Back to GetFilings.com
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 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 its 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 offices) (Zip Code)
Registrant's telephone number, including area code (831) 427-7222
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
PREFERRED SHARE PURCHASE RIGHTS COMMON STOCK, NO PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Registrant became subject to such filing requirements on May 25, 1993 as a
result of its initial public offering.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to
contained to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing sale price of the Common Stock on December 1,
2001 as reported on the Nasdaq National Market was approximately $24,057,462.
Shares of Common Stock held by each executive officer and director and by each
person who owns 5% or more of the outstanding Common Stock have been excluded in
that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
As of December 1, 2001, registrant had 40,117,488 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement dated on or about to be delivered to
shareholders in connection with the Annual Meeting of Shareholders to be held
are incorporated by reference into Part III.
================================================================================
TARANTELLA, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2001
TABLE OF CONTENTS
PART I PAGE NUMBER
-----------
Item 1. Business 1
Item 2. Properties 9
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 9
Executive Officers of the Registrant
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters 11
Item 6. Selected Financial Data 12
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
Item 8. Financial Statements and Supplementary Data 25
Item 9. Changes in and Disagreement with Accountants on Accounting and
Financial Disclosures 55
PART III
Item 10. Directors and Executive Officers of the Registrant 55
Item 11. Executive Compensation 55
Item 12. Security Ownership of Certain Beneficial Owners and Management 55
Item 13. Certain Relationships and Related Transactions 55
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K 56
Signatures 58
PART I
ITEM 1. BUSINESS
This report contains forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934. The forward-looking statements
involve risks and uncertainties. Actual results could differ materially from
those projected in the forward-looking report and those described in other
reports under the Securities Exchange Act of 1934. Readers are referred to the
"Sales and Distribution", "Customer Support and Service", "Product Development",
"Competition", "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Risk Factors" sections contained in this Annual
Report on Form 10-K, which identify some of the important factors or events that
could cause actual results of performances to differ materially from those
contained in the forward-looking statements.
BACKGROUND
Tarantella, Inc. (Nasdaq: TTLA) (the Company), emerged as a standalone entity in
May of this year from its origins as the Tarantella Division of The Santa Cruz
Operation, Inc. (SCO).
On May 4, 2001, SCO completed the sale of its Server Software and Professional
Services Divisions to Caldera Systems, Inc., retaining the Tarantella Division.
A new company, Caldera International, was formed which combined the assets
acquired from SCO with the assets of Caldera Systems. Upon the completion of the
sale, The Santa Cruz Operation, Inc. changed its corporate name to Tarantella,
Inc. and its Nasdaq trading symbol to TTLA, reflecting the new corporate focus.
NOTE: In order to simplify this business section, separations will be made
between the current Tarantella company overview and the section regarding the
prior SCO business.
TARANTELLA, INC.
INTRODUCTION
Tarantella, Inc. is a leading provider of Internet infrastructure software that
enables web-based access to enterprise applications.
Headquartered in Santa Cruz, California, Tarantella has development sites in the
US and UK and sales representatives in the US, UK, Germany, Australia, Mexico,
Canada, Spain, Japan, Netherlands and Italy. Tarantella products are sold both
directly and through a worldwide channel of enterprise class distributors,
value-added resellers, systems integrators and computer manufacturers.
Tarantella's flagship product, Tarantella Enterprise 3 software, delivers secure
web access to old or new applications, powers thin client deployments, enables
remote access for mobile users and telecommuters, and provides a compelling
alternative to traditional extranets and virtual private networks. Tarantella
Enterprise 3 software gives the user a single point of access for multiple
servers running on heterogeneous platforms and can be a powerful tool for
continued business operation.
Tarantella software aligns with Information Technology (IT) business goals,
provides a significant return on existing IT assets and complements other
software products, providing managed and secure web access to enterprise
mainframe, Windows, web, AS/400, Java(TM) technology, Linux, and UNIX
applications.
1
VISION AND MISSION: Managed, Secure Access for the Enterprise
Tarantella's vision is to become the leading provider of managed, secure,
web-based application access software for the Global 2000 companies.
CORPORATE STRATEGY
Tarantella's strategy is to focus on the application access needs of Global 2000
enterprises by making virtually any business application available to users
securely through standard Internet and intranet architectures. Tarantella
approaches this target market through the combination of a direct sales
organization, channel partners and strategic alliances, seeking the broadest
market acceptance for its products.
IMPORTANCE OF WEB-BASED APPLICATION ACCESS
Today's enterprises need secure and managed access to business critical systems
for their employees, customers and partners -- from anywhere, any time. The
number of mobile and remote workers continues to grow and more companies are
merging, often requiring the quick need for diverse computer systems to work
together. Workers are dispersed around the world, needing access to data that
may be thousands of miles away. Real time is now synonymous with Internet time.
The Internet has become ubiquitous and offers a cheap and reliable way for
businesses to gain access to their data. This power, however, brings with it an
urgent need for high level security and manageability.
Recent terrorist events in the US have also shown how quickly the enterprise can
be brought to a halt when the workplace is disrupted. Disaster recovery plans
for the data center are not enough; alternative access modes for users whose
offices are no longer available must also be provided. Valuable corporate
information kept on desktops is at risk and companies are increasingly realizing
that a centralized, managed approach can be more cost effective and secure.
Today's global enterprises are decentralized organizations, needing remote and
mobile access, flexible business continuance plans and ways to cut the high
costs and risks of managing distributed desktop computers. Tarantella software
compellingly addresses these needs.
ADVANTAGES OF THE TARANTELLA ENTERPRISE 3 SOLUTION
Tarantella Enterprise 3 web-based software leverages existing IT investment
without the need for re-engineering. It offers a non-intrusive solution that can
provide employees, customers and partners with managed, secure, local, remote,
and mobile access to critical applications. Tarantella Enterprise 3 software
simplifies administration and securely speeds access to Windows, web, Java(TM)
technology, mainframe, AS/400, Linux and UNIX based systems and applications
from client devices globally. Its proven centralized management architecture
effortlessly scales to accommodate rapid corporate change, technological
advancement and expanding remote access needs. Key software benefits are:
- - Centralizes IT management - simplifies complex environments and provides
a single user access point
- - Manages people and their access to applications and data from a single
place
- - Deploys new applications instantly with a simple drag-and-drop management
interface
- - Reduces IT spending - protects investment and assets
- - Provides greater productivity, requires less training and reduces demands
on IT resources
- - Requires no installation on clients or application servers
2
- - Integrates new-era applications and systems with legacy, pre-web
applications -- without re-engineering
- - Accommodates rapid organizational change
- - Enables alternative user access for business continuance
- - Gives unprecedented scalability that enables growth, with the flexibility
to unify diverse IT environments
- - Has innovative architecture that allows remote users to achieve secure,
dial-up connections at LAN-like performance
- - Adds new mobile and wireless devices easily for quick access to corporate
systems
- - Extends the reach and life of legacy applications
- - Gives partners, suppliers and customers secure access to corporate
systems over the web, without installing costly extranets or Virtual
Private Networks (VPNs).
TARGET MARKETS
Tarantella software is a horizontal network infrastructure solution, which may
be used across all types and sizes of companies. Several target markets have,
however, emerged in which the Tarantella value proposition is particularly
compelling, including large financial institutions, government agencies
(federal, local, defense departments), utilities, telecommunications, document
publishing and large transportation enterprises.
These enterprises generally employ heterogeneous information systems
architectures, are often geographically dispersed with remote access
requirements, and are under operational pressures to reduce costs and optimize
return on assets. These organizations typically depend on UNIX servers as a key
part of their IT. The larger the company, the more diverse the applications
platforms and the more widely distributed the user base is, the better fit there
is for a Tarantella solution. It is the scalability and flexibility of the
Tarantella solution that differentiates it from competitors who simply cannot
scale to meet the demanding heterogeneous architectures of the largest
enterprises.
PARTNERS
Tarantella understands the need for strong industry partners to augment the
Tarantella enterprise value proposition. Sun Microsystems, Inc., for example,
has become one of Tarantella's strongest allies. Tarantella Enterprise 3 is
SunTone(SM) certified and was a featured technology in Sun's strategic Sun ONE
launch. Additionally Tarantella and Sun have signed an agreement to jointly
market Tarantella software with Sun iPlanet(TM) portal products and Sun's Sun
Ray(TM) appliance organization is a founding member of Tarantella's Technology
Alliance Group (TAG). Lastly, Tarantella has signed distribution agreements with
some of the largest Sun distributors in the world--GE Access in the USA, Clarity
in the UK and ICOS in Italy.
Tarantella has also partnered with IBM, becoming an Advanced IBM Business
partner. IBM's thin client group was also a founder in our TAG program.
Additionally, Computer Associates' iCan SP subsidiary has entered into a joint
marketing agreement to offer Tarantella Enterprise 3 as part of its xSP solution
set. Long standing SCO partner Compaq continues their relationship with
Tarantella. These strategic relationships -- both new and ongoing -- provide
Tarantella additional credibility and leverage in selling to the enterprise
market.
3
CURRENT PRODUCTS
The Company offers the flagship Tarantella software products as well as the
established Vision 2K Suite, as described below:
Tarantella Enterprise 3 The Tarantella Enterprise 3 solution instantly provides
managed and secure access to enterprise mainframe, Windows, web, Java(TM)
technology, UNIX, Linux and AS/400 applications. It leverages existing IT assets
to provide cost savings, improved productivity and the flexibility to
accommodate the rapid changes in today's organizations. Its proven centralized
management effortlessly scales to accommodate rapid corporate change,
technological advancement and expanding remote access needs. It can span global
multi-site IT architectures, unifying and simplifying complexity and diversity
in order to provide an enhanced level of business continuity through increased
application and service availability.
Tarantella Enterprise 3 Starter for Linux
This application access software provides an easy entry point for smaller
organizations wishing to extend the reach of applications and services over
intranets and the Internet. It harnesses the power and reliability of Linux
systems, the convenience of the Internet with the power of Tarantella
technology, to provide application access from client devices anywhere. Its
non-intrusive and flexible architecture applies the advanced, industry-proven
Tarantella Enterprise 3 technology to smaller enterprise workgroups and
departments, and sets the foundation for a low-maintenance, centralized IT
strategy.
