-----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, WiNmacFg6MQloPqKHF27mVbCaies+pfiFAFwiq3Z6Ne2JnNvgoSSaaPPqcfT/2iq KxrkqYHx1EDu2SLhSfQirg== 0001095811-01-504675.txt : 20010831 0001095811-01-504675.hdr.sgml : 20010831 ACCESSION NUMBER: 0001095811-01-504675 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010830 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/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-21484 FILM NUMBER: 1728520 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/A 1 f75275ae10-qa.txt AMENDMENT TO FORM 10-Q PERIOD ENDED MARCH 31, 2001 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 10-Q/A [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 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 March 31, 2001 was 39,877,212. 2 TARANTELLA, INC. FORM 10-Q/A FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001 TABLE OF CONTENTS
PAGE ---- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS a) CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2001 AND 2000........1 b) CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2001 AND SEPTEMBER 30, 2000.......................2 c) CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED MARCH 31, 2001 AND 2000..................3 d) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS .......................4 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................................12 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...........18 PART II. OTHER INFORMATION ITEM 6. EXHIBITS.............................................................19 SIGNATURES............................................................................20
3 Part I. Financial Information Item I. Financial Statements TARANTELLA, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except earnings per share)
- -------------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED SIX MONTHS ENDED MARCH 31, MARCH 31, 2001 2000 2001 2000 (UNAUDITED) (UNAUDITED) - -------------------------------------------------------------------------------------------------------------------- NET REVENUES License, third parties $ 22,040 $ 29,934 $ 43,007 $ 75,769 License, related parties 2,125 1,878 4,019 5,481 Service, third parties 2,638 2,965 5,649 6,142 Service, related parties 548 765 1,131 1,803 - -------------------------------------------------------------------------------------------------------------------- Total net revenues 27,351 35,542 53,806 89,195 - -------------------------------------------------------------------------------------------------------------------- COST OF REVENUES License, third parties 2,923 4,133 6,114 10,337 License, related parties 589 834 877 1,322 Service, third parties 3,011 4,402 6,029 8,276 Service, related parties 608 888 1,192 2,154 - -------------------------------------------------------------------------------------------------------------------- Total cost of revenues 7,131 10,257 14,212 22,089 - -------------------------------------------------------------------------------------------------------------------- GROSS MARGIN 20,220 25,285 39,594 67,106 - -------------------------------------------------------------------------------------------------------------------- OPERATING EXPENSES: Research and development 6,518 11,632 12,950 22,210 Sales and marketing 16,675 23,723 33,006 49,022 General and administrative 4,505 4,672 8,772 8,508 Restructuring charges 1,133 5,887 1,133 5,887 - -------------------------------------------------------------------------------------------------------------------- Total operating expenses 28,831 45,914 55,861 85,627 - -------------------------------------------------------------------------------------------------------------------- OPERATING INCOME (LOSS) (8,611) (20,629) (16,267) (18,521) OTHER INCOME (EXPENSE): Interest income, net 284 592 690 1,192 Other income (expense), net 3,071 908 3,657 1,745 - -------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes (5,256) (19,129) (11,920) (15,584) Income taxes (817) 680 (201) 1,350 - -------------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) (4,439) (19,809) (11,719) (16,934) OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX Unrealized gain (loss) on available-for-sale equity securities (120) (34,198) (3,996) 21,665 Foreign currency translation adjustment 282 (79) 229 (78) - -------------------------------------------------------------------------------------------------------------------- COMPREHENSIVE INCOME (LOSS) $ (4,277) $(54,086) $(15,486) $ 4,653 - -------------------------------------------------------------------------------------------------------------------- EARNINGS (LOSS) PER SHARE: Basic $ (0.11) $ (0.56) $ (0.30) $ (0.48) Diluted $ (0.11) $ (0.56) $ (0.30) $ (0.48) - -------------------------------------------------------------------------------------------------------------------- SHARES USED IN EARNINGS (LOSS) PER SHARE CALCULATION: Basic 39,733 35,596 39,586 35,154 Diluted 39,733 35,596 39,586 35,154 - --------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 1 4 TARANTELLA, INC. CONSOLIDATED BALANCE SHEETS (In thousands)
MARCH 31, SEPTEMBER 30, 2001 2000 (UNAUDITED) - -------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 15,014 $ 20,879 Short-term investments 3,100 5,567 Receivables, third parties, net 18,253 22,917 Receivables, related parties 4,770 1,352 Available-for-sale equity securities 6,055 7,119 Other current assets 7,769 4,358 - -------------------------------------------------------------------------------------------------- Total current assets 54,961 62,192 - -------------------------------------------------------------------------------------------------- Property and equipment, net 7,251 9,012 Purchased software and technology licenses, net 4,593 5,830 Other assets 4,755 5,168 - -------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 71,560 $ 82,202 - -------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Trade accounts payable $ 2,667 $ 5,521 Royalties payable 3,771 4,530 Note Payable 7,000 -- Income taxes payable 1,397 1,964 Accrued restructuring charges 2,058 5,964 Accrued expenses and other current liabilities 22,835 20,225 Deferred revenues 10,968 7,334 - -------------------------------------------------------------------------------------------------- Total current liabilities 50,696 45,538 - -------------------------------------------------------------------------------------------------- Long-term lease obligations 6 545 Long-term deferred revenues 1,371 1,397 Other long-term liabilities 2,982 3,520 - -------------------------------------------------------------------------------------------------- Total long-term liabilities 4,359 5,462 - -------------------------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY Common stock, no par value, net, authorized 100,000 shares Issued and outstanding 39,877 and 39,346 shares 119,728 118,940 Accumulated other comprehensive income 1,719 5,486 Accumulated deficit (104,942) (93,224) - -------------------------------------------------------------------------------------------------- Total shareholders' equity 16,505 31,202 - -------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 71,560 $ 82,202 - --------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 2 5 TARANTELLA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
