<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D)
-
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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 THIS CHARTER)
CALIFORNIA 94-2549086
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 ENCINAL STREET, SANTA CRUZ, CALIFORNIA 95060
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (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 March
31, 2000 was 35,811,143.
================================================================================
<PAGE>
THE SANTA CRUZ OPERATION, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ITEM 1. FINANCIAL STATEMENTS PAGE
----
<S> <C>
A) CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2000 AND 1999 . . . . . . .1
B) CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2000 AND SEPTEMBER 30, 1999 . . . . . . . . . . . . . .2
C) CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 2000 AND 1999 . . . . . . . . . . . 3
D) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . .7
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK . . . . . 11
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . . . . .12
ITEM 6. EXHIBITS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
</TABLE>
<PAGE>
Part I. Financial Information
Item I. Financial Statements
THE SANTA CRUZ OPERATION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except earnings per share)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
-------------------- --------------------
2000 1999 2000 1999
(UNAUDITED) (UNAUDITED)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET REVENUES $ 35,542 $ 55,738 $ 89,195 $108,444
COST OF REVENUES 10,257 12,744 22,089 24,824
- ------------------------------------------------------------------------------------------------------
GROSS MARGIN 25,285 42,994 67,106 83,620
- ------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Research and development 11,632 10,678 22,210 20,858
Sales and marketing 23,723 23,993 49,022 47,325
General and administrative 4,672 4,688 8,508 8,484
Restructuring charges 5,887 - 5,887 -
- ------------------------------------------------------------------------------------------------------
Total operating expenses 45,914 39,359 85,627 76,667
- ------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) (20,629) 3,635 (18,521) 6,953
OTHER INCOME (EXPENSE):
Interest income, net 592 498 1,192 1,074
Other income (expense), net 908 446 1,745 436
- ------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (19,129) 4,579 (15,584) 8,463
Income taxes 680 735 1,350 1,515
- ------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) (19,809) 3,844 (16,934) 6,948
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX
Unrealized gain (loss) on available-for-sale
equity securities (34,198) - 21,665 -
Foreign currency translation adjustment (79) (597) (78) (853)
- ------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS) $(54,086) $ 3,247 $ 4,653 $ 6,095
- ------------------------------------------------------------------------------------------------------
EARNINGS (LOSS) PER SHARE:
Basic $ (0.56) $ 0.11 $ (0.48) $ 0.20
Diluted $ (0.56) $ 0.11 $ (0.48) $ 0.20
- ------------------------------------------------------------------------------------------------------
SHARES USED IN EARNINGS (LOSS) PER SHARE CALCULATION:
Basic 35,596 34,339 35,154 34,550
Diluted 35,596 35,394 35,154 35,294
- ------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
THE SANTA CRUZ OPERATION, INC.
