-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NDrf+rEQjr0DkElX3QNI2cxnYMJArHF7+wWeDdLKVPjiqbTgyksmLSqoPjgz3rB8 SXhevIKgCnWCrkaBDvr2og== 0000891618-02-000678.txt : 20020414 0000891618-02-000678.hdr.sgml : 20020414 ACCESSION NUMBER: 0000891618-02-000678 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020213 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TARANTELLA INC CENTRAL INDEX KEY: 0000851560 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 942549086 STATE OF INCORPORATION: CA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-21484 FILM NUMBER: 02542041 BUSINESS ADDRESS: STREET 1: 425 ENCINAL STREET STREET 2: PO BOX 1900 CITY: SANTA CRUZ STATE: CA ZIP: 95061 BUSINESS PHONE: 4084277172 FORMER COMPANY: FORMER CONFORMED NAME: SANTA CRUZ OPERATION INC DATE OF NAME CHANGE: 19940614 10-Q 1 f79121e10-q.txt FORM 10-Q FOR QUARTER ENDED 12/31/01 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, 2001 [ ] 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 TARANTELLA, 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) 427-7222 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, 2001 was 40,134,488. TARANTELLA, INC. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2001 TABLE OF CONTENTS PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS PAGE ---- a) CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2001 AND 2000.............3 b) CONSOLIDATED BALANCE SHEETS, AS OF DECEMBER 31, 2001 AND SEPTEMBER 30, 2001....................4 c) CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED DECEMBER 31, 2001 AND 2000.............5 d) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS .........................6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................................12 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...........19 PART II. OTHER INFORMATION SIGNATURES............................................................................21
2 Part I. Financial Information Item I. Financial Statements TARANTELLA, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
Three Months Ended December 31, ------------------------- 2001 2000 -------- -------- (Unaudited) Net revenues: Licenses $ 2,454 $ 22,861 Services 371 3,594 -------- -------- Total net revenues 2,825 26,455 -------- -------- Cost of revenues: Licenses 68 3,479 Services 250 3,602 -------- -------- Total cost of revenues 318 7,081 -------- -------- Gross margin 2,507 19,374 -------- -------- Operating expenses: Research and development 1,746 6,432 Selling, general and administrative 6,393 20,598 Restructuring charge 1,718 -- -------- -------- Total operating expenses 9,857 27,030 -------- -------- Operating loss (7,350) (7,656) -------- -------- Other income (expense): Equity losses in Caldera (4,010) -- Interest income, net 233 406 Other income (expense), net (533) 586 -------- -------- Total other income (expense) (4,310) 992 -------- -------- Loss before income taxes (11,660) (6,664) -------- -------- Provision for income taxes -- 616 -------- -------- Net loss (11,660) (7,280) Other comprehensive income (loss): Unrealized gain (loss) on available for sale securities 25 (3,876) Foreign currency translation adjustment (26) (53) -------- -------- Total other comprehensive loss (1) (3,929) -------- -------- Comprehensive loss $(11,661) $(11,209) ======== ======== Loss per share: Basic and diluted $ (0.29) $ (0.18) ======== ======== Shares used in earnings (loss) per share calculation: Basic and diluted 40,121 39,443 ======== ========
See accompanying notes to consolidated financial statements. 3 TARANTELLA, INC. CONSOLIDATED BALANCE SHEETS
December 31, September 30, 2001 2001 (In thousands) ----------- ------------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 8,941 $ 12,100 Short-term investments -- 2,000 Receivables, net of allowance for doubtful accounts of $2.7 million and $2.3 million, respectively 2,436 4,098 Available for sale equity securities 126 101 Note receivable from Caldera 3,734 1,846 Other receivables 1,275 1,658 Prepaids and other current assets 511 1,163 --------- --------- Total current assets 17,023 22,966 --------- --------- Property and equipment, net 1,763 2,232 Long-term portion of note receivable from Caldera 3,550 5,260 Equity investment in Caldera -- 4,010 Other assets 1,087 1,123 --------- --------- Total assets $ 23,423 $ 35,591 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Trade accounts payable $ 539 $ 802 Royalties payable 454 733 Income taxes payable 298 374 Accrued restructuring charges 1,013 344 Accrued expenses and other current liabilities 8,187 9,506 Deferred revenues 1,299 1,185 --------- --------- Total current liabilities 11,790 12,944 --------- --------- Long-term lease obligations -- 2 Long-term deferred revenues 68 91 Other long-term liabilities 1,835 1,760 --------- --------- Total long-term liabilities 1,903 1,853 --------- --------- Commitments and contingencies Shareholders' equity: Preferred stock, authorized 20,000 shares; No shares issued and outstanding at December 31, 2001 and September 30, 2001, respectively -- -- Common stock, no par value, authorized 100,000 shares; Issued and outstanding 40,134 and 40,117 shares at December 31, 2001 and September 30, 2001, respectively 120,516 119,919 Accumulated other comprehensive income (167) (166) Accumulated deficit (110,619) (98,959) --------- --------- Total shareholders' equity 9,730 20,794 --------- --------- Total liabilities and shareholders' equity $ 23,423 $ 35,591 ========= =========