- ---------------------------------------------------------------------------------------------------- SIX MONTHS ENDED MARCH 31, 2001 2000 (UNAUDITED) - ---------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(11,719) $(16,934) Adjustments to reconcile net loss to net cash used for operating activities - Depreciation and amortization 4,520 6,124 Investment (gain) loss (2,011) Exchange (gain) loss 336 (190) Gain on sale of marketable securities (2,120) -- Non-cash restructuring charge -- 5,887 Changes in operating assets and liabilities - Receivables 1,327 6,628 Other current assets (3,443) 351 Other assets 136 1,328 Royalties payable (748) (2,787) Trade accounts payable (2,844) (152) Income taxes payable (1,145) 1,295 Accrued expenses and other current liabilities 5,048 (6,743) Deferred revenues 3,540 9 Other long-term liabilities (3) (493) - ---------------------------------------------------------------------------------------------------- Net cash used for operating activities (9,126) (5,677) - ---------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (989) (2,526) Purchases of software and technology licenses (341) (433) Sales of short-term investments 2,500 11,725 Purchases of short-term investments (33) (10,606) Proceeds from sale of marketable securities 3,200 -- Changes in other assets (736) (2,869) - ---------------------------------------------------------------------------------------------------- Net cash provided by (used for) investing activities 3,601 (4,709) - ---------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments on capital leases (1,121) (1,580) Net proceeds from sale of common stock 788 11,331 Repurchases of common stock -- (12,786) - ---------------------------------------------------------------------------------------------------- Net cash used for financing activities (333) (3,035) - ---------------------------------------------------------------------------------------------------- Effects of exchange rate changes on cash and cash equivalents (7) 33 - ---------------------------------------------------------------------------------------------------- Change in cash and cash equivalents (5,865) (13,388) Cash and cash equivalents at beginning of period 20,879 33,683 - ---------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 15,014 $ 20,295 - ---------------------------------------------------------------------------------------------------- Cash paid- Income taxes $ 641 $ 5 Interest 90 135 Non-cash financing and investing activities- Unrealized gain (loss) on available-for-sale equity securities $ (120) $ 29,124 Assets acquired under capital leases -- 20 - ----------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 3 6 TARANTELLA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 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 2000 report on Form 10-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, 2000 balance sheet was derived from audited financial statements, and is included for comparative purposes. The Company's original incorporated name was The Santa Cruz Operation, Inc. As of May 7, 2001 the name has been changed to Tarantella, Inc. RESTATEMENT Statement of Financial Accounting Standard No. 133, Accounting for Derivative Instruments and Hedging Activities, was effective for the Company beginning October 1, 2000. Accordingly, any derivative investment held by the Company as of that date is required to be recorded at its fair value and then revalued at each period end with a corresponding adjustment to income. Upon further analysis by the Company, it was determined the Company obtained and held warrants in a private company which was purchased by a publicly traded entity during the Company's first quarter ended December 31, 2000. Under FAS 133 and as part of the restatement, these warrants were deemed derivatives and their fair values were recorded by the Company and revalued at the current market value at each period end. In addition, the Company held investments in a private entity that was purchased by a publicly traded entity and the exchange created a new cost basis for the investments at the date of exchange. The increase in the cost basis of the investment created a gain of $1.39 million in other income for the three month period ended March 31, 2001. Due to the new cost basis there was a decrease to unrealized loss of $1.86 million on available for sale equity securities, which resulted in a decrease of $1.86 million in comprehensive income for the six month period ended March 31, 2001. The financial statements for the three and six months ended March 31, 2001 have been restated to reflect these changes. The restatement does not affect previously reported net cash flows for the periods. The effects of this restatement on previously reported consolidated financials are as follows (amounts in thousands except per share data): 4 7
Three Months Ended Six Months Ended March 31, 2001 March 31, 2001 As previously As previously reported Restated reported Restated --------- --------- -------- -------- STATEMENT OF OPERATIONS: Other income, (expense) Interest income, net $ 284 $ 284 $ 478 $ 690 Other income (expense), net 1,677 3,071 1,858 3,657 Net income (loss) (5,833) (4,439) (13,730) (11,719) Other comprehensive income (loss) Unrealized gain (loss) on available-for-sale equity securities (1,976) (120) (5,134) (3,996) Foreign currency translation adjustment 282 282 229 229 Earnings (loss) per share $ (0.15) $ (0.11) $ (0.35) $ (0.30) BALANCE SHEET: Available-for-sale equity securities 2,905 6,055 Accumulated other comprehensive income 581 1,719 Accumulated deficit (106,954) (104,942)
