plan. The option exercise price of
all stock options granted under the Option Plan is generally equal to the fair
market value of the shares of Common Stock on the day prior to the date of
grant. The options have a term of 10 years (5 years in the case of incentive
stock options granted to Mr. Michels) and generally vest at the rate 25% of the
shares subject to the option per year in which the optionee remains in
continuous status as an employee or consultant. (2) The Company granted options
to purchase an aggregate of 4,104,447 shares to employees in fiscal year 2000.
(3) Potential realizable values are based on assumed annual rates of return
specified by the Securities and Exchange Commission. The Company's management
cautions shareholders and option holders that such increases in values are based
on speculative assumptions and should not be the basis for expectations of the
future value of their holdings.
61
<PAGE> 64
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 2000
AND FISCAL YEAR-END OPTION VALUES
The following table provides information on option exercises in fiscal
year 2000 by the Named Executive Officers and the value of such officer's
unexercised options as of September 30, 2000.
<TABLE>
<CAPTION>
SHARES
ACQUIRED NUMBER OF VALUE OF UNEXERCISED
ON VALUE UNEXERCISED OPTION SHARES IN-THE-MONEY OPTION SHARES ON SEPTEMBER
NAME EXERCISE REALIZED ON SEPTEMBER 30, 2000 30, 2000 ($) (2)
--------------------- ----------------
EXERCISABLE UNEXERCISABLE EXERCISABLE(1) UN-EXERCISABLE
----------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Douglas L. Michels....... 0 $ 0 398,525 528,502 $18,750 $18,750
John Moyer............... 69,992 512,362 56,143 98,865 3,281 6,563
Michael Orr.............. 0 0 43,750 306,250 0 0
Steven M. Sabbath........ 26,624 424,673 118,126 140,750 6,562 6,563
James Wilt .............. 0 0 236,545 178,555 20,456 13,125
</TABLE>
(1) Market value of underlying securities based on the closing price of the
Company's Common Stock on the NASDAQ National Market minus the exercise price.
(2) Market value of securities underlying unexercised in-the-money options based
on the closing price of the Company's Common Stock on September 29, 2000 (i.e.,
the last trading day of fiscal year 2000) on the NASDAQ National Market of
$2.9375 per share, minus the exercise price.
62
<PAGE> 65
EMPLOYMENT CONTRACTS AND CHANGE-IN-CONTROL ARRANGEMENTS
In March 1996, the Board of Directors approved a resolution providing
that prior to or after a change in control, as defined in the Option Plan, any
outstanding options held by corporate officers that were granted pursuant to the
Option Plan that are not at such time exercisable and vested shall become fully
exercisable and vested.
The Company adopted a change in control plan in June 1997 and,
accordingly, has entered into change in control agreements with each of the
Named Executive Officers. Pursuant to these agreements, each such officer is
eligible to receive, in the event that his or her employment is involuntarily
terminated within one year following a change in control of the Company, an
amount equal to the product of twelve (12) times his or her total monthly
compensation including targeted bonuses at 100% attainment, continuation of
health benefits, life insurance, long-term disability and other fringe benefit
plans available to him or her prior to the involuntary termination of employment
for twelve (12) months thereafter and accelerated vesting on all options held.
Pursuant to the terms of these agreements, a change in control is as defined in
the 1994 Incentive Stock Option Plan described herein.
Further, in the event the aforesaid transaction with Caldera is
consummated, an amendment to these change in control agreements with each of the
Named Executive Officers provides that all stock option grants held by such
officers prior to August 1, 2000 shall become fully vested and exercisable
through January 31, 2002 or the applicable expiration date of each such grant,
whichever shall be later. In addition, each such Officer shall be eligible to
receive an amount equal to the product of twelve (12) times his or her total
monthly compensation including targeted bonuses at 100% attainment provided that
such Officer remains in the employ of the Company or of Caldera for a period of
one year following the consummation of the transaction, unless released earlier
by the Company or Caldera upon completion of transition duties.