See accompanying notes to consolidated financial statements. 4 TARANTELLA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended December 31, ------------------------- (In thousands) 2001 2000 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $(11,660) $ (7,280) Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities - Depreciation and amortization 237 2,432 Foreign currency exchange (gain) loss (6) (41) Gain on sale of marketable security (267) (617) Loss on disposal of property and equipment 217 -- Equity losses in Caldera 4,010 -- Impairment of investments 350 -- Warrant and stock compensation expense 912 -- Changes in operating assets and liabilities - Receivables 1,288 2,112 Other current assets 903 (1,695) Other assets (117) 75 Trade accounts payable (263) (1,317) Royalties payable (279) (2,163) Income taxes payable (76) 239 Accrued restructuring expenses 669 (3,061) Accrued expenses and other current liabilities (1,319) 12 Deferred revenues 91 (900) Other long-term liabilities -- (4) -------- -------- Net cash provided by (used for) operating activities (5,310) (12,208) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of short-term investments -- (33) Sales of short-term investments and marketable securities 2,157 2,500 Purchases of property and equipment (5) (191) Purchases of software and technology licenses -- (198) Changes in other assets -- (145) -------- -------- Net cash provided by (used for) investing activities 2,152 1,933 -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments on capital lease obligations (2) (585) Net proceeds from issuance of common stock 2 7 -------- -------- Net cash provided by (used for) financing activities -- (578) -------- -------- Effects of exchange rate changes on cash and cash equivalents (1) (17) -------- -------- Change in cash and cash equivalents (3,159) (10,870) Cash and cash equivalents at beginning of period 12,100 20,879 -------- -------- Cash and cash equivalents at end of period $ 8,941 $ 10,009 ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid - Income taxes $ 71 $ 383 Interest 8 55 Non-cash financing and investing activities - Unrealized gain (loss) on available-for-sale equity securities 25 (3,876) Product sale exchanged for equity investment $ 375 $ --
See accompanying notes to consolidated financial statements. 5 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 include all material adjustments (consisting of normal recurring adjustments) which the Company considers necessary for a fair presentation of the financial condition and results of operations as of and for the interim period presented. The financial statements include the accounts of the Company and its wholly owned subsidiaries after all material intercompany balances and transactions have been eliminated. These consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto included in the Company's 2001 Annual Report on form 10-K. The consolidated interim results presented are not necessarily indicative of results to be expected for a full year. The September 30, 2001 balance sheet was derived from audited financial statements, and is included for comparative purposes. Certain reclassifications have been made for consistent presentation. The Company has restated its consolidated balance sheets and statements of operations for each of the three-month periods ended December 31, 2000 and March 31, 2001 to reflect a sale and exchange of investments held by the company and to account for derivatives held under Statement of Financial Accounting Standard No. 133 which was effective for the Company on October 1, 2000. Accordingly, the results of operations for the three-month period ended December 31, 2001 included herein reflect the effect of such restatements. 2. TRANSACTION WITH CALDERA On May 4, 2001, the Company consummated the sale of its Server Software and Professional Services Divisions to Caldera Systems, Inc. Under the terms of the transaction, Caldera Systems, Inc. acquired the assets of the server and professional services groups. A new company, Caldera International, was formed which combined the assets acquired from the Company with the assets of Caldera Systems. Upon the completion of the sale the Company is continuing to operate its Tarantella business, and accordingly, changed its corporate name to Tarantella, Inc. and NASDAQ trading symbol to TTLA to reflect the new corporate name. As consideration for the transaction, the Company received 16 million common stock shares of Caldera International (representing approximately 28.2% of Caldera International), $23 million in cash (of which $7 million was received on January 26, 2001) and a non-interest bearing promissory note in the amount of $8 million that will be received in quarterly installments of $2 million beginning the fifth quarter after the combination is completed. In addition, if the OpenServer line of business of the server and professional services groups generates revenues in excess of specified thresholds during the three-year period following the completion of the combination the Company will have earn-out rights entitling it to receive 45% of these excess revenues. The transaction was treated as a disposal of server and professional services groups and a gain of $53,267,000 was recorded upon completion of the transaction. The Company accounts for its investment in Caldera International using the equity method of accounting. For the first fiscal quarter of 2002, the Company's net loss included equity losses of $4.0 million for its share of Caldera International losses. In the first fiscal quarter of 2002,the Company sold 320,000 shares of Caldera International stock, recognized proceeds of $266,860, and received cash of $157,273. Subsequently, in the second fiscal quarter of 2002, the Company sold 564,066 shares of Caldera International stock and has received proceeds of $527,994. Accordingly, the Company now owns 15,157,600 shares of Caldera International common stock. Caldera's stockholders' equity at it's year ended October 31, 2001 was $34.6 million of which Tarantella's ownership share, represented approximately 27.9%, or a book value of $9.5 million in Caldera. If Caldera's operations decline to reduce the stockholders' equity to a deficit balance, Tarantella may be required to write down the value of any uncollected note receivable from Caldera, which was valued at $7.3 million as of December 31, 2001. 