1. TRANSACTION WITH CALDERA On May 7, 2001, the Company consummated the sale of its Server Software and Professional Services Divisions to Caldera Systems, Inc. Under the terms of the transaction, SCO received cash consideration of $23.0 million, of which $7.0 million had already been received, as well as a note from Caldera Systems, Inc. for $8.0 million due in four quarterly installments in the second year after the close of the transaction. Additionally, SCO received 16 million shares of Caldera International, Inc., the resulting newly created company that combines the assets of Caldera Systems, Inc. and the newly acquired Server Software and Professional Services Divisions. In connection with the sale, the Company will also be entitled to receive earn-out payments from Caldera International Inc. determined as 45% of the amount by which OpenServer revenues exceed certain specified threshold amounts during the three year period following the closing. The Company has changed its corporate name to Tarantella, Inc. The company has also changed its NASDAQ trading symbol to TTLA to reflect the new corporate name The following table presents the effects of the transaction on revenues and net income; had the transaction been consummated at the beginning of the quarter. The following amounts do not include any gains or losses from the transaction with Caldera. The Company, Tarantella Inc., anticipates no changes to the accounting methods that have been historically used. 5 8
Three Months Ended March 31, 2001 2001 (Unaudited) - ------------------------------------------------------------------------- TOTAL (PRO FORMA) NET REVENUES 4,028 - ------------------------------------------------------------------------- (PRO FORMA) NET LOSS (2,799) (PRO FORMA) LOSS PER SHARE: Basic $ (0.07) Diluted $ (0.07) - ------------------------------------------------------------------------- SHARES USED IN (PRO FORMA) LOSS PER SHARE CALCULATION: Basic 39,733 Diluted 39,733 - -------------------------------------------------------------------------
2. ACCRUED RESTRUCTURING CHARGE FISCAL 2001 During the second quarter of fiscal 2001, the Company announced and completed a restructuring plan, which resulted in a one-time 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 Company has reduced its spending levels to align its operating expenses with the Company's revenues. The restructuring charge is related to the Tarantella division and includes a reduction in personnel of 28 employees and a planned elimination and sublet of unused facilities. The entire $1.6 million relates to cash expenditures. The severance charges of $1.5 million include the elimination of 16 positions in the United States, 4 positions in the United Kingdom, and 8 positions in various other geographies. The reductions in force affect the sales, marketing and general and administrative functions of the Company. As of March 31, 2001 a total of 23 positions have been eliminated. The Company intends to partially sublet space in the Santa Cruz, California office. This space will be vacated and restored and subsequently sublet. The Company anticipates this will be complete within six months. The fiscal 2001 second quarter restructuring charge is summarized as follows: 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 - ------------------------------------------------------------------------------
FISCAL 2000 During fiscal 2000, the Company recorded $10.7 million in restructuring charges, including $7.3 million of severance and benefits, $1.9 million of facilities charges, $0.7 million of technology charges and $0.8 million of fixed asset disposals. 6 9 FISCAL 2000 SECOND QUARTER RESTRUCTURING PLAN 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. During the second quarter of fiscal 2001, the Company disposed of fixed assets related to this restructuring accrual. Additionally, the Company made payments on facilities costs related to this restructuring during the second quarter of fiscal 2001. The fiscal 2000 second quarter restructuring charge is summarized as follows: FISCAL 2000 SECOND QUARTER RESTRUCTURING ACCRUAL
Reduction Disposal of (In thousands) in Force Facilities Technology Fixed Assets Total - --------------------------------------------------------------------------------------------------- Restructuring charge accrued $ 3,574 $ 1,052 $ 667 $ 594 $ 5,887 Payments/utilization of the accrual (2,660) (94) (667) (256) (3,677) Provision adjustment (914) -- -- -- (914) - --------------------------------------------------------------------------------------------------- Accrual at September 30, 2000 -- 958 -- 338 1,296 Payments/utilization of the accrual -- (75) -- (4) (79) - --------------------------------------------------------------------------------------------------- Accrual at December 31, 2000 -- 883 -- 334 1,217 Payments/utilization of the accrual -- (169) -- (334) (503) - --------------------------------------------------------------------------------------------------- Accrual at March 31, 2001 -- 714 -- -- 714 - ---------------------------------------------------------------------------------------------------
FISCAL 2000 FOURTH QUARTER RESTRUCTURING PLAN In the fourth quarter of fiscal 2000, in connection with management's plan to reduce operating expenses, the Company announced a further restructuring plan, which resulted in a one-time charge of $5.7 million. During the second quarter of fiscal 2001 the Company made payments related to facilities costs and severance costs associated with this restructuring. Also during the second quarter of fiscal 2001, the Company disposed of certain fixed assets related to this restructuring. The Company recorded an adjustment to the fiscal 2000 fourth quarter restructuring provision of $0.4 million in severance costs in the second quarter of fiscal 2001. The severance costs were adjusted to reflect changes to the estimated expenses as actual payments were made. The fiscal 2000 fourth quarter restructuring charge is summarized as follows: FISCAL 2000 FOURTH QUARTER RESTRUCTURING ACCRUAL
Reduction Disposal of (In thousands) in Force Facilities Fixed Assets Total - ----------------------------------------------------------------------------------------------- Restructuring charge accrued $ 4,658 $ 804 $ 248 $ 5,710 Payments/utilization of the accrual (1,042) -- -- (1,042) - ----------------------------------------------------------------------------------------------- Accrual at September 30, 2000 3,616 804 248 4,668 Payments/utilization of the accrual (2,794) (167) (21) (2,982) - ----------------------------------------------------------------------------------------------- Accrual at December 31, 2000 822 637 227 1,686 Payments/utilization of the accrual (392) (157) (41) (590) Provision adjustment (430) -- -- (430) - ----------------------------------------------------------------------------------------------- Accrual at March 31, 2001 -- 480 186 666 - -----------------------------------------------------------------------------------------------
