<PAGE> 1
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO _______________
------------------------------------
COMMISSION FILE NUMBER 0-21484
THE SANTA CRUZ OPERATION, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN THIS CHARTER)
CALIFORNIA 94-2549086
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
425 ENCINAL STREET, SANTA CRUZ, CALIFORNIA 95060
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (831) 425-7222
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of the registrant's common stock as of December
31, 1999 was 35,301,748.
- --------------------------------------------------------------------------------
<PAGE> 2
THE SANTA CRUZ OPERATION, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ITEM 1. FINANCIAL STATEMENTS PAGE
<S> <C> <C>
a) CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED DECEMBER 31, 1999 AND 1998.............1
b) CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND SEPTEMBER 30, 1999....................2
c) CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1999 AND 1998.............3
d) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS .........................4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS..................................................7
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS..............................................................11
SIGNATURES............................................................................12
</TABLE>
<PAGE> 3
Part I. Financial Information
Item I. Financial Statements
THE SANTA CRUZ OPERATION, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except amounts per share)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1999 1998
(Unaudited)
-----------------------
<S> <C> <C>
NET REVENUES $ 53,653 $ 52,706
Cost of revenues 11,832 12,080
-------- --------
Gross margin 41,821 40,626
-------- --------
OPERATING EXPENSES:
Research and development 10,578 10,180
Sales and marketing 25,299 23,332
General and administrative 3,836 3,796
-------- --------
Total operating expenses 39,713 37,308
-------- --------
Operating income 2,108 3,318
OTHER INCOME (EXPENSE):
Interest income, net 600 576
Other income (expense), net 837 (10)
-------- --------
Income before income taxes 3,545 3,884
Income taxes 670 780
-------- --------
Net income 2,875 3,104
OTHER COMPREHENSIVE INCOME, NET OF TAX
Unrealized gain on available-for-sale equity securities 55,863 -
Foreign currency translation adjustment 1 (256)
-------- --------
Comprehensive income $ 58,739 $ 2,848
-------- --------
EARNINGS PER SHARE:
Basic $ 0.08 $ 0.09
Diluted $ 0.07 $ 0.09
-------- --------
SHARES USED IN EARNINGS PER SHARE CALCULATION:
Basic 34,713 34,757
Diluted 41,258 35,321
-------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE> 4
THE SANTA CRUZ OPERATION, INC.
<TABLE>
<CAPTION>
December 31, September 30,
CONSOLIDATED BALANCE SHEETS 1999 1999
(In thousands) (Unaudited)
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 37,867 $ 33,683
Short-term investments 29,547 29,161
Receivables, net 25,523 32,309
Available-for-sale equity securities 78,157 -
Deferred tax assets 2,947 1,202
Other current assets 5,344 6,310
--------- ---------
Total current assets 179,385 102,665
--------- ---------
Property and equipment, net 12,072 12,234
Purchased software and technology licenses, net 9,310 10,431
Long-term deferred tax assets 20,115 6,623
Other assets 6,797 7,331
--------- ---------
Total assets $ 227,679 $ 139,284
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 5,906 $ 7,482
Royalties payable 7,953 7,217
Income taxes payable 2,761 1,983
Deferred income taxes 30,611 -
Accrued expenses and other current liabilities 29,103 32,314
Deferred revenues 7,634 8,856
--------- ---------
Total current liabilities 83,968 57,852
--------- ---------
Long-term lease obligations 1,748 2,332
Long-term deferred revenues 1,381 2,571