3. ACCRUED RESTRUCTURING CHARGE FISCAL 2002 During the first quarter of fiscal 2002, the Company announced and completed a restructuring plan, which resulted in a charge of $1.7 million. The Company has reduced its spending levels to align its operating expenses with the Company's lower than expected revenues. The restructuring included a reduction in staffing of 52 employees, a reserve for unused facilities at the Company's corporate headquarters, and costs associated with closing several foreign offices. 6 A severance charge of $0.9 million includes the elimination of 19 positions in the United States, 23 positions in the United Kingdom, and 10 positions in Japan. The reductions in force affected the product development, support, sales, marketing and general and administrative functions of the Company. As of December 31, 2001, 51 positions had been eliminated. A facilities charge of $0.7 million relates to space the Company has vacated. The Company anticipates that it will sub-lease the space by December 31, 2002. In addition, a charge was taken for expenses associated with office closures in Japan and Brazil. The non-cash charge of $44,571 relates to fixed asset disposals for assets retired in Japan as this subsidiary will be closed. The Company expects to complete substantially all of the cost reduction actions initiated in the first quarter of fiscal year 2002 and in the fourth quarter of fiscal 2001 during the remainder of fiscal year 2002. The Company cannot assure that its current estimates of the costs associated with these restructuring actions will not change during the implementation period. FISCAL 2002 FIRST QUARTER RESTRUCTURING ACCRUAL
Reduction Disposal of (In Thousands) in Force Facilities Fixed Assets Total --------- ---------- ------------ ------- Restructuring charge accrued $ 856 $ 736 $ 44 $ 1,636 Payments/utilization of the accrual (772) (31) -- (803) ------- ------- ------- ------- Accrual at December 31, 2001 84 705 44 833 ------- ------- ------- -------
FISCAL 2001 During the second quarter of fiscal 2001, the Company announced and completed a restructuring plan, which resulted in a charge of $1.6 million, which when taken with an adjustment to a previously established restructuring reserve, resulted in the net charge of $1.1 million. The restructuring charge is related to the Tarantella division and included a reduction in personnel of 28 employees and a reserve for unused facilities. The entire $1.6 million relates to cash expenditures. The severance charge of $1.5 million included the elimination of 16 positions in the United States, 4 positions in the United Kingdom, and 8 positions in various other geographies. The reduction in force affected the sales, marketing and general and administrative functions of the Company. As of September 30, 2001, all 28 positions have been eliminated and there are no remaining cash expenditures. The Company anticipates that the sub-lease contemplated in the restructuring plan would be completed by September 30, 2001, however, the space remained vacant as of the end of the first quarter of fiscal 2002. As the Company vacated additional space within its Santa Cruz, California office in the first quarter of fiscal 2002, an additional charge was recorded for the estimated payments on the lease for an additional 12 months. The fiscal 2001 second quarter restructuring charge is summarized as follows: 7 FISCAL 2001 SECOND QUARTER RESTRUCTURING ACCRUAL
Reduction (In Thousands) in Force Facilities Total --------- ---------- ------- Restructuring charge accrued $ 1,499 $ 64 $ 1,563 Payments/utilization of the accrual (885) -- (885) ------- ------- ------- Accrual at March 31, 2001 614 64 678 Payments/utilization of the accrual (484) -- (484) ------- ------- ------- Accruals at June 30, 2001 130 64 194 Payments/utilization of the accrual (91) (24) (115) Provision Adjustment (39) -- (39) ------- ------- ------- Accruals at September 30, 2001 -- 40 40 Payments/utilization of the accrual -- (40) (40) Provision Adjustment -- 81 81 ------- ------- ------- Accruals at December 31, 2001 $ -- $ 81 $ 81 ------- ------- -------
During the fourth quarter of fiscal 2001, the Company announced and completed a restructuring plan, which resulted in a charge of $0.5 million. The restructuring charge included a reduction in personnel of 10 employees and a planned elimination of offices in Singapore and Australia. The entire $0.5 million relates to cash expenditures. The severance charges of $0.4 million include the elimination of 4 positions in the United States and 6 positions in the United Kingdom. The reductions in force affect the sales, marketing and general and administrative functions of the Company. As of September 30, 2001, all 10 positions were eliminated and all cash payments had been made. The Company in still in the process of closing the offices in Singapore and Australia so there is a remaining reserve of $99,000. The fiscal 2001 fourth quarter restructuring charge is summarized as follows:
Reduction (In Thousands) in Force Facilities Total --------- ---------- ------- Restructuring charge accrued $ 402 $ 102 $ 504 Payments/utilization of the accrual (200) -- (200) ----- ----- ----- Accrual at September 30, 2001 202 102 304 Payments/utilization of the accrual (202) (3) (205) ----- ----- ----- Accrual at December 31, 2001 $ -- $ 99 $ 99 ----- ----- -----
4. SEGMENT INFORMATION Beginning on May 4, 2001, with the sale of the Server Software and Professional Services divisions, the Company discontinued managing the business by division or geographic segment. Prior to May 4,2001, the Company reviewed performance on the basis of its three divisions - the Server Software Division, the Tarantella 8 Division, and the Professional Services Division. Accordingly, the Company operates in one reportable segment, Tarantella. The following table presents information on revenue and long-lived assets by geography. Revenue is allocated based on the location from which the sale is satisfied and long-lived asset information is based on the physical location of the asset. The significant reduction of revenues and long-lived assets is due to the sale of the Server and Professional Services divisions to Caldera International.