3. SEGMENT INFORMATION 7 10 For the quarter ended March 31, 2001, the Company reviewed the performance of its three divisions the Server Software Division, the Tarantella Division, and the Professional Services Division. Each segment markets the Company's software products and services to companies in a number of industries including telecommunications, manufacturing and government bodies. These products and services are either sold directly by each segment's sales force or are sold to end users through distributors or OEMs. The following table presents information about reportable segments (in thousands):
Three Months Ended Six Months Ended March 31, March 31, 2001 2000 2001 2000 - ------------------------------------------------------------------------ ---------------------- Net revenues: (Unaudited) Server software division $ 23,523 $ 32,876 $ 46,549 $ 82,372 Tarantella division 4,028 2,492 7,206 5,991 Professional services division 474 892 1,335 2,176 Corporate adjustments (674) (718) (1,284) (1,344) -------- -------- -------- -------- Total net revenues $ 27,351 $ 35,542 $ 53,806 $ 89,195 ======== ======== ======== ======== Gross margin: Server software division $ 17,530 $ 24,382 $ 34,481 $ 63,883 Tarantella division 3,371 1,713 5,954 4,558 Professional services division (410) (810) (516) (1,335) Corporate adjustments (271) -- (325) -- -------- -------- -------- -------- Total gross margin $ 20,220 $ 25,285 $ 39,594 $ 67,106 ======== ======== ======== ======== Restructuring credit: Server software division $ 430 $ (5,768) $ 430 $ (5,768) Tarantella division (1,563) -- (1,563) -- Professional services division -- (119) -- (119) -------- -------- -------- -------- Total restructuring (charge) credit $ (1,133) $ (5,887) $ (1,133) $ (5,887) ======== ======== ======== ======== Operating loss: Server software division $ (400) $(16,781) $ (610) $(13,166) Tarantella division (6,971) (2,626) (13,495) (3,358) Professional services division (1,269) (1,222) (2,199) (1,997) Corporate adjustments 29 -- 37 -- -------- -------- -------- -------- Total operating loss $ (8,611) $(20,629) $(16,267) $(18,521) -------- -------- -------- --------
The following table presents information about geographical segments (in thousands): 8 11
Three Months Ended Six Months Ended March 31, March 31, (In thousands) 2001 2000 2001 2000 - ------------------------------------------------------------------- --------------------- Net revenues: (Unaudited) United States $ 13,363 $17,386 $ 25,637 $36,590 Canada and Latin America 1,093 1,373 3,140 4,126 Europe, Middle East, India and Africa 10,174 14,339 19,954 40,101 Asia Pacific 2,553 2,272 4,644 5,419 Corporate Adjustments 168 172 431 2,959 -------- ------- -------- ------- Total net revenues $ 27,351 $35,542 $ 53,806 $89,195 ======== ======= ======== ======= Gross margin: United States $ 9,911 $11,332 $ 19,790 $24,309 Canada and Latin America 856 1,008 2,563 3,002 Europe, Middle East, India and Africa 7,923 10,889 14,522 32,371 Asia Pacific 2,038 1,885 3,574 4,466 Corporate Adjustments (508) 171 (855) 2,958 -------- ------- -------- ------- Total gross margin $ 20,220 $25,285 $ 39,594 $67,106 -------- ------- -------- -------
Revenue is allocated to geographical segments based on the location from which the sale is satisfied. 4. INVESTMENTS AVAILABLE FOR SALE EQUITY SECURITIES During the second quarter of fiscal 2001, the Company sold 3.2 million shares of Series D of the preferred stock of Rainmaker Systems, Inc. ("Rainmaker") with a cost basis of $1.1 million, and received cash proceeds of $3.2 million. At March 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 gains and losses on available for sale investments as of March 31, 2001 are as follows (in thousands):
Unrealized FMV Cost Gain/Loss Caldera 83 250 (167) Ebiz Stock 5,592 3,140 1,580 Rainmaker 380 171 209 ------ ------ ------- Total Stock 6,055 3,561 1,622 ------ ------ ------- Ebiz Warrants 1,051 -- ------ ------ ------- Total Available for Sale Equity Securities $6,055 $4,612 $ 1,622 ------ ------ -------
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. 5. COMPREHENSIVE INCOME 9 12 The following table presents the calculation of comprehensive income as required by SFAS 130. The components of other comprehensive income (loss) for the three and six months ended March 31, 2001 and 2000 are as follows (in thousands):
Three Months Ended Six Months Ended March 31, March 31, 2001 2000 2001 2000 ------- -------- -------- -------- Net loss $(4,439) $(19,809) $(11,719) $(16,934) Other comprehensive income (loss): Foreign currency translation adjustment 282 (79) 229 (78) Unrealized gain (loss) on available-for-sale (120) (47,730) (3,996) 29,124 equity securities Gross tax on unrealized gain (loss) on -- 19,011 -- (11,600) available-for-sale equity securities Release of deferred tax valuation allowance -- (5,479) -- 4,141 ------- -------- -------- -------- Total other comprehensive income (loss) $(4,277) $(54,086) $(15,486) $ 4,653 ======= ======== ======== ========
6. EARNINGS PER SHARE (EPS) DISCLOSURES Basic and diluted earnings per share were calculated as follows during the three and six months ended March 31, 2001 and 2000 (in thousands):
Three Months Ended Six Months Ended March 31, March 31, 2001 2000 2001 2000 -------- -------- -------- -------- Basic: Weighted average shares 39,733 35,596 39,586 35,154 -------- -------- -------- -------- Net loss $ (4,439) $(19,809) $(11,719) $(16,934) ======== ======== ======== ======== Net loss per share $ (0.11) $ (0.56) $ (0.30) $ (0.48) ======== ======== ======== ======== Diluted: Weighted average shares 39,733 35,596 39,586 35,154 Shares used in per share calculation 39,733 35,596 39,586 35,154 ======== ======== ======== ======== Net loss $ (4,439) $(19,809) $(11,719) $(16,934) ======== ======== ======== ======== Net loss per share $ (0.11) $ (0.56) $ (0.30) $ (0.48) ======== ======== ======== ======== Options and warrants outstanding at 3/31/01 and at 3/31/00 not included in computation of diluted EPS because the exercise price was greater than the average market price 11,651 495 11,636 519 Options outstanding at 3/31/01 and at 3/31/00 not included in computation of diluted EPS because their inclusion would have an anti- dilutive effect 1,051 10,462 1,515 10,438