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
CONSOLIDATED BALANCE SHEETS 2000 1999
(In thousands) (UNAUDITED)
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 20,295 $ 33,683
Short-term investments 28,042 29,161
Receivables, net 25,652 32,309
Available-for-sale equity securities 30,625 -
Deferred tax assets 1,989 1,202
Other current assets 5,874 6,310
- ----------------------------------------------------------------------------------------------
Total current assets 112,477 102,665
- ----------------------------------------------------------------------------------------------
Property and equipment, net 11,705 12,234
Purchased software and technology licenses, net 8,112 10,431
Long-term deferred tax assets 12,365 6,623
Other assets 6,984 7,331
- ----------------------------------------------------------------------------------------------
TOTAL ASSETS $ 151,643 $ 139,284
- ----------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 7,304 $ 7,482
Royalties payable 4,431 7,217
Income taxes payable 3,229 1,983
Deferred income taxes 11,600 -
Accrued expenses and other current liabilities 30,779 32,314
Deferred revenues 9,905 8,856
- ----------------------------------------------------------------------------------------------
Total current liabilities 67,248 57,852
- ----------------------------------------------------------------------------------------------
Long-term lease obligations 1,227 2,332
Long-term deferred revenues 1,546 2,571
Other long-term liabilities 5,600 6,191
- ----------------------------------------------------------------------------------------------
Total long-term liabilities 8,373 11,094
- ----------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common stock, no par value, net, authorized 100,000 shares
Issued and outstanding 35,811 and 34,346 shares 107,232 106,201
Accumulated other comprehensive income 21,995 408
Accumulated deficit (53,205) (36,271)
- ----------------------------------------------------------------------------------------------
Total shareholders' equity 76,022 70,338
- ----------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 151,643 $ 139,284
- ----------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
THE SANTA CRUZ OPERATION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
SIX MONTHS ENDED
MARCH 31,
- ------------------
2000 1999
(UNAUDITED)
- ----------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (16,934) $ 6,948
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities -
Depreciation and amortization 6,124 6,392
Exchange (gain) loss (190) 8
Non-cash restructuring charge 5,887 --
Changes in operating assets and liabilities -
Receivables 6,628 (5,676)
Other current assets 351 2,308
Other assets 1,328 1,335
Royalties payable (2,787) 2,012
Trade accounts payable (152) 364
Income taxes payable 1,295 965
Accrued expenses and other current liabilities (6,743) 2,413
Deferred revenues 9 (3,086)
- ----------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities (5,184) 13,983
- ----------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,526) (2,921)
Purchases of software and technology licenses (433) (1,875)
Sales of short-term investments 11,725 18,173
Purchases of short-term investments (10,606) (15,673)
Investments in other assets (2,869) (62)
- ----------------------------------------------------------------------------------------
Net cash used for investing activities (4,709) (2,358)
- ----------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital leases (1,580) (1,755)
Net proceeds from sale of common stock 11,331 1,320
Repurchases of common stock (12,786) (6,335)
Other long-term liabilities (493) (227)
- ----------------------------------------------------------------------------------------
Net cash used for financing activities (3,528) (6,997)
- ----------------------------------------------------------------------------------------
Effects of exchange rate changes on cash and cash equivalents 33 (765)
- ----------------------------------------------------------------------------------------
Change in cash and cash equivalents (13,388) 3,863
Cash and cash equivalents at beginning of period 33,683 23,758
- ----------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 20,295 $ 27,621
- ----------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid-
Income taxes $ 5 $ 668
Interest 135 249
Non-cash financing and investing activities-
Unrealized gain on available-for-sale equity securities $ 29,124 $ --
Assets acquired under capital leases 20 --
- ---------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
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. RESTRUCTURING CHARGE
During the second quarter of fiscal 2000, the Company announced and completed a
restructuring plan, which resulted in a one-time charge of $5.9 million. The
charge included a reduction in headcount of approximately 70 employees,
write-offs of certain acquired technologies, write-offs of certain fixed assets,
and elimination of non-essential facilities. Of the $5.9 million, $4.6 million
related to cash expenditures and $1.3 million related to non-cash charges. The
Company has determined that it will restructure its business operations into
three independent divisions, each with a separate management team and dedicated
development, marketing and sales organizations - the Server Software 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 is effective April 1, 2000. The Company
believes that as a result of creating these independent, focused organizations
the Company will be better able to control and measure the success of these
businesses. The restructuring charge related to cash expenditures included
$3.6 million for severance costs and $1.0 million for facilities costs. The
majority of the reduction in force was in product development for the Server
Software Division. The Company anticipates that the majority of the payments
will be made by the end of fiscal 2000.
The restructuring charge payable can be summarized as follows:
<TABLE>
<CAPTION>
Reduction
(In thousands) in Force Facilities Technology Other Total
- ----------------------------- ---------- ----------- ----------- ------ ------
<S> <C> <C> <C> <C> <C>
Restructuring charge accrued $ 3,574 $ 1,052 $ 667 $ 594 $5,887
========== =========== =========== ====== ======
</TABLE>
3. SEGMENT INFORMATION
For the quarter ended March 31, 2000, the Company reviewed performance on the
basis of geographical segments. The Company used 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. Beginning April 1, 2000, the Company
will review performance based on its three divisions - the Server Software
Division, the Tarantella Division and the Professional Services Division.