Other long-term liabilities 6,667 6,191
--------- ---------
Total long-term liabilities 9,796 11,094
--------- ---------
SHAREHOLDERS' EQUITY
Common stock, no par value, net, authorized 100,000 shares
Issued and outstanding 35,302 and 34,346 shares 111,039 106,201
Accumulated other comprehensive income 56,272 408
Accumulated deficit (33,396) (36,271)
--------- ---------
Total shareholders' equity 133,915 70,338
--------- ---------
Total liabilities and shareholders' equity $ 227,679 $ 139,284
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 5
THE SANTA CRUZ OPERATION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1999 1998
(Unaudited)
----------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,875 $ 3,104
Adjustments to reconcile net income to net cash
provided by operating activities -
Depreciation and amortization 2,874 3,339
Exchange gain (80) 33
Changes in operating assets and liabilities-
Receivables 6,868 (6,087)
Other current assets 1,002 2,549
Other assets 543 74
Royalties payable 723 381
Trade accounts payable (1,618) (93)
Income taxes payable 785 524
Accrued expenses and other current liabilities (3,035) (583)
Deferred revenues (2,457) (2,640)
-------- --------
Net cash provided by operating activities 8,480 601
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,258) (1,237)
Purchases of software and technology licenses (108) (163)
Sales of short-term investments 6,500 7,304
Purchases of short-term investments (6,886) (8,529)
Changes in other assets (1,505) 39
-------- --------
Net cash used for investing activities (3,257) (2,586)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital leases (835) (863)
Net proceeds from sale of common stock 6,883 134
Repurchases of common stock (6,278) (3,649)
Changes in other long-term liabilities (908) (1,464)
-------- --------
Net cash used for financing activities (1,138) (5,842)
-------- --------
Effects of exchange rate changes on cash and cash equivalents 99 (303)
-------- --------
Change in cash and cash equivalents 4,184 (8,130)
Cash and cash equivalents at beginning of period 33,683 23,758
-------- --------
Cash and cash equivalents at end of period $ 37,867 $ 15,628
-------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid-
Income taxes $ (121) $ 280
Interest 86 128
Non-cash financing and investing activities-
Unrealized gain on available-for-sale equity securities $ 76,854 $ --
-------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 6
THE SANTA CRUZ OPERATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited, consolidated
statements of operations, balance sheets and statements of cash flows
have been prepared in accordance with generally accepted accounting
principles and include all material adjustments (consisting of only
normal recurring adjustments) necessary for their fair presentation. The
financial statements include the accounts of the Company and its wholly
owned subsidiaries after all material intercompany balances and
transactions have been eliminated. The Notes to Consolidated Financial
Statements contained in the fiscal year 1999 report on Form10-K should
be read in conjunction with these Consolidated Financial Statements. The
consolidated interim results presented are not necessarily indicative of
results to be expected for a full year. Certain reclassifications have
been made for consistent presentation. The September 30, 1999 balance
sheet was derived from audited financial statements, and is included for
comparative purposes.
2. SEGMENT INFORMATION
The Company reviews performance on the basis of geographical segments.
The Company uses analysis of segment revenues and gross margin in order
to make preliminary decisions of resource allocation. 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. Revenue is allocated to segments
based on the location from which the sale is satisfied.