7. RECENT ACCOUNTING PRONOUNCEMENTS 10 13 In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial Statements, which provides guidance on the recognition, presentation and disclosure of revenue and financial statement filed with the SEC. SAB 101 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosures related to revenue recognition policies. The Company has adopted SAB 101 effective with the first quarter of fiscal 2001. The implementation of SAB 101 did not have a material effect on the financial position or results of operations of the Company. 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 (SFAS 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. The Company has adopted SFAS 133 as required for its first quarterly filing of fiscal year 2001. SFAS 133 shall be effective for all subsequent quarters and annual filings. Adoption of the standard required the Company to recognize the fair value of derivatives held during the first quarter ended December 31,2000. The cumulative effect of the adjustment was an increase in available-for-sale securities of $0.2 million at March 31, 2001 and an increase to net income of $1.1 million for the six-month period ended March 31, 2001. 8. SUBSEQUENT EVENTS On May 7, 2001, the Company consummated the sale of its Server Software and Professional Services Divisions to Caldera Systems, Inc. Under the terms of the transaction, SCO received cash consideration of $23.0 million, of which $7.0 million had already been received, as well as a note from Caldera Systems, Inc. for $8.0 million due in four quarterly installments in the second year after the close of the transaction. Additionally, SCO received 16 million shares of Caldera International, Inc., the resulting newly created company that combines the assets of Caldera Systems, Inc. and the newly acquired Server Software and Professional Services Divisions. In connection with the sale, the Company will also be entitled to receive earn-out payments from Caldera International Inc. determined as 45% of the amount by which OpenServer revenues exceed certain specified threshold amounts during the three year period following the closing. The Company has changed its corporate name to Tarantella, Inc. The company has also changed its NASDAQ trading symbol to TTLA to reflect the new corporate name. 11 14 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 The Company's net revenues are derived from software licenses and fees for services, which include engineering services, consulting, custom engineering, support and training. Net revenues for the three months ended March 31, 2001 decreased 23% to $27.3 million from $35.5 million in the same period in fiscal 2000. For the six months ended March 31, 2001, net revenues decreased 40% to $53.8 million from $89.2 million for the six months ended March 31, 2000. The decline in revenue performance was worldwide across all geographies and is attributable to fewer large project deals, as well as other market factors. The Company's revenues were directly impacted by the reduction in information technology ("IT") investments by companies for application server software and service initiatives. Furthermore, the Company experienced the impact of being involved in a protracted transaction involving the sale of a majority of the Company. For the three month period ended March 31, 2001, one customer accounted for 13.8% of the Company's net revenues. No one customer accounted for more than 10% of the Company's net revenues for same period in the prior year. License revenue for the three months ended March 31, 2001 was $24.2 million compared to $31.8 million in the same quarter of fiscal 2000. For the six months ended March 31, 2001, license revenues decreased 42% to $47.0 million from $81.3 million for the six months ended March 31, 2000. This decline is attributed to fewer large project deals and other market factors. Service revenues decreased to $3.2 million for the three months ended March 31, 2001, from $3.7 million in the same period in 2000, a decline of 15%. Service revenue was 12% of the total revenue of the second quarter, compared to 10% in the prior year. The decline in service revenues was primarily in professional services area and is the result of re-focusing of the professional services division on the implementation of new strategies. International revenues continue to represent a significant portion of total net revenues comprising 50% of the revenues for the second fiscal quarter of 2001 and 51% for the same quarter in fiscal 2000. COSTS AND EXPENSES Cost of license revenues for the three months ended March 31, 2001 decreased by 30% to $3.5 million compared to $5.0 million in the same period of fiscal 2000. For the six months ended March 31, 2001, cost of license revenues decreased 40% to $7.0 million from $11.7 million for the six months ended March 31, 2000. The declining cost of revenues is primarily due to expirations of several technology obligations. Additionally, material costs continue to decline as a result of the increasing number of internet orders. Also certain fixed costs such as technology and overhead declined. 12 15 Cost of service revenues for the three months ended March 31, 2001 decreased by 32% to $3.6 million compared to $5.3 million in the same period of fiscal 2000. For the six months ended March 31, 2001, cost of service revenues was $7.2 million as compared to $10.4 million for the same period in 2000. This decline is primarily a result of reduced staffing levels in both the support and professional services organizations due to realignments of these organizations. Total cost of revenues as a percentage of net revenues decreased to 26% in the second quarter of fiscal 2001 from 29% in the same period of fiscal 2000. For the six month periods ended March 31, 2001 and 2000, cost of revenues represented 26% and 25% of net revenues, respectively. A significant portion of cost of goods sold is fixed and the decrease in revenue impacted gross margin. These fixed costs include technology and overhead costs and certain of these fixed costs declined during both the second quarter of fiscal 2001 and the six month period ended March 31, 2001. Research and development expenses decreased 44% to $6.5 million in the second quarter of fiscal 2001 from $11.6 million in the comparable quarter of fiscal 2000, or 24% and 33% of net revenues, respectively. For the six months ended March 31, 2001, research and development expenses decreased 42% to $ 13.0 million compared to $22.2 million for the same period in 2000. The decrease in research and development expenses can be attributed to lower labor costs driven by lower headcount as a result of a planned reduction in force and higher than normal attrition , as well as, a significant decrease in allocating the corporate overhead costs to research and development. Sales and marketing expenses decreased 30% to $16.7 million in the second quarter of fiscal 2001 from $23.7 million for the comparable quarter of the prior year. Sales