There are no other employment contracts between the Company and any of
the executive officers named in the Summary Compensation Table above.
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
The Compensation Committee of the Board of Directors serves as an
administrative arm of the Board to make decisions regarding executive
compensation and to make recommendations to the Board on compensation matters
generally. The following is the report of the Compensation Committee describing
compensation policies and rationale applicable to the Company's executive
officers with respect to the compensation paid to such executive officers for
the fiscal year ended September 30, 2000. The information contained in such
report shall not be deemed to be "soliciting material" or to be "filed" with the
Securities and Exchange Commission, nor shall such information be incorporated
by reference into any future filing under the Securities Act or Exchange Act,
except to the extent that the Company specifically incorporates it by reference
into such filing.
General
The Compensation Committee is a standing committee comprised of three
nonemployee directors. After evaluating management's performance, the
Compensation Committee recommends compensation and pay levels to the full Board
for approval. Employee directors do not vote on their own compensation. Stock
option grants to executive officers are approved by the Compensation Committee.
Overview and Policies for 2000
The goals of the Compensation Committee are to attract, motivate,
reward, and retain the key executive talent necessary to achieve the Company's
business objectives and contribute to the long-term
63
<PAGE> 66
success of the Company. The Compensation Committee currently uses salary, bonus,
and stock options to meet these goals.
In fiscal year 2000, the Compensation Committee reviewed the
compensation of the Company's key executive officers by evaluating each
executive's scope of responsibility, prior experience, and salary history, and
also took into account the salaries for similar positions at comparable high
technology companies. In reviewing the compensation, the Compensation Committee
focused on each executive's prior performance with the Company and expected
contribution to the Company's future success.
The Company provides long-term incentives to executive officers through
the Option Plan. The purposes of the Option Plan are to attract and retain the
best employee talent available and to create a direct link between compensation
and the long-term performance of the Company. In general, the Option Plan
incorporates four-year vesting periods to encourage employees to remain with the
Company. The size of each option grant is based on the recipient's position and
tenure with the Company, the recipient's past performance, and the size of
previous stock option grants, primarily weighted toward the recipient's
position. In fiscal year 2000, the Company continued its policy of granting
stock options to new employees and granted additional stock options to
employees, including executive officers, who had made and were expected to make
significant contributions to the Company's development. These stock option
grants were based primarily on the scope of the executive officer's
responsibilities at the Company and the remuneration to be paid to such officer.
The compensation for Douglas L. Michels in fiscal year 2000 was
approved by the Board of Directors. The Compensation Committee made its
recommendation and the Board made its determination of the Chief Executive
Officer's compensation after considering the same factors used to determine the
compensation of other executive officers.
Summary
The Compensation Committee believes that the Company's compensation has
been successful in attracting and retaining qualified employees and in linking
compensation directly to corporate performance relative to the Company's goals.
The Company's compensation policies will evolve over time as the Company moves
to attain the near-term goals it has set for itself while maintaining its focus
on building long-term shareholder value.
MEMBERS OF THE COMPENSATION COMMITTEE:
RONALD LACHMAN
ALOK MOHAN
GILBERT P. WILLIAMSON
64
<PAGE> 67
PERFORMANCE GRAPH
Set forth below is a line graph comparing the annual percentage change
in the cumulative return to the shareholders of the Company's Common Stock with
the cumulative return of the Nasdaq National Market Index and the Nasdaq
Computer and Data Processing Stocks Index for the period commencing September
29, 1995 and ending on September 29, 2000. The information contained in the
performance graph shall not be deemed to be "soliciting material" or to be
"filed" with the Securities and Exchange Commission, nor shall such information
be incorporated by reference into any future filing under the Securities Act or
Exchange Act, except to the extent that the Company specifically incorporates it
by reference into such filing.