The following table presents information about reportable segments for
the three months ended December 31, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
1999 1998
------- -------
(unaudited)
<S> <C> <C>
Net Revenues:
United States $19,204 $22,218
Canada/Latin America 2,753 3,161
EMEIA 25,762 22,347
Asia Pacific 3,147 4,796
Corporate Adjustments 2,787 184
------- -------
Total net revenues $53,653 $52,706
======= =======
Gross Margin:
United States $12,977 $16,625
Canada/Latin America 1,994 2,153
EMEIA 21,482 17,910
Asia Pacific 2,581 3,888
Corporate adjustments 2,787 50
------- -------
Total gross margin $41,821 $40,626
======= =======
</TABLE>
3. EARNINGS PER SHARE (EPS) DISCLOSURES
The Company calculates earnings per share in accordance with 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 giving effect to all dilutive potential
common shares that were outstanding during the period. Dilutive potential
common shares consist of the incremental common shares issuable upon the
exercise of
4
<PAGE> 7
stock options for all periods. Basic and diluted earnings per share were
calculated as follows during the three months ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
(In thousands, except per share data) 1999 1998
------- -------
(unaudited)
<S> <C> <C>
Basic:
Weighted average shares 34,713 34,757
======= =======
Net income $ 2,875 $ 3,104
======= =======
Earnings per share $ 0.08 $ 0.09
======= =======
Diluted:
Weighted average shares 34,713 34,757
Common equivalent shares from stock options
and warrants 6,545 564
------- -------
Shares used in per share calculation 41,258 35,321
======= =======
Net income $ 2,875 $ 3,104
======= =======
Net income per share $ 0.07 $ 0.09
======= =======
Options outstanding at 12/31/99 and at 12/31/98
not included in computation of diluted
EPS because the exercise price was greater
than the average market price. 9 7,051
</TABLE>
4. COMPREHENSIVE INCOME
The following table presents the calculation of comprehensive income as required
by SFAS 130. Comprehensive income has no impact on the Company's net income,
balance sheet or shareholder's equity. The components of other comprehensive
income for the three months ended December 31, 1999 and 1998 are as follows (in
thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
(unaudited)
<S> <C> <C>
Net income $ 2,875 $ 3,104
Other comprehensive income:
Foreign currency translation adjustment 1 (256)
Unrealized gain on equity security 76,854 --
Gross tax on unrealized gain on equity security (30,611) --
Release of deferred tax valuation allowance 9,620 --
-------- --------
Total other comprehensive income $ 58,739 $ 2,848
======== ========
</TABLE>
5. RECENT ACCOUNTING PRONOUNCEMENTS
In December 1998, the Accounting Standards Executive Committee issued Statement
of Position 98-9 (SOP 98-9), Modification of SOP 97-2 Software Revenue
Recognition. SOP 98-9 amends SOP 97-2 to require that an entity recognize
revenue for multiple element arrangements by means of the "residual method" when
(1) there is vendor-specific objective evidence ("VSOE") of the fair values of
all the undelivered elements that are not accounted for by means of long-term
contract accounting, (2) VSOE of fair value does not exist for one or more of
the delivered elements, and (3) all revenue recognition criteria of SOP 97-2
(other than the requirement for VSOE of the fair value of each delivered
element) are satisfied. The provisions of SOP 98-9 that extend the deferral of
certain paragraphs of SOP 97-2 became effective December 15, 1998. These
paragraphs of SOP 97-2 and SOP 98-9 were effective for transactions entered into
for fiscal years beginning after March 15, 1999. Retroactive application is
prohibited. Management does not believe adoption of SOP 98-9 had a significant
impact on the Company's financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, (SFAS 133), Accounting for Derivative
Instruments and Hedging Activities, which establishes accounting and reporting
standards for derivative instruments and hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
Management does not believe this will have a material effect on the Company's
financial statements. Implementation of this standard has recently been delayed
by the FASB for a 12-month period. The Company will adopt SFAS 133 as required
for its first quarterly filing of fiscal year 2001.
5
<PAGE> 8
In April 1998, the Accounting Standards Executive Committee issued SOP 98-5,
Reporting on the Costs of Start-Up Activities. This standard requires companies
to expense the costs of start-up activities and organization costs as incurred.
In general, SOP 98-5 is effective for fiscal years beginning after December 15,
1998. The adoption of SOP 98-5 did not have a material impact on the Company's
financial statements.
In March 1998, the Accounting Standards Executive Committee issued SOP 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for Internal
Use, which provides guidance on accounting for the cost of computer software
developed or obtained for internal use. SOP 98-1 is effective for financial
statements for fiscal years beginning after December 15, 1998. The adoption of
SOP 98-1 did not have a material impact on the Company's financial statements.