and marketing expenses represented 61% of net revenues in the second quarter of fiscal 2001 and 67% in 2000. For the six months ended March 31, 2001, sales and marketing expenses decreased to $33.0 million (61% of net revenues) from $49.0 million (55% of net revenues) for the same period of the prior fiscal year. The decrease is due to lower labor costs as a result of a reduction in force and attrition, combined with reductions in sales program costs that vary directly with revenue, including cooperative advertising. General and administrative expenses decreased to $4.5 million for the second quarter of fiscal 2001 compared with $4.7 million in the second quarter of fiscal 2000, representing 16% and 13% of net revenues, respectively. For the six months ended March 31, 2001, general and administrative expenses increased $8.8 million, or 16% of net revenues, compared to $8.5 million, or 10% of net revenues, for the same period in 2000. The decline in general and administrative expense for the three months ended March 31, 2001 can be attributed to reduced spending for travel, and legal expenses and lower depreciation costs. The six month increase in general and administrative expenses of $0.3 million is due to a one-time facility repair and higher data processing costs in the first fiscal quarter. Restructuring charges decreased to $1.1 million in the second quarter of fiscal 2001 from $5.9 million for the comparable quarter of the prior year. During the second quarter of fiscal 2001, the Company announced and completed a restructuring plan, which resulted in a one-time charge of $1.6 million. The Company has reduced its spending levels to align its operating expenses with the Company's revenues. The restructuring charge is related to the Tarantella division and includes a reduction in personnel of 28 employees and an elimination and sublet of unused facilities. The entire $1.6 million relates to cash expenditures. The severance charges of $1.5 million include the elimination of 16 positions in the United States, 4 positions in the United Kingdom, and 8 positions in various other geographies. The reductions in force affect the sales, marketing and general and administrative functions of the Company. As of March 31, 2001 a total of 23 positions have been eliminated. The Company intends to partially sublet space in the Santa Cruz, California office. This space will be vacated and restored and subsequently sublet. The Company anticipates this will be complete within six months. Additionally, the Company recorded an adjustment to the fiscal 2000 fourth quarter restructuring provision of $0.4 million in severance costs in the second quarter of fiscal 2001. The severance costs were adjusted to reflect changes to the estimated expenses as actual payments were made. 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. Net interest income was $0.3 million for the second quarter of fiscal 2001 and $0.6 million for the comparable quarter in the prior year. For the six months ended March 31, 2001, net interest income was $0.7 million as compared to $1.2 million for the same period in 2000. Other income was $3.1 million in the second quarter of fiscal 2001, compared to $0.9 million for the same period of fiscal 2000. For the six months ended March 31, 2001, other income was $3.7 million as compared to $1.7 million for the same period in 2000. The decrease in interest income is due to lower cash balances compared to last 13 16 year and a higher exchange rate variance in the second quarter of fiscal 2001. The increase of other income in the second quarter of fiscal 2001 included a gain of $2.1 million realized on the liquidation of certain available-for-sale securities and a $1.4 million dollar gain on a derivative recognized under SFAS 133. The benefit from income taxes was $0.8 million for the second quarter of fiscal 2001 compared to a provision of $0.7 million for the same period of the prior fiscal year, and a benefit of $0.2 million for the six months ended March 31, 2001, compared to a provision of $1.4 million for the corresponding fiscal 2000 period. The income tax benefits are the result of foreign losses and the resolution of foreign audit issues. Net loss for the second quarter of fiscal 2001 was $4.4 million compared to net loss of $19.8 million for 2000. For the six months ended March 31, 2001, net loss was $11.7 million compared to net loss of $16.9 million in the same period in 2000. Segment Information. The Company began reviewing its performance on the basis of its three divisions during the third quarter of fiscal 2000. Further information is disclosed in Note 3. Server Software Division. Net revenues for the server division for the three months ended March 31, 2001 decreased 28% to $23.5 million from $32.9 million in the same period in fiscal 2000. For the six months ended March 31, 2001, net revenues for the server division was $46.5 million as compared to $82.3 million for the same period in 2000. The decline in revenue performance is attributable to fewer large project deals, as well as other market factors. Gross margin for the server division declined 28% to $17.5 million for the second quarter of fiscal 2001 compared to $24.4 million for the same period of fiscal 2000. For the six months ended March 31, 2001, gross margin for the server division was $34.5 million as compared to $63.9 million for the same period in 2000. The decline in gross margin is mainly attributable to lower sales. Gross margin as a percentage of revenues was 74.5% for the second quarter of fiscal 2001 compared to 74.2% for the same period of fiscal 2000 for the server division. The server division's operating loss for the three months ended March 31, 2001 was $0.4 million, compared to an operating loss of $16.8 million in the same period of fiscal 2000. For the six months ended March 31, 2001, operating loss for the server division was $0.6 million as compared to $13.2 million for the same period in 2000. The decline is due to lower operating expenses attributable to lower labor costs caused by a reduction in force and higher than normal attrition combined with reductions in sales program costs that vary directly with revenue, including cooperative advertising, and was partially offset by lower revenues in fiscal 2001. Tarantella Division. Net revenues for the Tarantella division for the three months ended March 31, 2001 increased 62% to $4.0 million from $2.5 million in the three months ended March 31, 2000. For the six months ended March 31, 2001, net revenues for the Tarantella division was $7.2 million as compared to $6.0 million for the same period in 2000. The increase in net revenues