Three Months Ended December 31, -------------------------- 2001 2000 ------- ------- (In thousands) Net revenues: United States ...................... $ 1,346 $12,270 Canada and Latin America ........... 223 2,047 EMEIA (1) .......................... 960 9,780 Asia Pacific ....................... 243 2,091 Corporate adjustments ............. 53 267 ------- ------- Total net revenues ............ $ 2,825 $26,455 ======= =======
December 31, September 30, 2001 2001 ------------ ------------ (In thousands) Long-lived assets: United States ........................ $ 5,711 $11,853 Canada and Latin America ............. 13 13 EMEIA (1) ............................ 591 663 Asia Pacific ......................... 85 97 Corporate adjustments ................ -- -- ------- ------- Total long-lived assets ......... $ 6,400 $12,626 ======= =======
(1) Europe, Middle East, India and Africa 5. INVESTMENTS AVAILABLE FOR SALE EQUITY SECURITIES. At December 31, 2001, the Company held 505,767 shares of Rainmaker's 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. Unrealized losses on available for sale investments as of December 31, 2001 are as follows (in thousands):
Unrealized FMV Cost Impairment Loss ---- ------ ---------- ---------- Rainmaker 126 171 -- (45) Ebiz -- 3,139 (3,319) -- ---- ------ ------- ---- Total Stock 126 3,310 3,139 (45) ---- ------ ------- ---- ---- ------ ------- ---- Ebiz warrants -- 176 (176) -- ---- ------ ------- ---- Total Available for Sale Securities $126 $3,486 $(3,315) $(45) ==== ====== ======= ====
9 Rainmaker's common stock is traded on the NASDAQ National Market under the symbol "RMKR." The Company no longer has the right to appoint a member to the Board of Directors. Ebiz's common stock is traded OTC under the symbol "EBIZ". The Company has a right to appoint one member to the board of directors, which has a total of 4 members. During the quarter ended June 30, 2001, the Company determined the decline in the fair value of its investment was other than temporary and thus required a permanent write-down of the stock held. In addition, Ebiz filed for Chapter 11 bankruptcy and thus the Company determined the investment held was impaired and no portion of the asset was recoverable. 6. EARNINGS PER SHARE (EPS) DISCLOSURES Basic and diluted earnings per share were calculated as follows during the three months ended December 31, 2001 and 2000 (in thousands):
Three Months Ended December 31, --------------------------- (In thousands, except per share data) 2001 2000 --------- --------- Basic and diluted: Weighted average shares 40,121 39,443 -------- -------- Net income (loss) $(11,660) $ (7,280) ======== ======== Earnings (loss) per share $ (0.29) $ (0.18) ======== ======== Options and warrants outstanding at 12/31/01 and at 12/31/00 not included in computation of diluted EPS because the exercise price was greater than the average market price 10,244 11,958 Options outstanding at 12/31/01 and at 12/31/00 not included in computation of diluted EPS because their inclusion would have an anti-dilutive effect 4,318 797
7. RECENT ACCOUNTING PRONOUNCEMENTS The Company adopted Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, at the beginning of its fiscal year 2001. The standard requires the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. During the year, the Company maintained certain derivatives related to warrants held by the Company in Ebiz, Inc., and warrants issued by the Company to underwriters of a private placement completed in the prior year. The fair value of the warrants were recorded at October 1, 2000 with adjustments recorded to income based on the change in fair value as determined at the end of each period. In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations." SFAS No. 141 addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. SFAS No. 141 is applicable to business combinations beginning July 1, 2001. The adoption of this statement is not expected to have a material impact on the Company's financial position or results of operations. In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 addresses the recognition and measurement of goodwill and other intangible assets subsequent to their acquisition. SFAS No. 142 also addresses the initial recognition and measurement of intangible assets acquired outside of a business combination whether acquired individually or with a group of other assets. Goodwill and intangible assets previously recorded on the Company's consolidated financial statements will be affected by the 10 provisions of SFAS No. 142. SFAS No. 142 will be effective for the Company's fiscal year 2003. The adoption of this statement is not expected to have a material impact on the Company's financial position or results of operations. In October 2001, the FASB issued SFAS No. 144, "Accounting for Impairment of Long-Lived Assets". SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement is effective for fiscal years beginning after December 15, 2001. Tarantella is required to adopt SFAS No. 144 on October 1, 2002. The adoption of this statement in not expected to have a material impact on the Company's financial position or results of operations. In September of 2000, SFAS No. 140 was issued replacing SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". This statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities based on a financial-components approach that focuses on control. Under that approach, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. In addition, this statement requires certain disclosures regarding securitization of financial assets. This statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. The adoption of this statement did not have a material effect on the Company's consolidated financial statements. 