Vision2K UNIX integration products
Integrating the Windows and UNIX worlds, Tarantella's established Vision2K
software suite extends the power and dependability of UNIX servers to the
Windows desktop environment and provides character-based and GUI access to UNIX
applications.
The Vision2K Suite consists of:
- VisionFS - server based file and print sharing
- XVision Eclipse - fast access to X applications
- TermVision - terminal emulation for Windows and the Internet
- SuperVision - centralized management of users
- TermLite - lightweight terminal emulator
SALES AND DISTRIBUTION
Tarantella's target customer set is the Global 2000 and government agencies
worldwide. To reach those customers, the Company has developed a two pronged
strategy utilizing both an extremely focused direct sales force and enterprise
distribution channels which include value-added distributors and resellers, as
well as systems integrators and independent software vendors (ISVs). Tarantella
selects channel partners for their expertise, experience and access to the
target market. In many cases, channel partners and Tarantella direct sales
people work together on targeted accounts
In addition to the enterprise sales motion, Tarantella fulfills to
small-to-medium businesses through the PartnerConnect program, with registered
and associate partners primarily managed by value-added distributors.
CUSTOMER SUPPORT AND SERVICES
Because of the business-critical use of Tarantella products, customer support
and services have become essential to achieving a high level of customer
satisfaction. The Company's services are designed to support
4
customers ranging from small and medium-sized businesses to large enterprises,
both at the end user and reseller levels. The Company, through its worldwide
customer support and services staff and its authorized third-party education,
support and channel partners, offers a variety of support programs and services:
Technical Support - includes a range of support offerings including on-line
support through the World Wide Web and varying levels of telephone support for
corporate accounts;
Educational Services - includes courseware and instruction guides provided to
the worldwide Tarantella Learning Centers, which in turn provide training and
education materials to both end users and resellers;
Developer Services - includes technical advisory and support services as well as
access to early product releases for application developers.
The Company sells support services to end users on an annual contract basis.
Options are available so that customers can tailor the support solution to meet
their specific needs. Electronic access is available through the World Wide Web.
Software updates, enhancements, and bug fixes are also available electronically.
Tarantella also supports end users via Authorized Tarantella Service Providers.
In addition, the Company provides its support services to distributors, VARs,
OEMs and integrators.
PRODUCT DEVELOPMENT
Tarantella product development is comprised of one integrated organization with
three sites located in Santa Cruz, California and Leeds and Cambridge, United
Kingdom. The company has developed or acquired skills in complex Internet
infrastructure areas including web-based technologies, communications, security,
Java(TM) technology, virtual user interfaces, networking, and adaptive
protocols. Furthermore, the heterogeneous nature of the product has led the
group to develop strong links with application server vendors, including
Microsoft, IBM, Sun and Oracle, and also to link with client vendors ranging
from traditional desktop and complex workstation clients to wireless handheld
devices from companies such as Nokia.
The company holds one patent and has another one that is pending.
Tarantella's patented, award-winning technology was designed from the beginning
for the public Internet and enterprise intranets. The Tarantella Adaptive
Internet Protocol (AIP) optimizes the tradeoffs between bandwidth and
application performance to give users the best possible experience over any
speed connection. In addition, Tarantella's innovative and non-invasive
implementation requires no changes to applications or their servers.
The Tarantella architecture is based on a three-layer approach, whereby the
Tarantella server sits in between the application layer (server) and the client
layer (user). There is no need to make changes to any applications or existing
servers to `drop' Tarantella into the network and provide access to applications
anywhere via existing client browsers.
Tarantella devotes resources to ongoing product testing and quality assurance to
support product reliability. The Company believes that its ability to integrate
product technologies, to incorporate a wide variety of standards into its
products, and to continue to offer enhancements to its existing products are
essential to maintaining its competitiveness in the marketplace.
COMPETITION
Tarantella's Enterprise software solutions compete against a range of point
products from companies including Citrix, Hummingbird, GraphOn, and Attachmate.
Additionally, Tarantella products can be used in place of, or to augment, VPN or
extranet products.
5
Citrix is the market leader in providing remote access to Windows applications;
Hummingbird is the same for UNIX and Attachmate for mainframes. GraphOn, on the
other hand, is largely focused on providing web-enabling tools for ISVs.
Each of these point competitors is a formidable opponent in their own space. In
contrast, Tarantella offers an integrated approach to all of these needs with
manageability, scalability, and flexibility to meet enterprise requirements.
Tarantella installs on all major UNIX and Linux platforms and delivers Windows,
UNIX, Linux, Mainframe and web-based applications in a secure managed
environment. It is the scalability and flexibility of our solutions in
heterogeneous and demanding architectures that differentiate Tarantella from
competitors.
EMPLOYEES
As of September 30, 2001, the Company had 207 employees, including 58 in product
development, 81 in sales and marketing, 11 in customer support services, and 57
in finance, manufacturing and distribution services and administration.
THE SCO BUSINESS
INTRODUCTION
The Santa Cruz Operation, Inc. (SCO) was founded in 1979 and began trading on
the Nasdaq Stock Exchange (Nasdaq: SCOC) in 1993. SCO was a global developer and
provider of server software for networked business computing and had 20 years of
experience developing UNIX system, open system, and open source software. SCO
owned the intellectual property for UNIX system technology.
Headquartered in Santa Cruz, California, SCO had sales representatives in more
than 80 countries and SCO products were sold and distributed worldwide by more
than 15,000 resellers, distributors, systems integrators and computer
manufacturers.
COMPANY STRATEGY
SCO's business strategy was threefold: 1) to provide the leading UNIX server
software for high-volume Intel processor-based servers; 2) to web-enable
existing and new applications with server-based software across multiple
platforms (see Tarantella section); and 3) to provide technical expertise to
companies via its Professional Services organization.
TARGET MARKETS
The Company targeted three major market segments: 1) primary information systems
for small and medium-sized businesses, 2) replicated systems for use in
distributed information systems in medium-sized and large organizations,
including Fortune 1000 Corporations, and 3) business-critical enterprise servers
for large and medium-sized businesses. Key targeted industries included retail
and telecommunications.
6
PRODUCTS
UnixWare 7
UnixWare 7 had been built from the ground up to support distributed network
computing on cost-efficient, "enterprise-class" Intel processor-based servers.
As an applications server, UnixWare 7 provided all of the facets of business
critical computing, including built-in security, reliability, and fault
tolerance on a standard, cost-effective, and high-performance Intel single- or
multi-processor hardware platform.
UnixWare 7 NonStop Clusters
UnixWare 7 NonStop Clusters provided totally dependable access to
business-critical data and applications. UnixWare 7 NonStop Clusters software
linked individual "nodes" -- whole computers, each running its own copy of the
operating system - such that they acted and appeared as a single system.
SCO OpenServer
The SCO OpenServer system was a leading UNIX server operating system for Intel
processor-based platforms. SCO OpenServer systems were exceptional at running
multi-user, transaction-based DBMS and business applications, communications
gateways, mail and messaging servers in both host and client/server
environments. SCO OpenServer Release 5 combined minicomputer-level reliability
and availability with the Intel platform's exceptional price/performance, value
and flexibility. Unlike other advanced operating systems, SCO OpenServer systems
revolutionized business productivity without obsoleting existing business
critical systems, applications or data. SCO OpenServer systems delivered
extensive networking with existing LANs and WANs, easy integration with Windows
desktops, built-in Internet access and services, simplified administration and
management, and outstanding scalability for long term growth.
SALES AND DISTRIBUTION
SCO had developed a highly trained and diverse sales and distribution channel of
over 15,000 resellers and distributors. SCO and its distribution network worked
together to provide comprehensive support services ranging from engineering and
consulting services to technical support and training and education. The SCO
sales and distribution channels focused on three major customer groups.
Small and Medium-Sized Businesses (SMB). SCO worked with VARs and authorized
resellers, which develop and/or sell business solutions to small and
medium-sized businesses.
Corporate Customers. In the U.S., and for selected customers across Europe, SCO
developed a major account team that built and managed the relationships with
customers in targeted industries as well as with the Company's channel partners
who supported these customers.
Government Customers. SCO also had a dedicated account team that managed the
relationships with government agencies in the U.S., while Government sales
outside the U.S. were managed by SCO regional management or by OEMs, major
distributors or major resellers.
CUSTOMER SUPPORT AND SERVICES
SCO's services were designed to support its wide range of customers, from small
and medium-sized businesses to large enterprises, both at the end user and
reseller levels. SCO, through its worldwide Professional Services, customer
support and services staff and its authorized third-party education, support and
channel partners, offered a variety of support and services:
Technical Support
Educational Services
Consulting Services
Developer Services
Engineering Services
7
The Company sold support services to end users on an annual contract or
as-needed basis. Options were available so those customers could tailor the
support solution to meet their specific needs.
PRODUCT DEVELOPMENT
Since its inception, SCO focused considerable resources on the development and
integration of UNIX systems and open systems software technologies and standards
for Intel processor-based computers. In December of 1995, SCO purchased the UNIX
Systems technologies from Novell Inc., which have since transferred to Caldera
International as part of the May 2001 transaction.
SCO devoted considerable resources to ongoing product testing and quality
assurance. In addition, the Company offered localized versions of its core
business critical servers in English, French, Italian, German, Spanish, Chinese
and Japanese.
COMPETITION
The market for operating systems is very competitive and rapidly changing. The
Company encountered significant competition from a limited number of direct
competitors including Microsoft, Novell, IBM and Sun Microsystems, which offer
hardware-independent multi-user operating systems for Intel platforms, and from
OEMs such as Hewlett-Packard, IBM, Olivetti and Sun Microsystems, which offer
their own versions of the UNIX System on a variety of RISC and Intel CPU-based
hardware. Competition from companies selling versions of the Linux operating
system also increased.
BRIEF HISTORY OF COMPANY PRODUCTS
- - 1983 -- SCO XENIX System V, a packaged version of the UNIX operating
system.
- - 1989 -- SCO UNIX System V/386, its first UNIX trademarked commercial
product for Intel processor based platforms.
- - 1990 -- SCO Open Desktop, a graphical version of SCO UNIX System V/386.