4
<PAGE>
The following table presents information about reportable segments for the three
month and six month periods ended March 31, 2000 and 1999 (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
2000 1999 2000 1999
------- -------- -------- ---------
(unaudited)
<S> <C> <C> <C> <C>
Net Revenues:
United States $17,386 $24,347 $ 36,590 $ 46,565
Canada/Latin America 1,373 3,211 4,126 6,372
EMEIA 14,339 23,336 40,101 45,683
Asia Pacific 2,272 4,895 5,419 9,691
Corporate Adjustments 172 (51) 2,959 133
------- -------- -------- ---------
Total net revenues $35,542 $55,738 $ 89,195 $108,444
======= ======== ======== =========
Gross Margin:
United States $11,332 $19,136 $ 24,309 $ 35,761
Canada/Latin America 1,008 1,071 3,002 3,224
EMEIA 10,889 18,718 32,371 36,628
Asia Pacific 1,885 4,120 4,466 8,008
Corporate Adjustments 171 (51) 2,958 (1)
------- -------- -------- ---------
Total gross margin $25,285 $42,994 $ 67,106 $ 83,620
======= ======== ======== =========
</TABLE>
4. 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
stock options for all periods. Basic and diluted earnings per share were
calculated as follows during the three month and six month periods ended March
31, 2000 and 1999:
<TABLE>
<CAPTION>
March 31, March 31,
2000 1999 2000 1999
---------- ---------- --------- ----------
(unaudited)
<S> <C> <C> <C> <C>
Basic:
Weighted average shares 35,596 34,339 35,154 34,550
========= ========== ========= ========
Net income (loss) ($19,809) $ 3,844 ($16,934) $6,948
========= ========== ========= ========
Earnings (loss) per share ($0.56) $ 0.11 ($0.48) $0.20
========= ========== ========= ========
Diluted:
Weighted average shares 35,596 34,339 35,154 34,550
Common equivalent shares from
stock options and warrants 0 1,055 0 744
--------- ---------- --------- -------
Shares used in per share calculation 35,596 35,394 35,154 35,294
========= ========== ========= =======
Net income (loss) ($19,809) $ 3,844 ($16,934) $ 6,948
========= ========== ========= =======
Earnings (loss) per share ($0.56) $ 0.11 ($0.48) $ 0.20
========== ========== ========= =======
Options outstanding at 3/31/00 and at 3/31/99
not included in computation of diluted
EPS because the exercise price was greater
than the average market price. 495 2,328 519 5,925
Options outstanding at 3/31/00 and at 3/31/99
not included in computation of diluted
EPS because their inclusion would have
an anti-dilutive effect. 10,462 ---- 10,438 ----
</TABLE>
5
<PAGE>
5. COMPREHENSIVE INCOME
The components of other comprehensive income for the three and six months ended
March 31, 2000 and 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
2000 1999 2000 1999
- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C>
Net income (loss) ($19,809) $3,844 ($16,934 $6,948
Other comprehensive income (loss):
Foreign currency translation adjustment (79) (597) (78) (853)
Unrealized gain (loss) on equity security (47,730) -- 29,124 --
Gross tax benefit (provision) on 19,011 -- (11,600) --
unrealized loss/gain
Reversal (provision) of deferred
tax valuation allowance (5,479) -- 4,141 --
--------- ------- ---------- -------
Total comprehensive income (loss) ($54,086) $3,247 $ 4,653 $6,095
========= ======= ========== =======
</TABLE>
6. RECENT ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation - an interpretation of APB Opinion No. 25. This interpretation has
provisions that are effective on staggered dates, some of which began after
December 15, 1998 and others that become effective after June 30, 2000. The
adoption of this interpretation did not and will not have a material impact on
the Company's financial statements.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 (SAB 101), Revenue Recognition in Financial Statements. SAB
101 provides guidance for revenue recognition under certain circumstances.