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our Condensed Consolidated Financial Statements and Notes thereto included elsewhere in the Quarterly Report on Form 10-Q, as well as the Management's Discussion and Analysis of Financial Condition and Result of Operations included in our Annual Report on From 10-K for the fiscal year ended September 30, 2001. 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. RESULTS OF OPERATIONS NET REVENUES The Company's net revenues are derived from software licenses and fees for services. Subsequent to the sale of the Server Software and Professional Services divisions to Caldera International, meaningful analysis should include a comparison of Tarantella division revenue. Tarantella division net revenues for the three months ended December 31, 2001 were $2.8 million compared to $3.2 million for the same period in the prior year, a decline of 11%. Tarantella division license revenues of $2.4 million for the three months ended December 31, 2001 declined $0.4 million or 16% from the same period in the prior year. Tarantella division service revenues of $0.4 million for the three months ended December 31, 2001 increased $0.1 million or 48% from the same period in the prior year. The decrease was primarily related to a general reduction in information technology ("IT") investments by companies for software and services initiatives. Net revenues for the three months ended December 31, 2001 decreased 89% to $2.8 million from $26.5 million in the same period in fiscal 2001. The decline in revenue performance was worldwide across all geographies and is attributable to the sale of the Server Software and Professional Services divisions to Caldera International in the third quarter of fiscal 2001. The Company's revenues were also impacted by the general reduction in IT investments by companies for software and service initiatives. One customer accounted for 21% of the Company's net revenues during the quarter ended December 31, 2001 License revenues for the three months ended December 31, 2001 were $2.4 million compared to $22.9 million in the same quarter of fiscal 2001. This decline is attributed to fewer large project deals and other market factors and the sale of the Server Software division to Caldera International. Service revenues decreased to $0.4 million for the three months ended December 31, 2001, from $3.6 million in the same period in 2001, a decline of 90%. Service revenue was 13% of the total revenue of the first fiscal quarter of 2002, compared to 14% for the same period in the prior year. The decline in service revenues was primarily in the support area and is the result of the sale of the Server Software and Professional Services divisions to Caldera International. International revenues continue to represent a significant portion of total net revenues comprising 50% of the revenues for the first fiscal quarter of 2002 and 54% for the same period in the prior year. COSTS AND EXPENSES Cost of license revenues for the three months ended December 31, 2001 decreased by 98% to $68,000 compared to $3.5 million in the same period of fiscal 2001. The declining cost of revenues is primarily due to the fact that revenues were significantly lower due to the sale of the Server Software division to Caldera International. 12 Cost of service revenues for the three months ended December 31, 2001 decreased by 93% to $250,000 compared to $3.6 million for the same period in fiscal 2001. This decline is primarily a result of the sale of the Server Software and Professional Services divisions to Caldera International as well as reduced staffing levels in the support organization. Total cost of revenues as a percentage of net revenues decreased to 11% in the first quarter of fiscal 2002 from 27% for the same period in fiscal 2001. Cost of revenues were lower as a percentage of net revenue because the Company now sells only Tarantella products which have lower royalty expenses than the server products. Also, there was a reduction in technology amortization costs for Tarantella products because some acquired technology became fully amortized during fiscal 2001. Research and development expenses decreased 73% to $1.7 million in the first quarter of fiscal 2002 from $6.4 million in the comparable quarter of fiscal 2001, and as a percentage of net revenues were 62% and 24% , respectively. The decrease in research and development expenses can be attributed to lower labor costs driven by lower headcount as a result of planned reductions in force and the sale of the Server Software division to Caldera International. The reduction in expenses related to headcount was partially offset by a $0.2 million write-off of purchased technology in the first quarter of fiscal 2002. Selling, general and administrative expenses decreased 69% to $6.4 million in the first quarter of fiscal 2002 from $20.6 million for the comparable quarter of the prior year. Selling, general and administrative expenses as a percentage of net revenues were 226% in the first quarter of fiscal 2002 and 78% in the same period in fiscal 2001. The significant increase as a percentage of net revenues is primarily related to the previously mentioned decrease in revenue. The decrease in expenses is due to lower labor costs as a result of the sales of the Server Software and Professional Service divisions to Caldera International, combined with reductions driven by lower headcount as a result of a planned reduction in force. This decrease in expenses was partially offset by a $0.5 million stock compensation charge in the first quarter of fiscal 2002 as a result of discounted stock options issued to selected employees who took reductions to their annual compensation. Restructuring charges for the first