- - 1993 -- Acquired IXI Corporation -- visual user interface and client
integration technology.
- - 1994 -- Acquired Visionware, Ltd. -- Windows connectivity technologies.
- - 1995 -- SCO OpenServer family, which integrated SCO OpenServer and SCO
Open Desktop product lines.
- - 1995 -- SCO Vision family of client-integration products, which integrate
Windows PCs with UNIX servers from all major UNIX system vendors.
- - 1995 -- SCO acquired the UnixWare product line and UNIX system technology
from Novell, Inc.
- - 1997 -- Tarantella web-enabling software launched.
- - 1998 -- UnixWare 7 Operating System.
- - 1999 -- Tarantella Enterprise II product released.
- - 2000 -- Tarantella Enterprise 3 product released
- - 2000 -- SCO entered into an agreement in which Caldera Systems would
acquire assets from the SCO Server Software and Professional Services
Divisions.
- - 2001 -- SCO completes the partial sale of company assets to Caldera
Systems, Inc. and changes its name to Tarantella, Inc.
8
ITEM 2. PROPERTIES
The Company occupies leased facilities in the United States, the United Kingdom,
Germany, Spain, Italy and Japan, consisting of an aggregate of approximately
90,000 square feet. The Company believes that these facilities are adequate for
its needs in the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
No material legal proceedings are pending to which the Company is a party or to
which any property of the Company is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held an annual meeting of shareholders on July 11, 2001. The
following matters were approved by the shareholders by the votes indicated:
NUMBER OF
MATTER SHARES FOR WITHHELD
- ------ ---------- ---------
ELECTION OF DIRECTORS:
Ninian Eadie 34,594,582 1,127,706
Ronald Lachman 34,597,422 1,124,866
Robert M. McClure 34,590,907 1,131,381
Douglas L. Michels 29,512,887 6,209,401
Alok Mohan 34,506,536 1,133,907
R. Duff Thompson 34,588,381 1,133,907
Gilbert P. Williamson 34,582,730 1,139,558
OTHER MATTERS: FOR AGAINST ABSTAIN
---------- --------- ------
Amendment of the Company's 1994 28,519,070 7,124,611 78,607
Incentive Stock Option Plan share
reserve by 1,500,000 shares
Amendment of the Company's 1993 28,606,258 7,032,789 83,241
Director Option Plan to increase the
Plan share reserve by 100,000 shares
Amendment of the Company's 1993 34,974,930 681,711 65,647
Employee Stock Purchase Plan to
increase the Plan share reserve by
250,000 shares
Ratification of Deloitte & Touche LLP 35,482,426 148,496 91,366
as independent certified public accountants
of the Company
9
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company as of September 30, 2001 were as follows:
Name Age Position with the Company
- ---- --- -------------------------
Douglas L. Michels 47 President and Chief Executive Officer
Randall Bresee 53 Senior Vice President and Chief Financial Officer
Steve Sabbath 54 Senior Vice President, Law and Corporate Affairs,
and Secretary
Geoff Seabrook 53 Senior Vice President, Corporate Development
Mr. Michels was named President and Chief Executive Officer in April 1998. Mr.
Michels is the principal architect of the Company's technology strategy and
served as the head of product development between June 1997 and April 1998 and
as Chief Technical Officer between February 1993 and June 1997. Mr. Michels has
been a director of the Company since 1979 and served as the Company's Executive
Vice President between 1979, when he co-founded the Company, and April 1998.
Mr. Bresee was named Senior Vice President and Chief Financial Officer in April
of 2000. Prior to that he was Chief Financial Officer at bamboo.com, serving in
the capacity from April 1999 to April 2000. Between January 1997 and April 1999
he was Vice President and Corporate Controller for SCO and between May 1996 and
January 1997 he served as Americas Controller for SCO. Prior to joining SCO, Mr.
Bresee served as Director of Finance for the Customer Support Division at
Silicon Graphics Incorporated from May 1988 to May 1996.
Mr. Sabbath was named Senior Vice President, Law and Corporate Affairs, and
Secretary in January 1998. Between 1993 and 1997, he served as Vice President,
Law and Corporate Affairs, and Secretary and served as Vice President, Legal
Affairs between 1991 and 1993. Prior to joining the Company, between February
1988 and January 1991, Mr. Sabbath was the Deputy General Counsel for Sun
Microsystems, Inc., a manufacturer of UNIX system-based hardware and software.
Mr. Seabrook was named Senior Vice President, Corporate Development in April
1998. Since joining the Company in 1989, Mr. Seabrook has held a number of
strategic positions, including Senior Vice President and General Manager, EMEIA.
Prior to joining the Company, Mr. Seabrook served as Vice President
International Operations at Century Data Inc..
10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The following required information is filed as a part of the report:
The Company has not paid cash dividends on its common stock. The Company's
common stock is traded over-the-counter and is quoted on the Nasdaq National
Market under the symbol "TTLA". The following table sets forth the range of high
and low closing sale prices for the Common Stock:
Low Sale Price High Sale Price
-------------- ---------------
Fiscal 2000:
First Quarter 11.25 34.63
Second Quarter 9.38 31.25
Third Quarter 4.19 8.94
Fourth Quarter 2.78 6.13
Fiscal 2001:
First Quarter 1.06 4.25
Second Quarter 0.88 2.84
Third Quarter 1.23 2.20
Fourth Quarter 0.31 1.62
On December 1, 2001, there were approximately 23,000 holders of the Company's
Common Stock.
11
ITEM 6. SELECTED FINANCIAL DATA
TARANTELLA, INC.
SELECTED FIVE YEAR FINANCIAL INFORMATION
Fiscal Year Ended September 30,
----------------------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
(In thousands, except per share data)
Net revenues $ 66,662 $ 148,923 $ 223,624 $ 171,900 $ 193,660
Cost of revenues 17,315 41,796 49,778 47,096 55,315
--------- --------- --------- --------- ---------
Gross margin 49,347 107,127 173,846 124,804 138,345
Operating expenses 83,724 158,360 157,473 138,397 154,939
--------- --------- --------- --------- ---------
Operating income (loss) (34,377) (51,233) 16,373 (13,593) (16,594)
Other income (expense):
Gain on Caldera transaction 53,267 -- -- -- --
Loss and Impairment of equity investment in Caldera (27,066) -- -- -- --
Interest income, net 1,118 1,679 1,942 2,261 2,291
Other income (expense), net 253 819 1,939 226 (866)
--------- --------- --------- --------- ---------
Income (loss) before income taxes (6,805) (48,735) 20,254 (11,106) (15,169)
Income taxes (1,070) 8,218 3,396 3,559 1
--------- --------- --------- --------- ---------
Net income (loss) (5,735) (56,953) 16,858 (14,665) (15,170)
Comprehensive income (loss) $ (11,123) $ (51,875) $ 15,974 $ (14,012) $ (14,234)
Earnings (loss) per share-basic $ (0.14) $ (1.59) $ 0.49 $ (0.41) $ (0.41)
Earnings (loss) per share-diluted $ (0.14) $ (1.59) $ 0.46 $ (0.41) $ (0.41)
--------- --------- --------- --------- ---------
Shares used in per share calculation-basic 39,831 35,720 34,232 35,817 36,628
Shares used in per share calculation-diluted 39,831 35,720 36,402 35,817 36,628
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
(In thousands) 2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
Cash, equivalents and short-term investments $ 14,100 $ 26,446 $ 62,844 $ 51,076 $ 51,711
Working capital 10,022 16,654 44,813 32,221 46,164
Total assets 35,591 82,202 139,284 131,189 146,665
Long-term liabilities 1,853 5,462 11,094 12,027 9,545
Shareholders' equity 20,794 31,202 70,338 60,135 81,462
--------- --------- --------- --------- ---------
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Tarantella is a leading provider of Internet infrastructure software that
enables web-based access to enterprise applications.
The Tarantella Enterprise 3 solution instantly provides managed and secure web
access to enterprise mainframe, Windows, AS/400, Linux, and UNIX applications.
It leverages existing IT assets to provide cost savings, improved productivity,
and the flexibility to accommodate the rapid changes in today's organizations.
This Management's Discussion and Analysis of Financial Condition and Results of
Operations includes forward-looking statements within the meaning of Section 21E
of the Securities Exchange Act of 1934. The forward-looking statements involve
risks and uncertainties. Actual results could differ materially from those
projected in the forward-looking statements as a results of certain factors,
including those set forth in Item 1, those described elsewhere in this report
and those described in other reports under the Securities Exchange Act of 1934.
We caution you not to place undue reliance on these forward-looking statements,
which speak only as of the date of this report.
RESULTS OF OPERATIONS
NET REVENUES
The Company's net revenues are derived from software licenses and fees for
services, which include engineering services, consulting, custom engineering,
support and training.
Net revenues were $66.7 million in fiscal 2001, a decrease of 55% from $148.9
million in fiscal 2000. In fiscal 2000, net revenues decreased by 33% from
$223.6 million in fiscal 1999. The decline in revenue performance in fiscal 2001
was worldwide across all geographies and is attributable to the sale of a
significant portion of our business. The Company's revenues were also impacted
by the general reduction in information technology ("IT") investments by
companies for application server software and service initiatives. The fiscal
2000 decline in revenue performance was worldwide across most geographies and is
attributable to delays in large project deals as well as customer delays due to
Year 2000 issues and other market factors. The recovery of the customer channel
from the impact of Year 2000 has been slower than expected. For the fiscal years
ended September 30, 2001, 2000 and 1999, no single customer accounted for more
than 10% of the Company's net revenues.
International revenues continue to be a significant portion of net revenues,
comprising 52% of the revenues for fiscal 2001 and 54% and 56% for 2000 and
1999, respectively.
License Revenues. License revenues were $58.3 million in fiscal 2001 as compared
to $133.5 million in fiscal 2000 and $208.5 million in fiscal 1999, representing
a decrease of 56% in fiscal 2001 over 2000 and a decrease of 36% in fiscal 2000
over 1999. License revenues were 87% of total net revenues for fiscal 2001 and
90% and 93% of total net revenues for fiscal 2000 and 1999, respectively. The
fiscal 2001 decline in license revenues is attributed to fewer large project
deals and other market factors and the sale of the server business to Caldera.