is due to an overall increase in the repeat business of current customers as well as an increase in the number of new customers. Additionally, there is an increase in the average deal size that is a result of a recent re-alignment of sales structure. Tarantella revenues increased 27% in the second quarter of fiscal 2001 when compared to the first quarter of this fiscal year. Gross margin for the Tarantella division was $3.3 million for the three months ended March 31, 2001 compared with gross margin of $1.7 million for the same period in fiscal 2000, an increase of 97%. Gross margin as a percentage of net revenues improved to 83.7% in the second quarter of fiscal 2001 compared to 68.7% for the comparable period of the prior year. For the six months ended March 31, 2001, gross margin for the Tarantella division was $6.0 million as compared to $4.6 million for the same period in 2000. The increase is attributed to improvement due to technology and overhead savings. The operating loss reported by the Tarantella division for the three months ended March 31, 2001 was $7.0 million, compared to a loss of $2.6 million in fiscal 2000. For the six months ended March 31, 2001, the operating loss for the Tarantella division was $13.5 million as compared to $3.4 million for the same period in 2000. The decrease is a result of the impact of being involved in a protracted transaction which more recently involves the re-alignment of the Tarantella sales structure. The Company has developed a dedicated, focused team for the Tarantella division and has increased the resources used by the division. Professional Services Division. Net revenues for the professional services division for the three month period ended March 31, 2001 declined to $0.5 million compared to $0.9 million for the same period in fiscal 2000. For the six months ended March 31, 2001, the net revenues for the professional services division was $1.3 million as compared to $2.2 14 17 million for the same period in 2000. The revenue decrease can be attributed to a shift in strategies undertaken to accommodate the future transaction. Gross loss for the professional services division was $0.4 million for the three months ended March 31, 2001 compared with a loss of $0.8 million for the same period in fiscal 2000, a reduction of 49%. For the six months ended March 31, 2001, the gross loss for the professional services division was $0.5 million as compared to $1.3 million for the same period in 2000. The reduction in gross loss is directly attributable to improved control of operating expenses. The operating loss for the professional services division remained relatively stable. For the three months ended March 31, 2001 was $1.3 million, compared to the operating loss of $1.2 million in fiscal 2000. For the six months ended March 31, 2001, the operating loss for the professional services division was $2.2 million as compared to $2.0 million for the same period in 2000. FACTORS THAT MAY AFFECT FUTURE RESULTS On May 7, 2001, the Company consummated the sale of its Server Software and Professional Services Divisions to Caldera Systems, Inc. Caldera may experience difficulty in integrating the assets and the employees acquired from the Company. There can be no assurance that the combination will create positive results for Caldera in which the Company will be a major shareholder. The successful combination will require substantial effort from each company. The Company's Tarantella products are still in the early stages of the product life-cycle. Furthermore, the market in which the products are sold is a new market. Therefore, it is difficult to assess the market potential and the ability of the products to meet the requirements of the market. As a small company, the Company may not have credibility with enterprise customers, which is critical to its success. Historically, revenues generated by the Server Software business and Professional Services have been a significant portion of the Company's total revenues. The Company's revenues derived from the distribution of Tarantella products will be but a fraction of historical revenues, and the Company's success will be dependent upon relatively significant revenue growth. 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 in customer purchases in anticipation of reduced selling activity during the summer months. Sales to the U.S. federal government generally increase during the quarter 15 18 ending September 30. This seasonal increase is primarily attributable to increased purchasing activity by the U.S. federal government prior to the close of its fiscal year. Additionally, net revenues for the first quarter of the fiscal year are typically lower or relatively flat compared to net revenues of the prior quarter. The overall cost of revenues may be affected by changes in the mix of net revenue contribution between licenses and services, product families, geographical regions and channels of distribution, as the costs associated with these revenues may have substantially different characteristics. The Company may also experience a change in margin as net revenues increase or decrease since technology costs, service costs and production costs are fixed within certain volume ranges. The Company depends on information received from external sources in evaluating the inventory levels at distribution partners in the determination of reserves for the return of materials not sold, stock rotation and price protection. Significant effort has gone into developing systems and procedures for determining the appropriate reserve level. Substantial portions of the Company's revenues are derived from sales to customers outside the United States. Trade sales to international customers represented 50% and 51% of total revenues for the second quarter of fiscal 2001 and 2000, 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. As the Company determines whether its tax carryforwards will more likely than not be utilized in the future, or as new legislation is enacted, the Company's effective tax rate is subject to change. 