quarter of fiscal 2002 were $1.7 million. There were no restructuring charges in the first quarter of fiscal 2001. During the first quarter of 2002, the Company announced and completed a restructuring plan, which resulted in a charge of $1.7 million. The Company reduced its spending levels to align its operating expenses with the Company's lower than expected revenues. The restructuring included a reduction in staffing of 52 employees, a reserve for unused facilities at the Companies corporate headquarters, and the costs associated with closing several foreign offices. Other income (expense) 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. Net interest income was $0.2 million for the first quarter of fiscal 2002 and $0.4 million for the same period in fiscal 2001. Other income (expense) was ($0.5) million in the first quarter in fiscal 2002, compared to $0.6 million for the same period of fiscal 2001. In the first quarter of fiscal 2002 there was an investment write off of $0.4 million due to the Company's assessment that the investment was more than temporarily impaired, and a charge of $0.2 million for warrant amortization and a $4.0 million charge of equity losses for our ownership in Caldera International. During the first quarter of fiscal 2001 income of $0.4 million was recognized to record the fair value of a warrant which was classified as a derivative under FAS No. 133. The provision for income taxes was zero for the first quarter of fiscal 2002 compared to $0.6 million for the same period in fiscal year 2001. The tax provision for the first quarter of fiscal 2001 reflects foreign taxes payable. Net loss for the first quarter of fiscal 2002 was $11.7 million compared to net loss of $7.3 million for 2001. The increase in net loss is due to the inclusion of $4.0 million of equity losses for our ownership of Caldera International. LIQUIDITY AND CAPITAL RESOURCES Cash, cash equivalents and short-term investments were $8.9 million at December 31, 2001, representing 38% of total assets. The three-month decrease in cash and short-term investments of $3.2 million was primarily attributable to the decrease in revenue resulting in lower cash collections. The Company's operating activities 13 used cash of $5.2 million for the first three months of fiscal 2002, compared to $12.2 million used for operating activities for the same period in fiscal 2001. Cash provided by investing activities during the three-month period was $2.1 million in fiscal 2002 compared to cash provided from investing of $1.9 million for the same period in fiscal 2001. There was no cash used for financing activities for the first three months of fiscal 2002 compared with $0.6 million used for the same period in fiscal 2001. The Company's first quarter ended December 31, 2001 Days Sales Outstanding (DSO) remained relatively flat at 77.2 days, an increase of 2 days from the same period of fiscal 2001. The Company incurred losses from operations of approximately $7.4 million during the first quarter of fiscal 2002 and $7.7 million during the same quarter of fiscal 2001. The Company has an accumulated deficit of $110.6 million at December 31, 2001. In the first fiscal quarter of 2002, the Company sold 320,000 shares of Caldera International stock, and recognized proceeds of $266,860, of which it received cash of $157,273. Subsequently, in the second fiscal quarter of 2002, the Company sold 564,066 shares of Caldera International stock and received proceeds of $527,994. Accordingly, the Company now owns 15,157,600 shares of Caldera International common stock, Caldera's stockholders' equity at it's year ended October 31, 2001 was $34.6 million of which Tarantella's ownership share, represented approximately 27.9%, or a book value of $9.5 million in Caldera. If Caldera's operations decline to reduce the stockholders' equity to a deficit balance, Tarantella may be required to write down the value of any uncollected note receivable from Caldera, which was valued at $7.3 million as of December 31, 2001. The Company believes that, based on its current plans, its existing cash and cash equivalents and funds generated from operations will be sufficient to meet its operating requirements for the next twelve months. Additional financing may be required thereafter, however, adequate funds may not be available when needed or may not be available on favorable terms, which could have a negative effect on its business and results of operations. FACTORS THAT MAY AFFECT FUTURE RESULTS Set forth below and elsewhere in this filing and in other documents the Company files with the SEC are risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statement in this filing. THE COMPANY'S OPERATING RESULTS MAY FLUCTUATE IN FUTURE PERIODS The results of operations for any quarter or fiscal year are not necessarily indicative of the results to be expected in future periods. The Company's operating results have in the past been, and will continue to be, subject to quarterly and annual fluctuations as a result of a number of factors, including but not limited to: - - Overall technology spending - - Changes in general economic conditions and specific market conditions in the Internet infrastructure industry - - Rapid technological changes that can adversely affect the demand for the Company's products - - Fluctuations in demand for the Company's products and services - - The public's perception of Tarantella and its products - - The long sales and implementation cycle for the Company's products - - General industry trends and the potential effects of price and product competition in the Internet infrastructure industry - - The introduction and acceptance of new technologies and products - - Reductions in sales to, or loss of, any significant customers - - The timing of orders, timing of shipments, and the ability to satisfy all contractual obligations in customer contracts - - The impact of acquired technologies and businesses - - The Company's ability to control spending and achieve targeted cost reductions - - The ability of the Company to generate cash adequate to continue operations - - The potential loss of key employees - - The Company's ability to attract and retain qualified personnel - - Adverse changes in the value of equity investments in third parties held by the Company - - The ability of the Company's customers and suppliers to obtain financing or to fund capital expenditures As a consequence, operating results for a particular future period are difficult to predict. 