The graph assumes that $100 was invested on September 30, 1995 in the
Company's Common Stock and in each index, and that all dividends were
reinvested. No dividends have been declared or paid on the Company's Common
Stock. Shareholder returns over the indicated period should not be considered
indicative of future shareholder returns. The Company operates on a 52-week
fiscal year which ended on September 30, 2000.
65
<PAGE> 68
Comparison of Five - Year Cumulative Total Returns
Performance Graph for
The Santa Cruz Operation, Inc.
Produced on 11/22/2000 including data to 09/29/2000
[PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
The Santa Cruz Nasdaq Stock Market Nasdaq Computer and Data Processing
Operation, Inc. (US Companies) Stocks SIC 7370-7379 US & Foreign
<S> <C> <C> <C>
09/1995 100.0 100.0 100.0
09/1996 79.1 118.7 124.0
09/1997 66.4 162.9 167.8
09/1998 52.2 165.5 217.5
09/1999 142.5 270.4 369.3
09/2000 35.1 358.9 464.3
</TABLE>
Notes:
A. The lines represent monthly index levels derived from compounded daily
returns that include all dividends.
B. The indexes are reweighted daily, using the market capitalization on the
previous trading day.
C. If the monthly interval, based on the fiscal year-end, is not a trading
day, the preceding trading day is used.
D. The index level for all series was set to $100.0 on 09/29/1995.
COMPENSATION OF DIRECTORS
During fiscal year 2000 the Company made payments to the Outside
Directors in an aggregate amount of seventy-eight thousand, five hundred dollars
($78,500) for attendance to Board meetings (including committee meetings) during
the fiscal year. The following payments were made to each outside director:
Ninian Eadie, eighteen thousand, two hundred and fifty dollars ($18,250); Ronald
Lachman, thirteen thousand dollars ($13,000); Robert McClure, nineteen thousand,
seven hundred and fifty dollars ($19,750); R. Duff Thompson, sixteen thousand,
seven hundred and fifty dollars ($16,750); and, Gilbert Williamson, ten
thousand, seven hundred and fifty dollars ($10,750). Pursuant to a consulting
agreement with director Williamson, the Company shall pay one thousand dollars
($1,000) a day, plus reasonable expenses, for consulting services rendered to
the Board of Directors and two thousand, five hundred dollars ($2,500) a day for
consulting services pertaining to the general business of the Company, to be
provided on an as-needed basis. During fiscal year 2000, the Company did not
retain Mr. Williamson for any consulting
66
<PAGE> 69
services and, therefore, no payments were made in fiscal year 2000. The Company
has a consulting agreement with director McClure, pursuant to which the Company
shall pay one thousand dollars ($1,000) per day, plus reasonable expenses, for
consulting services pertaining to the general business of the Company, to be
provided on an as-needed basis. In fiscal year 2000, the Company did not retain
Mr. McClure for any consulting services and, therefore, no payments were made in
fiscal year 2000. Directors are reimbursed for certain expenses in connection
with attendance at board and committee meetings.
Outside Directors (i.e., nonemployee directors) receive compensation
for their service on the Board pursuant to the Director Plan. This compensation
is in the form of stock options, or in the case of the Annual Grant, which is
automatically granted on the first day of each fiscal year, cash for each
meeting attended, in lieu of a stock option. All current outside directors have
elected stock options for fiscal year 2000.
The Company's Director Plan, which provides for the grant in
nonstatutory stock options to nonemployee directors of the Company, was adopted
by the Board of Directors in March 1993 and approved by the shareholders in May
1993. The Company has reserved a total of 1,400,000 shares of Common Stock for
issuance pursuant to the Director Plan. The Director Plan is currently
administered by the Board of Directors. Under the Director Plan, each
nonemployee director automatically receives a nonstatutory option to purchase
40,000 shares of the Company's Common Stock on the date upon which such person
first becomes a director (the "Initial Grant"). In addition, each nonemployee
director who remains in continuous status as a nonemployee director is
automatically granted a nonstatutory option (the "Annual Grant") to purchase
10,000 shares of Common Stock on the first day of each fiscal year, 6,000 shares
of which are pursuant to the Director Option Plan and 4,000 of which are
pursuant to the Incentive Stock Option Plan.