Management does not believe the adoption of SAB 101 will have a material impact
on the Company's financial statements.
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. The adoption of SOP 98-9 did not have 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. In
June 1999, the FASB issued Statement of Financial Accounting Standards No. 137
(No. 137), Accounting for Derivative Instruments - Deferral of the Effective
Date of SFAS Statement No. 133. SFAS 137 defers the effective date of SFAS 133
until June 15, 2000. Management does not believe this will have a material
effect on the Company's financial statements. The Company will adopt SFAS 133 as
required for its first quarterly filing of fiscal year 2001.
6
<PAGE>
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 March 31, 2000 decreased 36% to $35.5
million from $55.7 million in the same period in fiscal 1999. For the six
months ended March 31, 2000, net revenues decreased 18% to $89.2 million from
$108.4 million for the six months ended March 31, 1999. The decline in revenue
performance was worldwide across most geographies and is attributable to
continued customer delays due to Year 2000 issues as well as other market
factors. No one customer accounted for more than 10% of net revenues in the
second quarter ended March 31, 2000 or in the same period in the prior year.
International revenues continue to represent a significant portion of total net
revenues comprising 51% of the revenues for the second fiscal quarter of 2000
and 56% for the same quarter in fiscal 1999.
COSTS AND EXPENSES
Cost of revenues as a percentage of net revenues increased to 29% in the second
quarter of fiscal 2000 from 23% in the same period of 1999. For the six month
periods ended March 31, 2000 and 1999, cost of revenues represented 25% and 23%
of net revenues, respectively. A significant portion of cost of goods sold is
fixed and the decrease in revenue seriously impacted gross margin. These fixed
costs include technology and overhead costs.
Research and development expenses increased 9% to $11.6 million in the second
quarter of fiscal 2000 from $10.7 million in the comparable quarter of fiscal
1999, or 33% and 19% of net revenues, respectively. For the six months ended
March 31, 2000, research and development expenses increased 6% to $22.2 million
compared to $20.9 million for the same period in 1999. This represented 25% of
net revenues in fiscal 2000 and 19% in fiscal 1999. The increase in spending
was due to higher labor costs as well as one-time technology charges.
Sales and marketing expenses decreased 1% to $23.7 million in the second quarter
of fiscal 2000 from $24.0 million for the comparable quarter of the prior year.
Sales and marketing expenses represented 67% of net revenues in the second
quarter of fiscal 2000 and 43% in 1999. For the six months ended March 31,
2000, sales and marketing expenses increased to $49.0 million (55% of net
revenues) from $47.3 million (44% of net revenues) for the same period of the
prior fiscal year. Increased expenses due to higher staffing levels was offset
by reductions in sales program costs that vary directly with sales, including
commissions and cooperative advertising.
General and administrative expenses remained constant at $4.7 million for the
second quarter of fiscal 2000 and 1999, representing 13% and 8% of net revenues,
respectively. For the six months ended March 31, 2000, general and
administrative expenses held constant at $8.5 million, or 10% of net revenues,
compared to $8.5 million, or 8% of net revenues, for the same period in 1999.
Non-recurring charges of $5.9 million incurred in the second quarter of fiscal
2000 related to a worldwide restructuring, representing 17% of net revenues for
the quarter ending March 31, 2000 and 7% of net revenues for the six month
period ending March 31, 2000. The charge includes a reduction in headcount of
approximately 70 employees, write-offs of certain acquired technologies,
write-offs of certain fixed assets, and elimination of non-essential facilities.