14 THE COMPANY IS EXPOSED TO GENERAL ECONOMIC AND MARKET CONDITIONS Any significant downturn in the Company's customers' markets, or domestic and global conditions, which result in a decline in demand for their software and services could harm the business. The terrorist attacks of September 11, 2001, the subsequent military response by the United States and future events occurring in response to, or in connection with the attacks has negatively impacted the economy in general. In particular, the negative impacts of these events have affected the software industry. This could result in customers continuing to delay or cancel orders for software. Any of these occurrences could have a significant impact on the Company's operating results, revenues and costs and may cause the market price of our common stock to decline or become more volatile. 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 COMPANY DEPENDS ON THE DEVELOPMENT AND ACCEPTANCE OF NEW PRODUCTS IN A RAPIDLY CHANGING MARKET 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, 2002. 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. THE COMPANY COMPETES IN THE HIGHLY COMPETITIVE INTERNET INFRASTRUCTURE MARKET 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. OPERATING RESULTS FOR A PARTICULAR QUARTER ARE DIFFICULT TO PREDICT 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. 15 THE COMPANY'S REVENUES MAY BE AFFECTED BY THE SEASONALITY OF REVENUES IN THE EUROPEAN AND GOVERNMENT MARKETS 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. COST OF REVENUES MAY BE AFFECTED BY CHANGES IN THE MIX OF PRODUCTS AND SERVICES 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, services costs and production costs are fixed within certain volume ranges. THE COMPANY'S OPERATIONAL RESULTS COULD BE AFFECTED BY PRICE VARIATIONS The Company's results of operations could be adversely affected if it were to lower its prices significantly. In the event the Company reduced its prices, the Company's standard terms for selected distributors provide credit for inventory ordered in the previous 180 days, such credits to be applied against future purchases. The Company, as a matter of policy, does not allow product returns for refund. Product returns are generally allowances for stock balancing and are accompanied by compensating and offsetting orders. Revenues are net of a provision for estimated future stock balancing and excess quantities above levels the Company believes are appropriate in its distribution channels. The Company monitors the quantity and mix of its product sales. THE COMPANY IS DEPENDENT UPON INFORMATION RECEIVED FROM THIRD PARTIES IN ORDER TO DETERMINE INVENTORY AND RESERVES 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. In the event information is not received timely or accurately, our ability to monitor the inventory levels will be affected and may negatively impact our business. THE COMPANY'S BUSINESS DEPENDS UPON ITS PROPRIETARY RIGHTS AND THERE IS A RISK THAT SUCH RIGHTS WILL BE INFRINGED The Company attempts to protect its software with a combination of patent, 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. PORTIONS OF THE COMPANY'S SHRINK WRAP AND/OR CLICK THROUGH LICENSES MAY NOT BE ENFORCEABLE IN CERTAIN JURISDICTIONS 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" or "click through" license (i.e., licenses included as part of the product packaging or electronic delivery). Shrink-wrap and click-through licenses, which are not negotiated with or signed by individual end-user licensees, are intended to take effect upon opening of the product package or agreeing to the terms electronically. Certain 16 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. RISKS OF CLAIMS FROM THIRD PARTIES FOR INTELLECTUAL PROPERTY INFRINGEMENT COULD ADVERSELY AFFECT THE BUSINESS 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 UPON LICENSING ADEQUATE TECHNOLOGY FROM THIRD PARTIES 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. THE COMPANY'S RESULTS OF OPERATIONS MAY BE AFFECTED BY FLUCTUATIONS IN FOREIGN CURRENCY EXCHANGE RATES Although the Company's revenues are predominantly in U.S. dollars, substantial portions of the Company's revenues are derived from sales to customers outside the United States. Trade sales to international customers represented 50%, 52% and 54% of total revenues for fiscal 2002, 2001 and 2000 respectively. The Company's revenues can 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 CARRYING AMOUNT OF PURCHASED SOFTWARE AND TECHNOLOGY LICENSES MAY BE REDUCED DUE TO THE COMPANY'S AMORTIZATION POLICY The Company's policy is to amortize purchased software and technology licenses using the straight-line method over the remaining estimated economic life of the product, or on the ratio of current revenues to total projected product revenues, whichever is greater. Due to competitive pressures, it is reasonably possible that those estimates of anticipated future gross revenues, the remaining estimated economic life of the product, or both