An Outside Director may elect to receive cash compensation in lieu of
an Annual Grant. Each Outside Director who makes such an election shall receive
cash compensation per each Board meeting payable at a rate determined by the
Board. In addition to the annual election of either cash compensation or stock
options grants, each Board member also receives the following payments for
meeting attendance: one thousand dollars ($1,000) per regularly scheduled Board
meeting attended in person, seven hundred fifty dollars ($750) per special
meeting, which may be attended telephonically, and seven hundred fifty dollars
($750) per committee meeting, which may be attended telephonically. Also, in the
event that the Director who elected to receive options in lieu of cash is unable
to attend a regularly scheduled Board meeting, he shall have deducted from his
next Annual Grant two thousand shares (2,000) for any such meeting not attended.
Options granted under the Director Plan have a term of ten (10) years
unless terminated sooner upon termination of the optionee's status as a director
or otherwise pursuant to the Director Plan. Such options are not transferable by
the optionee other than by will or the laws of descent or distribution, and each
option is exercisable during the lifetime of the director only by such director.
The exercise price of each option granted under the Director Plan is equal to
the fair market value of the Common Stock on the date of grant. Initial Grant
options granted under the Director Plan vest cumulatively at the rate of
one-twentieth (1/20th) of the shares subject to the option for every three
months after the date of grant. Annual Grant options vest at a rate of
one-fourth (1/4th) of the shares subject to the option for every three months
after the date of grant.
In the event of a merger of the Company with or into another
corporation or a consolidation, acquisition of assets of like transaction
involving the Company immediately prior to occurrence of a change in control,
any outstanding option shall become fully exercisable and vested.
Unless terminated sooner, the Director Plan will terminate in 2003. The
Board has authority to amend or terminate the Director Plan provided no such
action may affect options already granted and such options shall remain in full
force and effect. As of the fiscal year end, options to purchase 324,000 shares
of Common Stock at a weighted average exercise price (per share) of
approximately $7.22 per share were outstanding and 894,000 shares remained
available for future option grants under the Director Plan.
67
<PAGE> 70
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee makes recommendations to the Board of
Directors concerning salaries and incentive compensation for directors and
officers of the Company. Mr. Michels, who served as President and Chief
Executive Officer of the Company during fiscal year 2000, is not a member of the
Compensation Committee and cannot vote on matters decided by the Committee. Mr.
Michels has also participated in the discussions and decisions regarding
salaries and incentive compensation for all employees of and consultants to the
Company, except that Mr. Michels has also been excluded from discussions and
decisions regarding his own salary and incentive compensation. No executive
officer of the Company serves as a member of the board of directors or
compensation committee of any entity that has one or more executive officer
serving as a member of the Company's Board of Directors or compensation
committee ("Interlock"). There are no Interlocks between the Company's Board of
Directors or Compensation Committee and boards of directors or compensation
committees of other companies.
68
<PAGE> 71
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of Common Stock of the Company as of November 1, 2000 as to
(i) each person who is known by the Company to own beneficially more than five
percent (5%) of the outstanding shares of its Common Stock, (ii) each director
and each nominee for director of the Company, (iii) each of the executive
officers named in the Summary Compensation Table below, and (iv) all directors
and executive officers as a group.
<TABLE>
<CAPTION>
COMMON STOCK APPROXIMATE
FIVE PERCENT SHAREHOLDERS, DIRECTORS BENEFICIALLY PERCENTAGE
AND CERTAIN EXECUTIVE OFFICERS OWNED OWNED(1)
------------------------------------ ------------ -----------
<S> <C> <C>
Douglas L. Michels(2)............................................. 4,439,050 11.13
c/o The Santa Cruz Operation, Inc.