6
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In addition to historical information contained herein, this Discussion and
Analysis contains forward-looking statements. These statements involve risks and
uncertainties and can be identified by the use of forward-looking terminology
such as "estimates," "projects," "anticipates," "plans," "future," "may,"
"will," "should," "predicts," "potential," "continue," "expects," "intends,"
"believes," and similar expressions. Examples of forward-looking statements
include those relating to 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
Net revenues for the three months ended December 31, 1999 increased 2% to $53.7
million from $52.7 million in the same period in fiscal 1999. The increase can
be attributed to better revenue performance in all European regions due to
strong upgrade business but was partially offset by a decrease in large project
sales, many of which were delayed by customers due to their Year 2000
preparations. No one customer accounted for more than 10% of net revenues in the
first quarter ended December 31, 1999 or in the same period in the prior year.
International revenues continue to represent a significant portion of total net
revenues comprising 59% of the revenues for the first fiscal quarter of 2000 and
58% for the same quarter in fiscal 1999.
COSTS AND EXPENSES
Cost of revenues as a percentage of net revenues decreased to 22% for the first
quarter of fiscal 2000 from 23% in the same period of 1999, principally due to
reduced royalty rates and reduced technology costs coupled with the impact of
stable fixed costs over higher unit sales volume. In addition, material costs
continued to decline as a result of increasing e-commerce business.
Research and development expenses increased 4% to $10.6 million in the first
quarter of fiscal 2000 from $10.2 million in the comparable quarter of fiscal
1999, or 20% and 19% of net revenues, respectively. The spending increase is
primarily attributable to higher staffing levels.
Sales and marketing expenses increased 8% to $25.3 million in the first quarter
of fiscal 2000 from $23.3 million for the comparable quarter of the prior year.
Sales and marketing expenses represented 47% of net revenues in the first
quarter of fiscal 2000 and 44% in 1999. Added staffing drove the increase as
well as sales program costs that vary directly with increased sales.
General and administrative expenses remained relatively flat at $3.8 million for
the first quarter of fiscal 2000 and 1999, representing 7% of net revenues for
the first quarter of fiscal 2000 and 1999, respectively. The increase in
absolute dollars was due to higher staffing levels.
Other income consists of net interest income, foreign exchange gain and loss,
and realized gain and loss on investments, as well as other miscellaneous income
and expense items. For the first quarter of fiscal 2000 and fiscal 1999, net
interest income remained constant at $0.6 million. Other income was $0.8 million
in the first quarter of fiscal 2000, compared to a loss of $0.01 million for the
same period of fiscal 1999. The growth in other income was due to the gain on
the sale of an equity security investment.
The provision for income taxes was $0.7 million for the first quarter of fiscal
2000 compared to $0.8 million for the same period of the prior fiscal year. The
tax provisions for the first quarters of the current and prior fiscal years
resulted from foreign taxes paid and reflect the realization of certain U.S.
deferred tax assets for which a valuation allowance was previously established.
During the first quarter of fiscal 2000, the Company recorded an unrealized gain
of $76.9 million related to its investment in Rainmaker Systems, Inc., which
recently completed its initial public offering. The unrealized gain makes it
more likely than not that the Company will utilize a substantial portion of its
deferred tax assets for which a valuation allowance was previously established.
The benefit of the reversal of that
7
<PAGE> 10
portion of the valuation allowance was offset against the deferred tax liability
related to the gain and recorded to accumulated other comprehensive income.
Net income for the first quarter of fiscal 2000 was $2.9 million compared to
$3.1 million for 1999.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's future operating results may be affected by various uncertain
trends and factors which are beyond the Company's control. These include adverse
changes in general economic conditions and rapid or unexpected changes in the
technologies affecting the Company's products. The process of developing new
high technology products is complex and uncertain and requires accurate
anticipation of customer needs and technological trends. The industry has become
increasingly competitive and, accordingly, the Company's results may also be
adversely affected by the actions of existing or future competitors, including
the development of new technologies, the introduction of new products, and the
reduction of prices by such competitors to gain or retain market share. The
Company's results of operations could be adversely affected if it were required
to lower its prices significantly.