The fiscal 1999 to 2000 license revenue decrease was due to customer delays due
to Year 2000 issues and a slower than expected recovery of the sales channel
from the impact of Y2K.
Services Revenues. Services revenues decreased to $8.4 million in fiscal 2001, a
decrease of 46% from the $15.4 million in fiscal 2000. Revenue from services
remained relatively constant in fiscal 2000 at $15.4
13
million, a 2% increase over the $15.2 million level of fiscal 1999. Services
revenues were 13% of the total revenue for fiscal 2001, compared to 10% in the
prior year. The decline in services revenues was primarily in the professional
services area and is the result of re-focusing of the professional services
division on the implementation of new strategies in conjunction with the sale of
the professional services business to Caldera.
COST OF REVENUES
The Company's overall cost of revenues as a percentage of net revenues can be
affected by mix changes in net revenue contribution between product families,
geographic regions and channels of distribution, since both price and cost
characteristics associated with these revenue streams can vary greatly. The
Company can also experience fluctuations in gross margin as net revenues
increase or decrease since certain costs of revenues including technology,
services, product assembly and distribution act as fixed costs within certain
volume ranges.
Cost of License Revenues. Cost of license revenues includes royalties paid to
certain software vendors, amortization of acquired technologies, product
packaging, documentation and all costs associated with the acquisition of
components, assembling of finished products, warehousing and shipping. Cost of
license revenues as a percentage of license revenues decreased to 14% in fiscal
2001 from 17% in fiscal 2000, and 15% in fiscal 1999. The 3% decrease from 2000
to 2001 was primarily due to the expiration 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. The 2% increase from 1999 to 2000 was due to the impact of
having fixed costs over lower unit sale volume. These fixed costs include
technology and overhead costs. This impact is partially offset by declining
material costs resulting from the continuing growth of e-commerce business.
Cost of Services Revenues. Cost of services revenues includes documentation,
consulting and personnel related expenses associated with providing such
services. Costs of services revenues as a percentage of services revenues
decreased to 107% from 126% in fiscal 2000, which in turn was a decrease from
128% in fiscal 1999. The improvement in cost of services revenues in Fiscal 2001
is primarily a result of reduced staffing levels in both the support and
professional services organizations due to realignments of these organizations.
The decrease in fiscal 2000 resulted from relatively constant costs as a
percentage of higher fiscal 2000 revenues.
RESEARCH AND DEVELOPMENT
The Company invests in research and development both for new products and to
provide continuing enhancements to current products. Research and development
expenses decreased 54% to $18.4 million in fiscal 2001 from $39.7 million in
fiscal 2000, which was a decrease of 6% from fiscal 1999 spending of $42.4
million. Research and development expenses represented 28% of net revenues for
fiscal 2001, 27% of net revenues for fiscal 2000, and 19% of net revenues for
fiscal 1999. The decrease in research and development expenses in fiscal 2000
and 2001 can be attributed to lower labor costs driven by lower headcount as a
result of a planned reduction in force. Fiscal 2001 spending was also favorably
impacted by the sale of the Server Software and Professional Services divisions
to Caldera.
SALES AND MARKETING
Sales and marketing expenses decreased 47% to $46.9 million in fiscal 2001,
compared to $89.3 million for fiscal 2000 and $98.5 million for fiscal 1999.
Sales and marketing expenses represented 70% of net revenues in fiscal 2001, 60%
in fiscal 2000 and 44% in fiscal 1999. The decrease in fiscal 2001 is due to
lower labor costs as a result of the sale of the Server and Professional
Services division to Caldera combined with reductions driven by lower headcount
as a result of a planned reduction in force. The
14
decrease in fiscal 2000 is due to a decline in sales program costs that vary
directly with revenue, including commissions and cooperative advertising. The
increase as a percentage of revenue in both fiscal 2001 and fiscal 2000 is due
to revenues declining faster than the company was able to reduce expenses.
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased 7% to $17.3 million in fiscal
2001, compared with $18.7 million in fiscal 2000 and $16.6 million in fiscal
1999. General and administrative represented 26% of net revenues in fiscal 2001,
13% in fiscal 2000 and 7% in fiscal 1999. The significant increase in general
and administrative expense as a percentage of revenue is due to fixed costs
spread over much lower revenue as well as the payment of executive retention
bonuses of $2.1 million associated with the sale of the majority of the business
to Caldera. The transfer of certain staff from other functions due to the
creation of the Company's divisions drove the increase in fiscal 2000.
Allowance for doubtful accounts at the end of September 30, 2001 was $2.3
million, or 36% of gross accounts receivable. At the end of September 30, 2000,
allowance for doubtful accounts was $3.2 million, or 12% of gross accounts
receivable. The reason for the significant increase in allowance for doubtful
accounts is because the Company retained all accounts receivable when they sold
the server and professional services divisions to Caldera. All of the current
allowance for doubtful accounts relates to sales of server products. The
allowance for doubtful accounts balance of $2.3 million at September 30, 2001
includes a $0.7 million reserve for a customer that has declared bankruptcy.
RESTRUCTURING CHARGES
Restructuring charges of $1.0 million were incurred in fiscal year 2001 that
related to worldwide restructurings undertaken in the second and fourth quarters
of fiscal 2001. The restructurings included a reduction in personnel of
approximately 38 employees and elimination of non-essential facilities. As of
September 30, 2001, all 38 positions have been eliminated, however there were
cash payments of $304,000 remaining. Of the $1.0 million, the entire $1.0
million charge related to cash expenditures. These reductions were made to align
spending with lower than expected company revenues. 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 anticipated that the
sub-lease would be completed within three months, however as of September 30,
2001 the space remained vacant.
Restructuring charges of $10.7 million were incurred in fiscal year 2000 that
related to worldwide restructurings undertaken in the second and fourth quarters
of fiscal 2000, representing 7% of total net revenues for the fiscal year. The
restructuring charges included a reduction in personnel of approximately 227
employees, write-off of certain acquired technologies, write-off of certain
fixed assets, and elimination of non-essential facilities. Of the $10.7 million,
$9.2 million related to cash expenditures and $1.5 million related to non-cash
charges. The restructuring charge included cash expenditures of $7.3 million for
severance costs and $1.9 million for facilities costs. The non-cash charges
related to disposals of fixed assets and write-off of technology. The disposal
of fixed assets was comprised of computer equipment that was no longer in use
due to the reduction of personnel. Losses on the disposal of these fixed assets
were recorded against the restructuring charge. The amount of these charges was
$842,000. The technology write-off relates to technology that was no longer used
in product development due to the reduction in development personnel. The
Company restructured its business operations into three independent divisions,
each with a separate management team and dedicated development, marketing and
sales organizations - the Server Division, the Tarantella Division and the
Professional Services Division. The Company believed this reorganization would
create independent focused teams that could pursue revenue in their respective
markets and was effective April 1, 2000. The Company believed that as a result
of creating these independent, focused organizations the Company would be better
able to control and measure the success of these businesses. As a result of the
restructuring plans various regional offices in the United States, United
Kingdom, Latin America and the Asia Pacific region were eliminated. The US
regional facilities and the Watford, UK leases were vacated and restored, and
subsequently sub-let or terminated. The remaining
15
international offices were vacated immediately. Of the facilities closed, the
majority related to the Server Division while a minor portion related to the
Corporate Division which is comprised primarily of the finance and General and
Administrative functions of the Company's United Kingdom subsidiary. Reserves
for any payments not made by the end of fiscal 2001 were released.
OTHER INCOME (EXPENSE)
Other income and expense consists of interest income net of interest expense,
foreign exchange gains and losses, and realized gains and losses on investments,
as well as other miscellaneous income and expense items. Net interest income
decreased in fiscal 2001 to $1.1 million compared to $1.7 million for fiscal
2000 and $1.9 million for fiscal 1999. Other income was $0.3 million for fiscal
2001, $0.8 million for fiscal 2000 and $1.9 million for fiscal 1999. 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. In fiscal 2000 the Company recorded a gain on the sale of shares of
Rainmaker stock of $1.9 million, net of an other-than temporary decline in
another investment position of $0.7 million. The decrease in other income from
fiscal 1999 to fiscal 2000 was due to gains from the partial liquidation of
converted debentures of a domestic distribution channel partner of $3.3 million,
net of an other-than temporary decline in another investment position of $1.0
million which were included in the fiscal 1999 results but did not recur in
fiscal 2000. In fiscal 2001 there was a $53.3 million gain included in other
income for the sale of the server and professional services divisions to
Caldera. There was also a charge taken for the impairment of the Caldera
investment in the amount of $22.5 million, net of the unamortized portion of
negative goodwill. The fiscal 2001 results also include $4.6 million for the
loss from the equity investment in Caldera. This loss is net of $0.7 million of
negative goodwill related to the excess of net assets in Caldera over the value
of the investment at the time of closing.
INCOME TAXES
In fiscal 2001, 2000 and 1999, the Company's effective income tax rates were
16%, (17)% and 17%. The fiscal 2001 tax benefit of $1.1 million reflects a
benefit of $1.6 million due to the resolution of foreign audit issues and
foreign income taxes of $0.5 million. The fiscal 2000 tax primarily reflects the
write off of deferred tax assets of $7.8 million and foreign income taxes of
$0.5 million. The fiscal 1999 tax primarily reflects foreign income taxes.
NET INCOME (LOSS)
The Company reported a net loss of $5.7 million in fiscal 2001 compared to net
loss of $57.0 million in fiscal 2000 and net income of $16.9 million in fiscal
1999. Although revenues were significantly lower in fiscal 2001, the net losses
decreased by 90% due to the net gain recorded for the Caldera transaction. The
net loss in fiscal 2000 is primarily due to lower revenues, restructuring
charges and the reduction of net deferred tax assets. The net income in fiscal
1999 was driven by strong revenue performance, which was directly related to the
increasing importance of server-based computing as well as customers upgrading
in preparation for Year 2000.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments were $14.1 million at
September 30, 2001, representing 40% of total assets. The decrease in cash and
short-term investments of $12.3 million 2001 is due to operating losses, lower
revenues and a decrease in sales linearity, which resulted in lower cash
collections. The Company's operating activities used cash of $34.2 million
during fiscal 2001, compared to $41.6 million used for operating activities for
fiscal 2000. Cash provided by investing activities was $25.0 million in fiscal
2001 compared to cash provided from investing of $19.5 million in fiscal 2000.