will be reduced significantly in the near future. As a result, the carrying amount of the Company's purchased software and technology licenses may be reduced materially in the near future and, therefore, could create an adverse impact on the Company's future reported earnings. THE COMPANY MAY MAKE FUTURE ACQUISITIONS WHERE ADVISABLE AND ACQUISITIONS INVOLVE NUMEROUS RISKS 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 17 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 FLUCTUATIONS IN THE MARKET VALUES OF ITS PORTFOLIO OF INVESTMENTS 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 increased significantly after the completion of the transaction with Caldera. The Company is exposed to fluctuations in the market values of 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 publicly traded companies, the values of which are subject to market price volatility. The Company has also invested in privately held companies, many of which can still be considered in the startup or development stages. These investments are inherently a higher risk as the market for the technologies or products are typically in the early stages of development 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 SUCCESS LARGELY DEPENDS UPON ITS ABILITY TO RETAIN AND RECRUIT KEY PERSONNEL 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 COMPANY'S STOCK PRICE MAY BE VOLATILE 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. Strategic factors such as new product introductions, acquisitions or restructurings 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 operating results 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. IF THE COMPANY FAILS TO BECOME EURO-COMPLIANT IN A TIMELY MANNER, IT MAY RESULT IN AN ADVERSE IMPACT ON THE COMPANY'S RESULTS OF OPERATIONS OR FINANCIAL POSITION The Single European Currency (Euro) was introduced on January 1, 1999 with complete transition to this new currency required by January 2002. We have made changes to our internal systems in order to transition to the Euro. The main change that we made was changing the operating currency of the European subsidiaries that are affected by the Euro from the national currency to the Euro. We further expect that use of the Euro may affect our foreign exchange activities and may result in increased fluctuations in foreign currency results. RECENT ACCOUNTING PRONOUNCEMENTS The Company adopted Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, at the beginning of its fiscal year 2001. The standard requires the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that 18 are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. During the year, the Company maintained certain derivatives related to warrants held by the Company in Ebiz, Inc., and warrants issued by the Company to underwriters of a private placement completed in the prior year. The fair value of the warrants were recorded at October 1, 2000 with adjustments recorded to income based on the change in fair value as determined at the end of each period. In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations." SFAS No. 141 addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. SFAS No. 141 is applicable to business combinations beginning July 1, 2001. The adoption of this statement is not expected to have a material impact on the Company's financial position or results of operations. In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 addresses the recognition and measurement of goodwill and other intangible assets subsequent to their acquisition. SFAS No. 142 also addresses the initial recognition and measurement of intangible assets acquired outside of a business combination whether acquired individually or with a group of other assets. Goodwill and intangible assets previously recorded on the Company's consolidated financial statements will be affected by the provisions of SFAS No. 142. SFAS No. 142 will be effective for the Company's fiscal year 2003. The adoption of this statement is not expected to have a material impact on the Company's financial position or results of operations. In October 2001, the FASB issued SFAS No. 144, "Accounting for Impairment of Long-Lived Assets". SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement is effective for fiscal years beginning after December 15, 2001. Tarantella is required to adopt SFAS No. 144 on October 1, 2002. The adoption of this statement in not expected to have a material impact on the Company's financial position or results of operations. In September of 2000, SFAS No. 140 was issued replacing SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". This statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities based on a financial-components approach that focuses on control. Under that approach, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. In addition, this statement requires certain disclosures regarding securitization of financial assets. This statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. The adoption of this statement did not have a material effect on the Company's consolidated financial statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Reference is made to part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in our Annual Report on Form 10-K for the year ended September 30, 2001. 19 PART II. OTHER INFORMATION ITEMS 4, 5 AND 6 ARE NOT APPLICABLE AND HAVE BEEN OMITTED. 20 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. Tarantella, Inc. Date: February 14, 2002 By: /s/ Randall Bresee ---------------------------------------- Randall Bresee Senior Vice President, Chief Financial Officer By: /s/ Jenny Twaddle ---------------------------------------- Jenny Twaddle Vice President, Corporate Controller 21 -----END PRIVACY-ENHANCED MESSAGE-----