The Company participates in a highly dynamic industry and future results could
be subject to significant volatility, particularly on a quarterly basis. The
Company's revenues and operating results may be unpredictable due to the
Company's shipment patterns. The Company operates with little backlog of orders
because its products are generally shipped as orders are received. In general, a
substantial portion of the Company's revenues have been booked and shipped in
the third month of the quarter, with a concentration of these revenues in the
latter half of that third month. In addition, the timing of closing of large
license contracts and the release of new products and product upgrades increase
the risk of quarter to quarter fluctuations and the uncertainty of quarterly
operating results. The Company's staffing and operating expense levels are based
on an operating plan and are relatively fixed throughout the quarter. As a
result, if revenues are not realized in the quarter as expected, the Company's
expected operating results could be adversely affected, and such effect could be
substantial and could result in an operating loss.
The Company experiences seasonality of revenues for both the European market and
the U.S. federal government market. European revenues during the quarter ending
June 30 are historically lower or relatively flat compared to the prior quarter.
This reflects a reduction of customer purchases in anticipation of reduced
selling activity during the summer months. Sales to the U.S. federal government
generally increase during the quarter ending September 30. This seasonal
increase is primarily attributable to increased purchasing activity by the U.S.
federal government prior to the close of its fiscal year. Additionally, net
revenues for the first quarter of the fiscal year are typically lower or
relatively flat compared to net revenues of the prior quarter.
The overall cost of revenues may be affected by changes in the mix of net
revenue contribution between licenses and services, product families,
geographical regions and channels of distribution, as the costs associated with
these revenues may have substantially different characteristics. The Company may
also experience a change in margin as net revenues increase or decrease since
technology costs, service costs and production costs are fixed within certain
volume ranges.
The Company's results of operations could be adversely affected if it were to
lower its prices significantly. In the event the Company reduced its prices, the
Company's standard terms for selected distributors provide credit for inventory
ordered in the previous 180 days, such credits to be applied against future
purchases. The Company, as a matter of policy, does not allow product returns
for refund. Product returns are generally allowed for stock balancing and are
accompanied by compensating and offsetting orders. Revenues are net of a
provision for estimated future stock balancing and excess quantities above
levels the Company believes are appropriate in its distribution channels. The
Company monitors the quantity and mix of its product sales.
The Company depends on information received from external sources in evaluating
the inventory levels at distribution partners in the determination of reserves
for the return of materials not sold, stock rotation and price protection.
Significant effort has gone into developing systems and procedures for
determining the appropriate reserve level.
As the Company determines whether its tax carryforwards will more likely than
not be utilized in the future, or as new tax legislation is enacted, the
Company's effective tax rate is subject to change. Substantial amounts of the
Company's deferred tax assets for which a valuation allowance was previously
established have been recorded in the first quarter of fiscal 2000 in connection
with the unrealized gain on the Company's investment in Rainmaker Systems. As a
result, these deferred tax assets are no longer available to offset future
taxable income and it is
8
<PAGE> 11
expected that the Company's effective tax rate in future quarters will increase
to levels that approach U.S. statutory tax rates. In the event that the Company
does not show sufficient profitability in the future, the Company may be
required to write off portions of the net deferred tax assets previously
recognized in income up to the entire amount of $7.8 million.
Substantial portions of the Company's revenues are derived from sales to
customers outside the United States. Trade sales to international customers
represented 59% and 58% of total revenues for the first quarter of fiscal 2000
and 1999, respectively. A substantial portion of the international revenues of
the Company's U.K. 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 book value of the Company's
purchased software and technology licenses may be reduced materially in the near
future and, therefore, could create an adverse impact on the Company's future
reported earnings.
The Company continually evaluates potential acquisition candidates. Such
candidates are selected based on products or markets which are complementary to
those of the Company's. Acquisitions involve a number of special risks,
including the successful combination of the companies in an efficient and timely
manner, the coordination of research and development and sales efforts, the
retention of key personnel, the integration of the acquired products, the
diversion of management's attention to assimilation of the operations and
personnel of the acquired companies, and the difficulty of presenting a unified
corporate image. The Company's operations and financial results could be
significantly affected by such an acquisition.