The increase was
16
attributable primarily to the proceeds received from the Caldera transaction.
Cash provided for financing activities was $0.7 million for fiscal 2001 compared
with $9.9 million for fiscal 2000.
The company's days sales outstanding (DSO) at the end of fiscal 2001 was 87, an
increase of 21 days from the end of fiscal 2000. The increase in DSO at the end
of fiscal 2001 was due to a deterioration of sales linearity during the fourth
quarter as well as increased delinquent accounts receivable. It is expected that
DSO for Tarantella will not fluctuate significantly from the 87 days at the end
of fiscal 2001. DSO are expected to remain at higher levels than prior years
because a larger portion of the products are now sold directly to the customer
and this type of sale does not have the even linearity seen in sales through
distribution.
As of September 30, 2001, the Company had an equity investment in Rainmaker
Systems having a fair market value of $0.1 million and a cost basis of $0.2
million. 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 net losses from operations of approximately $5.7
million during fiscal 2001 and $57.9 million during fiscal 2000 and revenues
have declined from $148.9 million in fiscal 2000 to $66.7 million in fiscal
2001. For fiscal 2001 losses from operations were $34.4 million, compared to
$51.2 million during fiscal 2000. The Company has an accumulated deficit of
$99.0 million as of September 30, 2001.
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. Draws on the financing
agreement are repayable on December 31, 2001 and bear interest at a rate per
annum of 10%. Draws 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 the Company's common stock on the date of issuance, subject to
certain limitations. The unconverted principal is repayable in cash. The Company
has not drawn on this line of credit.
The Company believes that, based on its current plans 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 2002, however additional financing may be required
thereafter.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Set forth below and elsewhere in this Report 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 Report.
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
17
- - 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.
THE COMPANY IS EXPOSED TO GENERAL ECONOMIC AND MARKET CONDITIONS
Any significant downturn in the Companies 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 may negatively
impact the economy in general. In particular, the negative impacts of these
events may affect the software industry. This could result in customers delaying
or canceling orders for software. Any of these occurrences could have a
significant impact on the Companies operating results, revenues and costs and
may cause the market price of their 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
18
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.
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.
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.
19
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 DEPENDANT 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.
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
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.
20
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.
TAX CARRYFORWARDS
As the Company utilizes its tax carryforwards and as new tax legislation is
enacted, the Company's effective tax rate is subject to change.
THE COMPANY'S RESULTS OF OPERATIONS MAY BE AFFECTED BY FLUCTUATIONS IN FOREIGN
CURRENCY EXCHANGE RATES
Substantial portions of the Company's revenues are derived from sales to
customers outside the United States. Trade sales to international customers
represented 52%, 54% and 56% of total revenues for fiscal 2001, 2000 and 1999,
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 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.
21
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 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 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. 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.
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
and expect to continue to make changes to our internal systems in preparation
for the transition to the Euro. Changes made to date include changing the
operating currency of the European subsidiaries that are affected by the Euro
from the national currency to the Euro, which became effective during fiscal
2001. We expect to complete the conversion of all financial aspects of these
subsidiaries by December 31, 2001.
We further expect that use of the Euro may affect our foreign exchange
activities and may result in increased fluctuations in foreign currency results.
Any delays in our ability to be Euro-compliant could have an adverse impact on
our results of operations or financial position.
22
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 throughout
the year based on the then current fair value. As of September 30, 2001, the
fair value of both warrants was determined to be insignificant.
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.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") No. 101, Revenue Recognition in Financial
Statements, which provides guidance on the recognition, presentation and
disclosure of revenue and financial statements 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.
23
ITEM 7A. QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET-RATE SENSITIVE INSTRUMENTS AND RISK MANAGEMENT
The following discussion about the Company's risk-management activities includes
"forward-looking statements" that involve risk and uncertainties. Actual results
could differ materially from those projected in the forward-looking statements.
We are exposed to market risk related to changes in interest rates, foreign
currency exchange rates, and equity security price risk. We do not use
derivative financial instruments for speculative or trading purposes.
The following tables summarize the financial instruments held by the Company at
September 30, 2001 which are sensitive to changes in interest rates. In the past
the Company used forward foreign exchange contracts to manage foreign exchange
exposures associated with underlying assets, liabilities and anticipated
transactions. Since the completion of the transaction in which the Company sold
the Server Software and Professional Services divisions to Caldera
International, the Company does not feel the foreign exchange risk is great
enough to warrant the purchase of forward foreign exchange contracts.
In the normal course of business, the Company also faces risks that are either
non-financial or non-quantifiable. Such risks principally include technology
risk, country risk, credit risk and legal risk, and are not represented in the
following tables.
INTEREST-RATE RISK
As of September 30, 2001 the Company had cash and equivalents of $12.1 million,
consisting of cash and highly liquid money market instruments with maturities of
less than 90 days, and bank certificate of deposits of $2.0 million. Because of
the short maturities of these instruments, a sudden change in market interest
rates would not have a material impact on the fair value of the portfolio. The
company would not expect operating results or cash flows to be affected to any
significant degree by the effect of a sudden change in market interest on our
portfolio.
24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TARANTELLA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Years Ended September 30,
-------------------------------------
(In thousands, except per share data) 2001 2000 1999
- --------------------------------------------------------------------------------------------------------
Net revenues:
Licenses $ 58,310 $ 133,510 $ 208,466
Services 8,352 15,413 15,158
- --------------------------------------------------------------------------------------------------------
Total net revenues 66,662 148,923 223,624
- --------------------------------------------------------------------------------------------------------
Cost of revenues:
Licenses 8,346 22,366 30,450
Services 8,969 19,430 19,328
- --------------------------------------------------------------------------------------------------------
Total cost of revenues 17,315 41,796 49,778
- --------------------------------------------------------------------------------------------------------
Gross margin 49,347 107,127 173,846
- --------------------------------------------------------------------------------------------------------
Operating expenses:
Research and development 18,439 39,673 42,376
Sales and marketing 46,940 89,313 98,525
General and Administrative 17,326 18,691 16,572
Restructuring charge 1,019 10,683 --
- --------------------------------------------------------------------------------------------------------
Total operating expenses 83,724 158,360 157,473
- --------------------------------------------------------------------------------------------------------
Operating income (loss) (34,377) (51,233) 16,373
- --------------------------------------------------------------------------------------------------------
Other income (expense):
Gain on Caldera transaction 53,267 -- --
Loss and impairment of equity investment in Caldera (27,066) -- --
Interest income, net 1,118 1,679 1,942
Other income, net 253 819 1,939
- --------------------------------------------------------------------------------------------------------
Total other income 27,572 2,498 3,881
- --------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (6,805) (48,735) 20,254
- --------------------------------------------------------------------------------------------------------
Provision for (benefit from) income taxes (1,070) 8,218 3,396
- --------------------------------------------------------------------------------------------------------
Net income (loss) (5,735) (56,953) 16,858
Other comprehensive income (loss):
Foreign currency translation adjustment 33 (539) (884)
Unrealized gain (loss) on available for sale
securities, net of tax of $2,119 in fiscal 2000 (5,686) 3,498 --
- --------------------------------------------------------------------------------------------------------
Total other comprehensive income (loss) (5,653) 2,959 (884)
Reversal of valuation allowance on deferred tax assets -- 2,119 --
- --------------------------------------------------------------------------------------------------------
Comprehensive income (loss) $ (11,388) $ (51,875) $ 15,974
- --------------------------------------------------------------------------------------------------------
Earnings (loss) per share:
Basic $ (0.14) $ (1.59) $ 0.49
Diluted $ (0.14) $ (1.59) $ 0.46
- --------------------------------------------------------------------------------------------------------
Shares used in earnings (loss) per share calculation:
Basic 39,831 35,720 34,232
Diluted 39,831 35,720 36,402
- --------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
25
TARANTELLA, INC.
CONSOLIDATED BALANCE SHEETS
September 30,
----------------------------
(In thousands) 2001 2000
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 12,100 $ 20,879
Short-term investments 2,000 5,567
Receivables, net of allowance for doubtful accounts 4,098 24,269
of $2.3 million and $3.2 million in 2001 and 2000, respectively
Available-for-sale equity securities 101 7,119
Note receivable from Caldera 1,846 --
Other receivables 1,658 795
Prepaids and other current assets 1,163 3,563
------------ ------------
Total current assets 22,966 62,192
------------ ------------
Property and equipment, net 2,232 14,842
Long-term portion of note receivable from Caldera 5,260 --
Equity investment in Caldera 4,010 --
Other assets 1,123 5,168
------------ ------------
Total assets $ 35,591 $ 82,202
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 802 $ 5,521
Royalties payable 733 4,530
Income taxes payable 374 1,964
Accrued restructuring charges 344 5,964
Accrued expenses and other current liabilities 9,506 20,225
Deferred revenues 1,185 7,334
------------ ------------
Total current liabilities 12,944 45,538
------------ ------------
Long-term lease obligations 2 545
Long-term deferred revenues 91 1,397
Other long-term liabilities 1,760 3,520
------------ ------------
Total long-term liabilities 1,853 5,462
------------ ------------
Commitments and contingencies (note 10) Shareholders' equity:
Preferred stock, authorized 20,000,000 shares;
No shares issued and outstanding in 2001 and 2000 -- --
Common stock, no par value, authorized 100,000 shares;
Issued and outstanding 40,117 and 39,436 shares
in 2001 and 2000, respectively 119,919 118,940
Accumulated other comprehensive income (166) 5,486
Accumulated deficit (98,959) (93,224)
------------ ------------
Total shareholders' equity 20,794 31,202
------------ ------------
Total liabilities and shareholders' equity $ 35,591 $ 82,202
------------ ------------
See accompanying notes to consolidated financial statements.