Of the $5.9 million, $4.6 million related to cash expenditures and $1.3 million
related to non-cash charges. The Company has determined that it will
restructure its business operations into three independent divisions, each with
7
<PAGE>
a separate management team and dedicated development, marketing and sales
organizations - the Server Software 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 is effective April 1, 2000. The Company believes that as a result
of creating these independent, focused organizations the Company will be better
able to control and measure the success of these businesses. The restructuring
charge related to cash expenditures included $3.6 million for severance costs
and $1.0 million for facilities costs. The majority of the reduction in force
was in product development for the Server Software Division. The Company
anticipates that the majority of the payments will be made by the end of fiscal
2000.
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 second quarter of fiscal 2000, net interest income
was $0.6 million, compared to $0.5 million for the same quarter of fiscal 1999.
For the six months ended March 31, 2000, net interest income was $1.2 million as
compared to $1.1 million for the same period in 1999. Other income was $0.9
million in the second quarter of fiscal 2000, compared to $0.4 million for the
same period of fiscal 1999. For the six months ended March 31, 2000, other
income was $1.7 million as compared to $0.4 million for the same period in 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 second quarter of fiscal
2000 compared to $0.7 million for the same period of the prior fiscal year, and
$1.4 million for the six months ended March 31, 2000, compared to $1.5 million
for the corresponding fiscal 1999 period. The tax provisions for the second
quarter and six month period of the current fiscal year reflects foreign taxes
payable. The tax provisions for the second quarter and six month periods of
fiscal 1999 reflects foreign taxes payable and the realization of certain U.S.
deferred tax assets for which a valuation allowance was previously established.
Net loss for the second quarter of fiscal 2000 was $19.8 million compared to net
income of $3.8 million for the same quarter in fiscal 1999. For the six months
ended March 31, 2000, net loss was $16.9 million compared to net income of $6.9
million in the same period in 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 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.
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.
8
<PAGE>
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.
Substantial portions of the Company's revenues are derived from sales to
customers outside the United States. Trade sales to international customers
represented 51% and 56% of total revenues for the second 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 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.
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
9
<PAGE>
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 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.
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.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments were $48.3 million at March
31, 2000, representing 32% of total assets. The six month decrease in cash and
short-term investments of $14.5 million was primarily attributable to the
decrease in revenue and a decrease in sales linearity, resulting in lower cash
collections. The Company's operating activities used cash of $5.2 million for
the first six months of fiscal 2000, compared to $14.0 million provided by
operating activities for fiscal 1999. Cash used for investing activities during
the six month period was $4.7 million in fiscal 2000 and $2.4 million in fiscal
1999. 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 $3.5 million for the first six months of fiscal
2000 compared with $7.0 million for the same period in fiscal 1999. In both
fiscal 2000 and 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 March 31, 2000, the Company had available lines of credit of approximately
$15.9 million under which the Company had $0.4 million in outstanding
borrowings. The Company believes that its existing cash and short-term
investments, funds generated from operations and available borrowing
capabilities will be sufficient to meet its operating requirements through at
least the end of the fiscal year.
The Company's second quarter ended March 31, 2000 Days Sales Outstanding (DSO)
was 65.0 days, an increase of 22.2 days from the first quarter of fiscal 2000.
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 under a non-systematic
repurchase program. As of March 31, 2000, 3,104,050 shares had been repurchased
and retired under this non-systematic program.
10
<PAGE>
As of March 31, 2000, the Company had an equity investment in Rainmaker Systems,
Inc. having a fair market value of $29.6 million and a cost basis of $1.3
million. During the first quarter of fiscal 2000, the Company recorded an
unrealized gain related to its investment in Rainmaker Systems, which completed
its initial public offering during that 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation - an interpretation of APB Opinion No. 25. This interpretation has
provisions that are effective on staggered dates, some of which began after
December 15, 1998 and others that become effective after June 30, 2000. The
adoption of this interpretation did not and will not have a material impact on
the Company's financial statements.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 (SAB 101), Revenue Recognition in Financial Statements. SAB
101 provides guidance for revenue recognition under certain circumstances.