425 Encinal Street
Santa Cruz, California 95061-1900
Ninian Eadie(3)................................................... 97,000 *
Ronald Lachman(4) ................................................ 151,000 *
Robert M. McClure(5). ............................................ 135,832 *
Alok Mohan(6)..................................................... 631,083 1.58
Jack Moyer(7)..................................................... 87,469 *
Michael Orr(8).................................................... 65,624 *
Steven M. Sabbath(9) ............................................. 155,725 *
R. Duff Thompson(10).............................................. 24,000 *
Gilbert P. Williamson(11)......................................... 130,500 *
James Wilt(12).................................................... 471,641 1.19
All directors and executive officers as a group (14 persons)(13)... 6,946,791 16.54%
</TABLE>
* Less than one percent
(1) Applicable percentage of ownership is based on shares of Common Stock
outstanding as of November 1, 2000 together with applicable options held
by such shareholder. Beneficial ownership is determined in accordance with
the rules of the Securities and Exchange Commission and includes voting
and investment power with respect to shares. Shares of Common Stock
subject to options currently exercisable or exercisable within sixty (60)
days after November 1, 2000 are deemed outstanding for computing the
percentage ownership of the person holding such options, but are not
deemed outstanding for computing the percentage of any other person.
(2) Includes 455,650 shares issuable upon exercise of options to purchase
shares of Common Stock that are exercisable within sixty (60) days after
November 1, 2000. Includes 75,000 shares gifted to the J3D Family
Partnership, of which Douglas Michels is the general partner; and 355,000
shares in a trust account established by Mr. Michels' late father,
Lawrence Michels, of which Douglas Michels is a general partner.
(3) Represents 97,000 shares issuable upon exercise of options to purchase
shares of Common Stock that are exercisable within sixty (60) days after
November 1, 2000.
(4) Includes 79,000 shares issuable upon exercise of options to purchase
shares of Common Stock that are exercisable within sixty (60) days after
November 1, 2000. Also includes 24,000 shares in trust accounts
established for the benefit of his minor children of which Mr. Lachman is
a trustee. In addition, 5,000 shares are also held by the Ronald and Mary
Ann Lachman Foundation of which Mr. Lachman is a director; Mr. Lachman
disclaims beneficial ownership of these shares.
(5) Includes 132,500 shares issuable upon exercise of options to purchase
shares of Common Stock that are exercisable within sixty (60) days after
November 1, 2000.
(6) Includes 571,248 shares issuable upon exercise of options to purchase
shares of Common Stock that are exercisable within sixty (60) days after
November 1, 2000.
69
<PAGE> 72
(7) Includes 72,496 shares issuable upon exercise of options to purchase
shares of Common Stock that are exercisable within sixty (60) days after
November 1, 2000.
(8) Represents 65,624 shares issuable upon exercise of options to purchase
shares of Common Stock that are exercisable within sixty (60) days after
November 1, 2000.
(9) Includes 135,500 shares issuable upon exercise of options to purchase
shares of Common Stock that are exercisable within sixty (60) days after
November 1, 2000.
(10) Represents 24,000 shares issuable upon exercise of options to purchase
shares of Common Stock that are exercisable within sixty (60) days after
November 1, 2000.
(11) Represents 130,500 shares issuable upon exercise of options to purchase
shares of Common Stock that are exercisable within sixty (60) days after
November 1, 2000.
(12) Includes 259,965 shares issuable upon exercise of options to purchase
shares of Common Stock that are exercisable within sixty (60) days after
November 1, 2000.
(13) Includes 2,562,105 shares issuable upon exercise of options to purchase
shares of Common Stock granted to executive officers and directors of the
Company that are exercisable within sixty (60) days after November 1,
2000.
70
<PAGE> 73
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In April 1999, the Company entered into a consulting agreement with Mr.