26
TARANTELLA, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated
Common Stock Note Other Total
---------------------------- Receivable Comprehensive Accumulated Shareholders'
(In thousands) Shares Amount from Officer Income (Loss) Deficit Equity
------------ ------------ ------------ ------------ ------------ ------------
BALANCES, SEPTEMBER 30, 1998 35,049 $ 112,064 $ (92) $ 1,292 $ (53,129) $ 60,135
------------ ------------ ------------ ------------ ------------ ------------
Common stock issuance under
stock option and purchase plans 1,721 7,107 -- -- -- 7,107
Common stock repurchases (2,424) (14,034) -- -- -- (14,034)
Interest on note -- -- (5) -- -- (5)
Stock option income tax benefit -- 1,161 -- -- -- 1,161
Foreign currency translation -- -- -- (884) -- (884)
Net income -- -- -- -- 16,858 16,858
------------ ------------ ------------ ------------ ------------ ------------
BALANCES, SEPTEMBER 30, 1999 34,346 $ 106,298 $ (97) $ 408 $ (36,271) $ 70,338
------------ ------------ ------------ ------------ ------------ ------------
Common stock issuance under
stock option and purchase plans 2,574 12,523 -- -- -- 12,523
Common stock repurchases (759) (12,786) -- -- -- (12,786)
Private placement 3,275 12,769 -- -- -- 12,769
Unrealized gain on investment -- -- -- 5,617 -- 5,617
Repayment of note -- -- 97 -- -- 97
Stock compensation expense -- 136 -- -- -- 136
Foreign currency translation -- -- -- (539) -- (539)
Net loss -- -- -- -- (56,953) (56,953)
------------ ------------ ------------ ------------ ------------ ------------
BALANCES, SEPTEMBER 30, 2000 39,436 $ 118,940 $ -- $ 5,486 $ (93,224) $ 31,202
------------ ------------ ------------ ------------ ------------ ------------
Common stock issuance under
stock option and purchase plans 681 1,176 -- -- -- 1,176
Unrealized loss on investment -- -- -- (5,686) -- (5,686)
Stock compensation expense -- 61 -- -- -- 61
Foreign currency translation -- -- -- 34 -- 34
Warrants - Canopy Group -- 969 -- -- -- 969
Warrants - Security Research -- (1,227) -- -- -- (1,227)
Net loss -- -- -- -- (5,735) (5,735)
------------ ------------ ------------ ------------ ------------ ------------
BALANCES, SEPTEMBER 30, 2001 40,117 $ 119,919 $ -- $ (166) $ (98,959) $ 20,794
------------ ------------ ------------ ------------ ------------ ------------
See accompanying notes to consolidated financial statements.
27
TARANTELLA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Years Ended September 30,
--------------------------------------------
(In thousands) 2001 2000 1999
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (5,735) $ (56,953) $ 16,858
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities -
Depreciation and amortization 5,086 11,302 12,140
Deferred taxes -- 7,821 --
Stock option income tax benefit -- -- 1,161
Foreign currency exchange (gain) loss 82 (342) 20
Gain on sale of marketable security (2,118) (1,896) (3,272)
Loss on disposal of property and equipment 1,559 -- --
Gain on Caldera transaction (53,267) -- --
Loss on equity investment in Caldera 4,581 -- --
Impairment of equity investment in Caldera 22,485 -- --
Realized loss on available-for-sale investments 675 -- --
Impairment of available-for-sale investments 2,503 672 1,000
Amortization of warrant and stock compensation expense (439) (136) --
Changes in operating assets and liabilities-
Receivables 11,475 7,309 (4,971)
Other current assets (337) 1,959 2,545
Other assets (279) 1,893 502
Trade accounts payable (4,719) (1,846) (15)
Royalties payable (1,139) (2,695) 2,135
Income taxes payable (646) 171 176
Accrued restructuring expenses (5,620) 5,964 0
Accrued expenses and other current liabilities (1,512) (10,679) 4,158
Deferred revenues (5,096) (2,489) (6,409)
Cash flows from other long-term liabilities (1,760) (1,701) 158
------------ ------------ ------------
Net cash provided by (used for) operating activities (34,221) (41,646) 26,186
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (33) (12,088) (28,654)
Sales of short-term investments and marketable securities 6,800 36,906 29,083
Purchases of property and equipment (1,629) (2,077) (3,816)
Purchases of software and technology licenses (894) (999) (2,633)
Changes in other assets 215 (2,268) 1,058
Proceeds from Caldera transaction 20,493 -- --
------------ ------------ ------------
Net cash provided by (used for) investing activities 24,952 19,474 (4,962)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations (543) (2,916) (3,626)
Net proceeds from issuance of common stock 1,176 25,563 7,107
Repurchases of common stock -- (12,786) (14,034)
------------ ------------ ------------
Net cash provided by (used for) financing activities 633 9,861 (10,553)
------------ ------------ ------------
Effects of exchange rate changes on cash and cash equivalents (143) (493) (746)
------------ ------------ ------------
Change in cash and cash equivalents (8,779) (12,804) 9,925
Cash and cash equivalents at beginning of year 20,879 33,683 23,758
------------ ------------ ------------
Cash and cash equivalents at end of year $ 12,100 $ 20,879 $ 33,683
------------ ------------ ------------
See accompanying notes to consolidated financial statements.
28
TARANTELLA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Fiscal Years Ended September 30,
-------------------------------------------
(In thousands) 2001 2000 1999
------------ ------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid -
Income taxes $ 1,238 $ 218 $ 3,319
Interest 317 344 544
Non-cash financing and investing activities -
Warrants issued to Security Research (1,227) -- --
Warrants issued to Canopy 969 -- --
Unrealized gain (loss) on available-for-sale
equity securities (5,686) 5,617 --
Assets acquired under capital leases -- 20 1,978
Assets written off against restructuring reserve 586 923 --
Reconciliation of proceeds from Caldera transaction:
Gain on Caldera transaction 53,267 -- --
Net assets sold 3,494 -- --
Discounted note receivable (6,828) -- --
Fair value of Caldera International common stock (29,440) -- --
------------ ------------ ------------
Cash proceeds from Caldera transaction $ 20,493 $ -- $ --
------------ ------------ ------------
See accompanying notes to consolidated financial statements.
29
TARANTELLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- THE COMPANY
THE COMPANY Tarantella is a leading provider of Internet infrastructure software
that enables web-based access to enterprise applications. The Tarantella
Enterprise 3 solution instantly provides managed and secure Web access to
enterprise mainframe, Windows, AS/400, Linux, and UNIX applications. It
leverages existing IT assets to provide cost savings, improved productivity, and
the flexibility to accommodate the rapid changes in today's organizations.
The Company was incorporated as The Santa Cruz Operation, Inc. (SCO) in
California in 1979. On May 4, 2001, SCO completed the sale of its Server
Software and Professional Services Divisions to Caldera Systems, Inc., retaining
the Tarantella Division. A new company, Caldera International, was formed which
combined the assets acquired from SCO with the assets of Caldera Systems. Upon
the completion of the sale, The Santa Cruz Operation, Inc. changed its corporate
name to Tarantella, Inc. and its Nasdaq trading symbol to TTLA, reflecting the
new corporate focus.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS RISKS AND UNCERTAINTIES The Company operates in the software industry,
which is characterized by intense competition, rapid technological advances and
evolving industry standards. Factors that could affect the Company's future
operating results and cause actual results to vary materially from expectations
include, but are not limited to, dependence on an industry that is characterized
by rapid technological changes, fluctuations in end-user demands, evolving
industry standards, competition, and risks associated with foreign currencies.
Failure by the Company to anticipate or respond adequately to technological
developments in its industry, changes in customer or supplier requirements or
changes in industry standards could have a material adverse effect on the
Company's business and operating results.
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the
Company and its wholly-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated on consolidation.
USE OF ESTIMATES The preparation of financial statements in conformity with
accounting principles generally accepted in the United States ("generally
accepted accounting principles") requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Such estimates include the allowances for bad debt, product
returns and certain accrued expenses and liabilities, and a valuation allowance
for deferred tax assets. Actual results could differ from those estimates.
RECLASSIFICATIONS Certain prior year reclassifications have been made for
consistent presentation.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS The Company considers all highly
liquid investments with an original maturity of 90 days or less at the date of
acquisition to be cash equivalents. Short-term investments include instruments
with lives ranging from 91 days to three years.
INVESTMENTS The Company classifies its investments in certain equity securities
in publicly traded companies as available-for-sale. Such investments are
recorded at fair market value, based on quoted market prices and unrealized
gains and losses are included in other comprehensive income. As of September 30,
2001, unrealized losses on such investments were $5.7 million. As of September
30, 2000, unrealized gains were $3.5 million. The Company has investments in
privately held companies which are classified as other assets. Realized gains
and losses, which are calculated based on the specific
30
identification method, are recorded in operations as incurred. Investments in
companies with less than 20% ownership are carried at the lower of cost or
realizable value.
CREDIT RISK Financial instruments which potentially subject us to concentrations
of credit risk consist primarily of cash equivalents, short-term investments and
accounts receivable. Cash, cash equivalents and short-term investments consist
primarily of cash accounts held at various banks, a money market fund held at
several financial institutions and a certificate of deposit. We sell our
products various organizations in different industries and geographies. Credit
risk is further mitigated by our credit evaluation process and limited payment
terms. We do not require collateral or other security to support accounts
receivable. In addition, we maintain an allowance for potential credit losses.
PROPERTY AND EQUIPMENT Property and equipment are stated at cost and, except for
assets recorded under capital lease and leasehold improvements, are depreciated
using the straight-line method over the estimated useful lives of the assets,
ranging from three to five years. Leasehold improvements and assets recorded
under capitalized leases are amortized using the straight-line method over the
lesser of the remaining term of the lease or the estimated economic life of the
asset, ranging from one to ten years.
PURCHASED SOFTWARE AND TECHNOLOGY LICENSES Purchased software consists of core
intellectual property rights owned by the Company. Technology licenses represent
payments for the rights to use and integrate third party technology into the
Company's product offerings. Amounts capitalized are amortized on a
straight-line basis over the estimated product life, ranging from three to ten
years, or on the ratio of current revenues to total projected product revenues,
whichever results in greater amortization.
ACCOUNTING FOR LONG-LIVED ASSETS The Company reviews property and equipment and
purchased software and technology licenses for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability is measured by comparison of its carrying amount
to estimated future net cash flows the assets are expected to generate. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying value of the asset exceeds the
projected discounted future operating cash flows.