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. This risk will increase significantly after the consummation of the transaction with Caldera. The Company is exposed to fluctuations in the market values of our portfolio investments. The Company maintains investment portfolio holdings of various issuers, types and maturities. These securities are generally classified as available for sale and consequently, are recorded on the balance sheet at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive income, net of tax. Part of this portfolio includes minority equity investments in several publicly traded companies, the values of which are subject to market price volatility. The Company has also invested in several privately held companies, many of which can still be considered in the startup or development stages. These investments are inherently risky as the market for the technologies or products they have under development are typically in the early stages and may never materialize. The Company could lose its entire initial investment in these companies. The Company typically does not attempt to reduce or eliminate its market exposure pertaining to these equity securities. The Company's continued success depends to a significant extent on senior management and other key employees. None of these individuals is subject to a long-term employment contract or a non-competition 16 19 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. Through December 31, 2001, 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 $18.1 million at March 31, 2001, representing 26% of total assets. The six month decrease in cash and short-term investments of $8.3 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 $9.1 million for the first six months of fiscal 2001, compared to $5.7 million used for operating activities for fiscal 2000. Cash provided by investing activities during the six month period was $3.6 million in fiscal 2001 compared to cash used for investing of $4.7 million in fiscal 2000. In both fiscal 2001 and 2000 cash was used to fund purchases of property and equipment and short-term investments. In fiscal 2000 cash was used for common stock repurchases. Cash used for financing activities was $0.3 million for the first six months of fiscal 2001 compared with $3.0 million for the same period in fiscal 2000. The Company's second quarter ended March 31, 2001 Days Sales Outstanding (DSO) remained relatively flat from 75.8 days, an increase of 0.4 days from the first quarter of fiscal 2001. As of March 31, 2001, the Company had an equity investment in Rainmaker Systems having a fair market value of $0.4 million and a cost basis of $0.2 million. The fair market value of this investment could fluctuate substantially due to changing stock prices. This investment is available-for-sale, and the Company may choose to sell a portion of this investment position in the future. In January 2001, the Company sold 3,200,000 shares of its Rainmaker stock for $1.00 per share, and received cash proceeds of $3.2 million. The cost basis of the sale was $1.1 million, and the Company realized a gain of $2.1 million from this sale. The Company has incurred losses from operations of approximately $8.6 million during the second quarter of fiscal 2001 and $20.6 million during fiscal 2000 and revenues have declined from $35.5 million for the second quarter of fiscal 2000 to $27.4 million for the same quarter of fiscal 2001. For the six month period ended fiscal 2001 losses from operations were $16.3 million and $18.5 million during the comparable quarters in fiscal 2000. Revenues declined from $89.1 million for the six months ended fiscal 2000 to $53.8 million for the same period of fiscal 2001. Revenues have declined $223.6 million for the year ended September 30, 1999 to $148.9 million for the year ended September 30, 2000 and the Company has an accumulated deficit as of March 31, 2001. These factors have caused management to evaluate the Company's liquidity and to establish plans to reduce costs, and increase revenues and improve margins. The Company has recently announced cost reduction plans in order to reduce operating expenses to levels consistent with current revenues and is investigating financing alternatives. There can 17 20 be no assurance that such cost reduction measures will be adequate or such financing will be available, if at all, on terms acceptable to the Company. In connection with the transaction with Caldera, the Company entered into a Loan Agreement and a Secured Convertible Promissory Note effective January 8, 2001, with The Canopy Group for borrowings up to $18.0 million. Drawings on the financing agreement are repayable on December 31, 2001 and bear interest at a rate per annum of 10%. Drawings are collateralized by the Company's tangible and intangible assets and are convertible into common stock at the option of the lender at the closing price of SCO common stock on the date of issuance, subject to certain limitations. The unconverted principal is repayable in cash. The Company has not made any drawings on this line of credit. At March 31, 2001, the Company had available lines of credit of approximately $0.9 million under which the Company had $0.3 million in outstanding borrowings. The Company believes that, based on its current plans, which include the completion of the transaction with Caldera discussed above, its existing cash and cash equivalents, short-term investments, funds generated from operations and available borrowing capabilities will be sufficient to meet its operating requirements through fiscal 2001, however additional financing may be required thereafter. RECENT ACCOUNTING PRONOUNCEMENTS In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial Statements, which provides guidance on the recognition, presentation and disclosure of revenue and financial statement filed with the SEC. SAB 101 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosures related to revenue recognition policies. The Company has adopted SAB 101 effective with the first quarter of fiscal 2001. The implementation of SAB 101 did not have a material effect on the financial position or results of operations of the Company. 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 (SFAS 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. The Company has adopted SFAS 133 as required for its first quarterly filing of fiscal year 2001. Adoption of the standard required the Company to recognize the fair value of derivatives held during the first quarter ended December 31,2000. The cumulative effect of the adjustment was an increase in available-for-sale securities of $0.2 million at March 31, 2001 and an increase to net income of $1.1 million for the six-month period ended March 31, 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. 18 21 PART II. OTHER INFORMATION ITEMS 1, 2, 3, 4, 5 AND 6 ARE NOT APPLICABLE AND HAVE BEEN OMITTED. 19 22 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: August 29, 2001 By: /s/ Randall Bresee ----------------------------------- Randall Bresee Senior Vice President, Chief Financial Officer By: /s/ Jenny Twaddle ----------------------------------- Jenny Twaddle Vice President, Corporate Controller 20 -----END PRIVACY-ENHANCED MESSAGE-----