Mohan, pursuant to which Mr. Mohan became an external consultant to the Company
and his status as an employee ceased. The term of the agreement was for one
year, commencing April 21, 1999, and was renewable by mutual agreement of both
parties with approval by the Compensation Committee. As compensation for Mr.
Mohan's consulting services to the Company he received a fee target of one
hundred and twenty-six thousand dollars ($126,000) per year, paid as follows:
ninety thousand dollars ($90,000) annually as a retainer; and thirty-six
thousand dollars ($36,000) annually as a target incentive. Incentive payments
were made solely based upon the Company's performance against its Revenue and
EPS measures, paid in accordance with the provisions of the Company's Management
Incentive Plan. Mr. Mohan received no incentive payments during fiscal year
2000. The consulting agreement expired April 21, 2000, and the Company entered
into a new consulting agreement, commencing on April 22, 2000 and continuing
through the completion of the Caldera acquisition of the Server and Professional
Services business. As compensation for Mr. Mohan's consulting services to the
Company he receives five thousand dollars ($5,000) per month, with no incentive
bonus. His stock options previously held continue to vest over the term of the
agreement and convert to nonstatutory options. He continues to be covered under
the Company's medical, dental, and vision plans. In addition, Mr. Mohan will
forego any compensation normally accorded to members of the Company's Board of
Directors for participation on the Board or for attendance at committee meetings
and/or board meetings and will not be entitled to additional stock options
granted to board members on an annual basis.
The Douglas Michels Family Partnership and the Lawrence Michels Family
Limited Partnership are partners in Encinal Partnership No. 1 ("EP1"), which
leases to the Company certain office premises located in Santa Cruz, California
under two leases. The first lease commenced on January 1, 1989 and had a
ten-year term, with two options for the Company to renew for five-year periods.
The lease has been renewed through June 30, 2005. The lease covers approximately
56,230 square feet of building space at a current cost of approximately $88,010
per month, subject to an annual adjustment upward based on the Consumer Price
Index. The second lease commenced on July 1, 1991 and had a seven-year term,
with two options to renew for five-year periods. The second lease has been
renewed through June 30, 2005. The second lease covers approximately 26,055
square feet of building space at a current cost of approximately $31,268 per
month, subject to an annual adjustment based on the Consumer Price Index.
The third partner in EP1 is Wave Crest Development, Inc. ("Wave
Crest"). Wave Crest leases to the Company 61,500 square feet of office space in
Santa Cruz, California. From time to time, Douglas Michels engages in real
estate transactions with Wave Crest and its president.
The Company believes that the transactions described above were on
terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. All future transactions between the Company and any
director or executive officer are subject to approval by a majority of the
disinterested members of the Board of Directors.
The Company has entered into indemnification agreements with each of
its directors and executive officers. Such agreements require the Company to
indemnify such individuals to the fullest extent permitted by California law.
71
<PAGE> 74
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 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.
2. Exhibit Listing
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
2.0 Asset Purchase Agreement By and Between The
Santa Cruz Operation, Inc. and Novell, Inc.
(4)
3.1 Restated Articles of Incorporation of
Registrant. (2)
3.2 Bylaws of Registrant, as amended. (5)
4.1 Specimen Common Stock Certificate of
Registrant. (1)
10.11 Software License Agreement with Locus
Computing Corporation effective January 11,
1989. (1)
10.12 Lease with Encinal Partnership No. 1
commencing May 1, 1991 (100 Pioneer Street).
(1)
10.13 Lease with Encinal Partnership No. 1
commencing January 1, 1989 (425 Encinal
Street). (1)
10.14 Lease with Wave Crest Development, Inc.
commencing August 1, 1987 (440 Encinal
Street). (1)
10.15 Lease with Wave Crest Development, Inc.
commencing June 1, 1988 (400 Encinal
Street). (1)
10.16 Lease with Wave Crest Development, Inc.
commencing July 1, 1988 (399 Encinal
Street). (1)
10.17 Form of Indemnification Agreement. (1)
10.18 Master Registration Rights Agreement as
amended. (1)
10.19 1993 Stock Purchase Plan and form of Stock
Purchase Agreement. (3)(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)
</TABLE>
72
<PAGE> 75
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
21.1 Subsidiaries of Registrant.
23.1 Consent of Independent Accountants.
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.