SOFTWARE DEVELOPMENT COSTS Statement of Financial Accounting Standards ("SFAS")
No. 86 provides for the capitalization of certain software development costs
once technological feasibility is established. Capitalized costs are then
amortized on a straight-line basis over the estimated product life, or on the
ratio of current revenues to total projected product revenues, whichever is
greater. Through September 30, 2001, the Company believes its process for
developing software was essentially completed concurrent with the establishment
of technological feasibility, and accordingly, no software development costs
have been capitalized to date.
At each balance sheet date the Company compares the unamortized balance of
purchased software and technology with its net realizable value. Any amount by
which the unamortized balance exceeds the net realizable value is written off.
The net realizable value is calculated as the estimated future gross revenues
from the product reduced by the estimated future costs of completing and
disposing of that product, including the costs of performing the maintenance and
customer support required to satisfy the Company's responsibility set forth at
the time of the sale.
REVENUE RECOGNITION The Company's revenue is derived primarily from two sources,
across many industries: (i) products license revenue, derived primarily from
product sales to resellers and end users, including large scale enterprises and
royalty revenue, derived primarily from initial license fees and ongoing
royalties from product sales by source code OEMs; and (ii) services and support
revenue, derived primarily from providing software updates, support and
education and consulting services to end users.
The Company adopted the provisions of AICPA Statement of Position ("SOP") 97-2,
Software Revenue Recognition, as amended. Product revenue is recognized upon
shipment if evidence of an arrangement exists, the fee is fixed and
determinable, collection of resulting receivables is probable and product
returns
31
are reasonably assured. Sales to distributors, are recognized upon sale by the
distributor to resellers or end users. Estimated product returns are recorded
upon recognition of revenue from customers having rights of return, including
exchange rights for unsold products and product upgrades.
Until May 2001, the Company sold two types of software product -- its UNIX based
operating system software, which was sold under the Unixware and OpenServer
names, and its application broker software sold under the Tarantella name. In
May 2001, the Company sold the UNIX based business to Caldera Systems, Inc.
The Company sold Unixware and OpenServer products separately and as a result,
contracts involving the sale of Unixware and OpenServer which contain multiple
obligations (e.g. delivered and undelivered products, maintenance and other
services), the Company allocated revenue to each component of the contract based
on objective evidence of its fair value, which is specific to the Company. The
fair value of each element is based on the price sold separately. The Company
recognized revenue allocated to undelivered products when the criteria for
product revenue set forth above was met.
For multiple element contracts involving the sale of its Tarantella product the
Company uses the residual value method to allocate revenue to each component.
The fair value of services and post contract support is determined based upon
separate sales and renewal rates set forth in the contract, respectively.
The Company recognizes revenue from maintenance fees for ongoing customer
support and product updates ratably over the period of the maintenance contract.
Payments for maintenance fees are generally made in advance and are
non-refundable. For revenue allocated to education and consulting services or
derived from the separate sale of such services, the Company recognizes revenue
as the related services are performed.
The Company recognizes product revenue from royalty payments upon receipt of
quarterly royalty reports from OEMs (original equipment manufacturer) related to
their product sales.
The Company performs ongoing credit evaluations of its customers' financial
condition and does not require collateral. The Company maintains allowances for
potential credit losses and such losses have been within management's
expectations.
COOPERATIVE ADVERTISING The Company expenses advertising costs as incurred. The
Company reimburses certain qualified customers for a portion of the advertising
costs related to their promotion of the Company's products. The Company's
maximum liability for reimbursement is accrued at the time revenue is recognized
as a percentage of the qualified customer's net revenue derived from the
Company's products. For 2001, 2000 and 1999, cooperative advertising expense
totaled approximately $1.6 million, $7.8 million and $10.5 million,
respectively.
INCOME TAXES The Company records income taxes using an asset and liability
approach that results in the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been recognized in
the Company's consolidated financial statements or tax returns. In estimating
future tax consequences, all expected future events other than enactment of
changes in tax laws are considered. When necessary, a valuation allowance is
recorded to reduce tax assets to an amount whose realization is more likely than
not. The provision for income taxes represents taxes payable for the current
period, plus the net change in deferred tax amounts.
COMPUTATION OF EARNINGS (LOSS) PER SHARE Basic earnings (loss) per share is
computed by dividing income available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted earnings
(loss) per share is computed by giving effect to all dilutive potential common
shares that were outstanding during the period. For the Company, dilutive
potential common shares consist of the incremental common shares issuable upon
the exercise of stock options and warrants for all periods.
32
A reconciliation of the numerator and denominator used in the calculation of
basic and diluted earnings (loss) per share is provided as follows (in
thousands, except per share amounts):
(in thousands, except per share data) Fiscal Years Ended September 30,
--------------------------------------------
2001 2000 1999
------------ ------------ ------------
Basic:
Weighted average shares 39,831 35,720 34,232
============ ============ ============
Net income (loss) $ (5,735) $ (56,953) $ 16,858
============ ============ ============
Earnings (loss) per share $ (0.14) $ (1.59) $ 0.49
============ ============ ============
Diluted:
Weighted average shares 39,831 35,720 34,232
Common equivalent shares from
stock options and warrants -- -- 2,170
------------ ------------ ------------
Shares used in per share calculation 39,831 35,720 36,402
============ ============ ============
Net income (loss) $ (5,735) $ (56,953) $ 16,858
============ ============ ============
Earnings (loss) per share $ (0.14) $ (1.59) $ 0.46
============ ============ ============
September 30,
------------------------------------------
2001 2000 1999
------------ ------------ ------------
Options and warrants outstanding not included
in computation of diluted earnings (loss) per
share because the exercise price was greater
than the average market price 8,978 1,583 3,190
Options and warrants outstanding not included in
computation of diluted earnings (loss) per share
because their inclusion would have been
anti-dilutive 2,408 10,283 --
SEGMENT INFORMATION In 1999, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information". SFAS No. 131
supercedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise". Under the new standard the Company is required to use the
"management" approach to reporting its segments. The management approach
designates the internal
33
organization used by management for making operating decisions and assessing
performance as the source of the Company's segments.
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 throughout the year based on the then current
fair value. As of September 30, 2001, the fair value of both warrants was
determined to be insignificant.
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 is 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.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") No. 101, Revenue Recognition in Financial
Statements, which provides guidance on the recognition, presentation and
disclosure of revenue and financial statements 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.
34
STOCK-BASED COMPENSATION The Company accounts for employee stock plans under the
intrinsic value method prescribed by Accounting Principles Board Opinion ("APB")
No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"), and Financial
Accounting Standards Board Interpretation ("FASB") No. 44, "Accounting for
Certain Transactions Involving Stock Compensation" (an Interpretation of APB No.
25) and has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation". The Company accounts for equity instruments issued to
non-employees in accordance with the provisions of SFAS No. 123.
FOREIGN CURRENCY TRANSLATION The functional currency of the Company's foreign
subsidiaries is the local foreign currency. All assets and liabilities
denominated in foreign currencies are translated into U.S. dollars at the
exchange rate prevailing on the balance sheet date. Revenues, costs and expenses
are translated at average rates of exchange prevailing during the period.
Translation adjustments resulting from translation of the subsidiaries' accounts
are accumulated as a separate component of shareholders' equity. Gains and
losses resulting from foreign currency transactions are included in the
consolidated statements of operations and have not been significant.
HEDGING OF FOREIGN CURRENCY TRANSACTIONS In the past the Company utilized
foreign currency forward exchange contracts to hedge foreign currency market
exposures of underlying assets, liabilities and other obligations. The Company
did not use forward exchange contracts for speculative or trading purposes. The
Company's accounting policies for these instruments are based on the Company's
designation of such instruments as hedging transactions. The criteria the
Company uses for designating an instrument as a hedge include the instrument's
effectiveness in risk reduction and one-to-one matching of forward exchange
contracts to underlying transactions. Gains and losses on currency forward
contracts that are designated and effective as hedges of firm commitments are
deferred and recognized in income in the same period that the underlying
transactions are settled. Gains and losses on currency forward contracts that
are designated and effective as hedges of existing transactions are recognized
in income in the same period as losses and gains on the underlying transactions
are recognized and generally offset. Gains and losses on any instruments not
meeting the above criteria would be recognized in income in the current period.
The Company transacts business in various foreign currencies. At September 30,
2001 the Company had no foreign exchange contracts. At September 30, 2000, the
Company had foreign exchange contracts, all having maturities of 90 days or
less, to sell approximately $9,000,000 in U.S. dollars.
The fair value of these contracts at September 30, 2000 was not significant. As
of September 30, 2000 the following contracts were outstanding:
Forward Contracts
September 30, 2000
Contract
Premium paid/ amount Forward Term of
(Discount received) (In thousands) strike rate contract
------------------- -------------- ----------- ----------
Contract 1 2 $ 1,250 1.50255 (GB Pound/US Dollar) 2 months
Contract 2 3 $ 1,250 1.503025 (GB Pound/US Dollar) 2.5 months
Contract 3 5 $ 1,000 1.4568 (GB Pound/US Dollar) 2 months
Contract 4 5 $ 1,000 1.45705 (GB Pound/US Dollar) 2.5 months
Contract 5 5 $ 1,000 1.4574 (GB Pound/US Dollar) 3 months
Contract 6 (27) $ 3,500 1.4391 (GB Pound/US Dollar) 2 months
Contract 7 (38) $(3,500) 1.46598 (US Dollar/GB Pound) 2.5 months
35
FAIR VALUE OF FINANCIAL INSTRUMENTS Carrying amounts of certain of the Company's
financial instruments, including cash and cash equivalents, receivables,
accounts payable, accrued payroll and other accrued liabilities, approximate
fair value because of their short maturities. The fair values of investments are
determined using quoted market prices for those securities or similar financial
instruments. The fair value of other long-term liabilities approximates the
carrying value due to the market interest rates that these obligations bear. A
non-interest bearing $8.0 million note receivable was received from Caldera in
connection with the sale of the server and professional services divisions. The
note is due in quarterly installments beginning August 1, 2002 and is secured by
certain intellectual property sold to Caldera. The value of the note receivable
at September 30, 2001 is as follows:
CALDERA NOTE RECEIVABLE
As of September 30, 2001
------------------------------------------
Short Long
Term Term Total
------------ ------------ ------------
Face Amount ..... 2,000 6,000 8,000
Discount ........ 154 740 894
------------ ------------ ------------
Book Value ...... 1,846 5,260 7,106
============ ============ ============
NOTE 3 - CASH AND CASH EQUIVALENTS
September 30,
---------------------------
2001 2000
------------ ------------
(In thousands)
Bank demand deposits ....... $ 864 $ 1,819
Money market accounts ...... 11,236 19,060
------------ ------------
$ 12,100 $ 20,879
------------ ------------
At September 30, 2001, all investments had original maturity dates of 90 days or
less at the date of acquisition.