The Company 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. 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 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.
9
<PAGE> 12
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments were $67.4 million at December
31, 1999, representing 30% of total assets. The three month increase in cash and
short-term investments of $4.6 million was primarily a result of cash generated
by operations as well as an increase in funds received from stock option
exercises. The Company's operating activities provided cash of $8.5 million in
the first quarter of fiscal 2000, compared with $0.6 million for the same period
of fiscal 1999. Cash used for investing activities during the quarter ending
December 31, 1999 and 1998 was $3.3 million and $2.6 million, respectively. In
both fiscal 2000 and 1999, cash was used to fund purchases of property and
equipment, common stock repurchases and short-term investments. Cash used for
financing activities was $1.1 million for the first quarter of fiscal 2000
compared with $5.8 million for the first quarter of fiscal 1999. In the first
quarter of both fiscal 2000 and fiscal 1999, proceeds from the issuance of
common stock were more than offset by the Company's stock repurchases and
payments on capital lease obligations.
At December 31, 1999, the Company had available lines of credit of approximately
$15.9 million under which the Company had $0.9 million in outstanding
borrowings. The Company believes that its existing cash and short-term
investments, funds generated from operations and available borrowing
capabilities will be sufficient to meet its operating requirements for at least
the next twelve months.
The Company's first quarter ended December 31, 1999 Days Sales Outstanding (DSO)
was 42.8 days, a decrease of 14.7 days from the first quarter of fiscal 1999.
The Company is engaged in a systematic repurchase of the Company's Common Stock
for the funding of its employee stock programs. Additionally, the Company is
authorized to buy back up to 6,000,000 additional shares. As of December 31,
1999, 3,104,050 shares had been repurchased and retired under this
non-systematic program.
As of December 31, 1999, the Company had an equity investment in Rainmaker
Systems having a fair market value of $78.2 million and a cost basis of $1.3
million. During the first quarter of fiscal 2000, the Company recorded an
unrealized gain of $76.9 million related to its investment in Rainmaker Systems,
which completed its initial public offering during the quarter. The fair market
value of this investment could fluctuate substantially due to changing stock
prices. In connection with Rainmaker's initial public offering, the Company has
agreed not to sell or otherwise dispose of any of its shares until May 15, 2000
in compliance with securities laws. This investment is available-for-sale, and
the Company may choose to sell a portion of this investment position in the
future.
10
<PAGE> 13
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule.
ITEMS 1, 2, 3, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
11
<PAGE> 14
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
The Santa Cruz Operation, Inc.
Date: February 9, 2000 By: /s/ Douglas L. Michels
--------------------------------------
Douglas L. Michels
President, Chief Executive Officer
By: /s/ Jenny Twaddle
--------------------------------------
Jenny Twaddle
Corporate Controller and Acting
Chief Financial Officer
12
<PAGE> 15
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibits
<S> <C>
27 Financial Data Schedule.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 37,867
<SECURITIES> 29,547
<RECEIVABLES> 32,753
<ALLOWANCES> (7,230)
<INVENTORY> 548
<CURRENT-ASSETS> 179,385
<PP&E> 58,163
<DEPRECIATION> (46,091)
<TOTAL-ASSETS> 227,679
<CURRENT-LIABILITIES> 83,968
<BONDS> 0
0
0
<COMMON> 111,039
<OTHER-SE> 22,876
<TOTAL-LIABILITY-AND-EQUITY> 227,679
<SALES> 49,438
<TOTAL-REVENUES> 53,653
<CGS> 6,692
<TOTAL-COSTS> 11,832
<OTHER-EXPENSES> 39,713
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 600
<INCOME-PRETAX> 3,545
<INCOME-TAX> 670
<INCOME-CONTINUING> 2,875
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,875
<EPS-BASIC> 0.08
<EPS-DILUTED> 0.07
</TABLE>