On September 22, 2000, the Company filed a Current Report on Form 8-K
to report that the Company had entered into an agreement to sell 409,375 units
as $32.00. A unit consists of eight shares of common stock of the Company and a
warrant to purchase either two additional shares of the Company's common stock
at $4.00 per share or one share of the common stock of Caldera held by the
Company at $8.00 per share. The warrants for the Caldera shares can be exercised
only if the Agreement between the Company and Caldera is consummated.
73
<PAGE> 76
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/ Randall Bresee By: /s/ Steven M. Sabbath
---------------------------------- -------------------------------------
Randall Bresee Steven M. Sabbath
Senior Vice President, Senior Vice President,
Chief Financial Officer Law and Corporate Affairs & Secretary
Date: December 15, 2000 Date: December 15, 2000
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 15, 2000
/s/ Alok Mohan /s/ Robert M. McClure
---------------------------------- ----------------------------
Alok Mohan Robert M. McClure
Chairman of the Board of Directors Director
Date: December 15, 2000 Date: December 15, 2000
/s/ Gilbert P. Williamson /s/ R. Duff Thompson
---------------------------------- ----------------------------
Gilbert P. Williamson R. Duff Thompson
Director Director
Date: December 15, 2000 Date: December 15, 2000
/s/ Ronald Lachman /s/ Ninian Eadie
---------------------------------- ----------------------------
Ronald Lachman Ninian Eadie
Director Director
Date: December 15, 2000 Date: December 15, 2000
74
<PAGE> 77
THE SANTA CRUZ OPERATION, INC.
SCHEDULE II/RULE 5-04
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
(In thousands)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE
BEGINNING REVENUES OR AT END OF
DESCRIPTION OF YEAR EXPENSES DEDUCTIONS YEAR
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Year Ended September 30, 2000
Allowance for returns $ 7,108 $ (269) $ 4,509 $ 2,330
Allowance for doubtful accounts 1,114 (19) 233 862
----------- ----------- ----------- -----------
Total allowance $ 8,222 $ (288) $ 4,742 $ 3,192
=========== =========== =========== ===========
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
=========== =========== =========== ===========
</TABLE>
75
<PAGE> 78
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
2.0 Asset Purchase Agreement By and Between The
Santa Cruz Operation, Inc. and Novell, Inc.
(4)
3.1 Restated Articles of Incorporation of
Registrant. (2)
3.2 Bylaws of Registrant, as amended. (5)
4.1 Specimen Common Stock Certificate of
Registrant. (1)
10.11 Software License Agreement with Locus
Computing Corporation effective January 11,
1989. (1)
10.12 Lease with Encinal Partnership No. 1
commencing May 1, 1991 (100 Pioneer Street).
(1)
10.13 Lease with Encinal Partnership No. 1
commencing January 1, 1989 (425 Encinal
Street). (1)
10.14 Lease with Wave Crest Development, Inc.
commencing August 1, 1987 (440 Encinal
Street). (1)
10.15 Lease with Wave Crest Development, Inc.
commencing June 1, 1988 (400 Encinal
Street). (1)
10.16 Lease with Wave Crest Development, Inc.
commencing July 1, 1988 (399 Encinal
Street). (1)
10.17 Form of Indemnification Agreement. (1)
10.18 Master Registration Rights Agreement as
amended. (1)
10.19 1993 Stock Purchase Plan and form of Stock
Purchase Agreement. (3)(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)
</TABLE>
<PAGE> 79
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
21.1 Subsidiaries of Registrant.
23.1 Consent of Independent Accountants.
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.