Management does not believe SAB 101 will have a material impact on the Company's
financial statements.
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. The adoption of SOP 98-9 did not have 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. In
June 1999, the FASB issued Statement of Financial Accounting Standards No. 137
(No. 137), Accounting for Derivative Instruments - Deferral of the Effective
Date of SFAS Statement No. 133. SFAS 137 defers the effective date of SFAS 133
until June 15, 2000. Management does not believe this will have a material
effect on the Company's financial statements. The Company will adopt SFAS 133 as
required for its first quarterly filing of fiscal year 2001.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information called for by this item is provided under the paragraph
beginning with the sentence "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," under the caption "Factors That May Affect Future Results" under
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations.
11
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Santa Cruz Operation, Inc. held an annual meeting of shareholders on
February 22, 2000. The following matters were approved by the shareholders by
the votes indicated:
<TABLE>
<CAPTION>
<S> <C> <C>
MATTER NUMBER OF SHARES
- ---------------------- ----------------
FOR WITHHELD
---------------- ---------
ELECTION OF DIRECTORS:
Ninian Eadie 25,959,996 5,441,833
Ronald Lachman 25,958,565 5,443,264
Robert M. McClure 25,956,921 5,444,908
Douglas L. Michels 25,956,751 5,445,078
Alok Mohan 25,421,681 5,980,148
R. Duff Thompson 25,956,721 5,445,108
Gilbert Williamson 25,953,739 5,448,090
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
OTHER MATTERS: FOR AGAINST ABSTAIN NO VOTE
---------- --------- ------- ----------
Amendment of the Company's 12,778,185 5,761,860 56,978 12,804,806
1994 Incentive Stock Option
Plan to increase the Plan share
reserve by 3,000,000 shares.
Amendment of the Company's 15,035,074 3,478,796 85,153 12,804,806
1993 Director Option Plan to
increase the Plan share reserve
by 250,000 shares.
Amendment of the Company's 15,536,328 2,978,865 75,930 12,810,706
1993 Employee Stock Purchase
Plan to increase the Plan share
Reserve by 750,000 shares.
Ratification of 31,331,615 42,576 27,638 -0-
PricewaterhouseCoopers, LLP
as independent certified public
accountants of the Company.
</TABLE>
ITEM 6. EXHIBITS
(a) Exhibits
27 Financial Data Schedule.
ITEMS 1, 2, 3 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
12
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
The Santa Cruz Operation, Inc.
Date: May 15, 2000 By: /s/ Douglas L. Michels
---------------------------------------
Douglas L. Michels
President, Chief Executive Officer
By: /s/ Jenny Twaddle
---------------------------------------
Jenny Twaddle
Vice President, Corporate Controller
and Acting Chief Financial Officer
13
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibits
<S> <C>
27 Financial Data Schedule.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 20,295
<SECURITIES> 28,042
<RECEIVABLES> 31,368
<ALLOWANCES> (5,716)
<INVENTORY> 596
<CURRENT-ASSETS> 95,476
<PP&E> 58,742
<DEPRECIATION> (47,037)
<TOTAL-ASSETS> 151,643
<CURRENT-LIABILITIES> 67,248
<BONDS> 0
0
0
<COMMON> 107,232
<OTHER-SE> (31,210)
<TOTAL-LIABILITY-AND-EQUITY> 151,643
<SALES> 81,250
<TOTAL-REVENUES> 89,195
<CGS> 11,659
<TOTAL-COSTS> 22,089
<OTHER-EXPENSES> 85,627
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,192
<INCOME-PRETAX> (15,584)
<INCOME-TAX> 1,350
<INCOME-CONTINUING> (16,934)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16,934)
<EPS-BASIC> (0.48)
<EPS-DILUTED> (0.48)
</TABLE>