NOTE 4 - SHORT-TERM INVESTMENTS
September 30,
---------------------------
2001 2000
------------ ------------
(In thousands)
Bank certificates of deposit ...... $ 2,000 $ 3,100
Government agency bonds ........... -- 971
Commercial paper .................. -- 1,496
------------ ------------
$ 2,000 $ 5,567
------------ ------------
36
NOTE 5 - RELATED PARTIES
September 30,
---------------------------
2001 2000
------------ ------------
(In thousands)
Net revenues
License, third parties ................ $ 52,527 $ 118,877
License, related parties .............. 5,783 14,633
Service, third parties ................ 6,986 12,680
Service, related parties .............. 1,366 2,733
------------ ------------
Total net revenues ............... $ 66,662 $ 148,923
------------ ------------
Receivables
Receivables, third parties, net ....... $ 3,709 $ 22,917
Receivables, related parties, net ..... 389 1,352
------------ ------------
Total Receivables, net ........... $ 4,098 $ 24,269
------------ ------------
NOTE 6 - PROPERTY AND EQUIPMENT
September 30,
----------------------------
2001 2000
------------ ------------
(In thousands)
Computer and office equipment .......................... $ 2,568 $ 20,703
Furniture and fixtures ................................. 847 5,883
Leasehold improvements ................................. 1,673 8,143
Purchased software and technology licenses, at cost .... 1,082 31,588
------------ ------------
6,170 66,317
Less accumulated depreciation and amortization ......... (3,938) (51,475)
------------ ------------
$ 2,232 $ 14,842
============ ============
Depreciation and amortization expense was $5.1 million, $9.9 million and $11.7
million during fiscal 2001, 2000 and 1999, respectively. During fiscal 2001 the
Company sold net property and equipment of $8.4 million to Caldera as part of
the sale of the Server and Professional Services divisions.
NOTE 7 - LINE OF CREDIT
At September 30, 2001, the Company had available an $18 million line of credit
from the Canopy Group, under which the Company had no borrowings. The interest
rate on this line of credit is 10% on amounts borrowed. The line of credit
expires on December 31, 2001 and is secured by the assets of the Company. In
connection with the line of credit, the Company issued a warrant to purchase
1,440,000 shares of common stock at an exercise price of $1.5625 Per share. The
warrant expires on January 8, 2003. The estimated fair value of the warrant,
$1.0 million, has been recorded as a deferred financing cost in other assets and
is being amortized over the term of the agreement.
NOTE 8 - ROYALTIES PAYABLE
Royalties payable represent obligations to pay authors of certain software
products under licensing agreements. Two corporate shareholders accounted $0.6
million of royalty expense for fiscal 2000. At September 30, 2001 and September
30, 2000 no royalties were payable to corporate shareholders. There was no
royalty expense for corporate shareholders in fiscal 2001.
37
NOTE 9 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
September 30,
----------------------------
2001 2000
------------ ------------
(In thousands)
Accrued wages, commissions, bonuses ...... $ 1,955 $ 6,519
Accrued advertising ...................... 2,062 3,147
Accrued fringe benefits .................. 668 1,374
Capital lease obligations ................ 454 1,803
Customer deposits ........................ 811 761
Other payable - Caldera .................. 657 --
Other accrued expenses ................... 2,899 6,621
------------ ------------
$ 9,506 $ 20,225
============ ============
NOTE 10 -- COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS Future minimum lease payments under non-cancelable operating
leases (with initial or remaining lease terms in excess of one year) and future
minimum capital lease payments as of September 30, 2001 were as follows:
Capital Operating
(In thousands) Leases Leases
------------ ------------
Year Ending September 30,
2002 $ 9 $ 1,212
2003 2 1,208
2004 -- 1,206
2005 -- 905
2006 -- --
Later years, through 2020 -- --
------------ ------------
Total minimum lease payments 11 $ 4,531
============
Less amount representing interest --
------------
Present value of net minimum capital lease payments 11
Less current installments of
obligations under capital leases 9
------------ ------------
Obligations under capital leases,
excluding current installments $ 2
============ ============
The cost of assets recorded under capital leases was $35,260 and $8.2 million at
September 30, 2001 and 2000, respectively. Accumulated amortization on those
dates was $23,449 and $6.1 million, respectively.
Rent expense amounted to approximately $4.9 million, $7.7 million and $8.0
million in fiscal 2001, 2000, and 1999, respectively.
38
Included in the Company's operating lease commitments are facilities leased from
Encinal Partners, a partnership which includes the Company President and Chief
Executive Officer. The Company's Board of Directors has reviewed and approved
the lease agreements and determined that the lease agreements entered into by
the Company are equivalent to agreements that would be negotiated with an
independent third party on an "arms-length" basis. The remaining lease term of
this facility is four years. Rent expense for this facility amounted to
approximately $1.4 million in fiscal 2001, $1.5 million in fiscal 2000, and $1.4
million in fiscal 1999.
From time to time, the Company and its subsidiaries may experience claims in the
ordinary course of business, including among others employee legal actions and
alleged trademark infringements. Due to the nature of these matters, it is not
possible to either determine the range of loss that may result from them or
their ultimate resolution.
NOTE 11 - SHAREHOLDERS' EQUITY
PREFERRED STOCK The Company is authorized to issue 20,000,000 shares of
Preferred Stock. As of September 30, 2001, there were no shares of Preferred
Series stock either issued or outstanding.
1993 EMPLOYEE STOCK PURCHASE PLAN The Company has an Employee Stock Purchase
Plan ("ESPP") for all eligible employees which is administered by the Board of
Directors. Under the ESPP, shares of the Company's ESPP stock may be purchased
at six-month intervals at 85% of the fair market value on the first or last day
of each six-month period whichever is lower. Employees may purchase shares
through payroll deductions of up to 10% of gross compensation during an offering
period. During 2001, 2000, and 1999, employees purchased 670,591, 493,092, and
589,968 shares at an average per share price of $1.72, $4.31, and $3.52 ,
respectively. The number of shares reserved for issuance under the ESPP was
increased by 250,000 shares in July 2001. As of September 30, 2001, 1,196,466
shares were reserved for future issuance.
1994 INCENTIVE STOCK OPTION PLAN As of September 30, 2001, the Company had
authorized 21,513,665 shares of Common Stock for issuance under the 1994
Incentive Stock Option Plan (the "Option Plan"). The Company's Board of
Directors administers the Option Plan and determines the terms of the options
granted under the Option Plan, including the exercise price, number of shares
subject to each option and the exercisability thereof. In addition, the stock
option committee of the Company's Board of Directors is authorized to grant up
to 50,000 shares to an individual employee or consultant under the terms of the
Option Plan during a one-year period. In July 2001, the number of shares
available for issuance under this plan was increased by 1,500,000 shares. As of
September 30, 2001 there were 6.7 million shares available for issuance. On
October 9, 2001, 4.1 million shares were granted, reducing the number of shares
available for issuance to 2.6 million shares.
The exercise price of all incentive options granted under the Option Plan must
be at least equal to the fair market value. Options granted under the Option
Plan prior to January 31, 1996 generally become exercisable over a five year
period. Effective January 31, 1996, the vesting period for subsequent grants was
changed to four years. The term of each option is ten years.
1993 DIRECTOR OPTION PLAN The Company's 1993 Director Option Plan (the "Director
Plan") provides for the granting of nonstatutory stock options to non-employee
directors of the Company and is administered by the Board of Directors. In July
2001, the number of shares available for issuance under the Director Plan was
increased by 100,000 shares. As of September 30, 2001 there were 1.0 million
shares available for issuance.
A summary of the status of the Company's stock option plans as of September 30,
2001, 2000, and 1999, and changes during the years then ended is presented
below:
39
(In thousands) 2001 2000 1999
---------------------------- ---------------------------- ----------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Option and Director Plans Shares Price Shares Price Shares Price
------------ ------------ ------------ ------------ ------------ ------------
Outstanding at beginning of year 11,866 $ 6.60 11,491 $ 5.25 10,349 $ 4.80
Granted 3,930 1.90 4,164 10.10 3,009 6.50
Exercised (11) 1.83 (2,081) 4.99 (1,131) 4.44
Cancelled (6,822) 6.76 (1,708) 7.89 (736) 5.25
------------ ------------ ------------
Outstanding at end of year 8,963 4.42 11,866 6.60 11,491 5.25
============ ============ ============
Options exercisable at end of year 4,276 5.44 4,821 $ 5.24 4,480 $ 5.08
Weighted-average fair value of
options granted during the year $ 1.27 $ 6.18 $ 3.61
The following table summarizes information about stock options outstanding at
September 30, 2001:
Weighted-Avg
Range of Remaining Weighted-Avg Weighted-Avg
Exercise Price Outstanding Contractual Life Exercise Price Exercisable Exercise Price
---------------- ------------- ---------------- -------------- ----------- --------------
$ 0.40 - 0.40 40 9.9 years $ 0.40 -- --
1.28 - 1.90 2,712 9.5 1.70 221 1.68
2.11 - 3.13 1,502 8.6 2.68 471 2.70
3.22 - 4.75 1,457 6.8 4.16 977 4.21
4.88 - 7.00 2,174 5.4 5.50 2,085 5.46
7.69 - 10.18 607 7.9 9.16 286 9.14
11.75 - 16.31 405 7.6 15.27 211 14.39
17.88 - 18.50 65 8.2 18.49 25 18.49
31.25 - 31.25 1 8.3 31.25 -- 31.25
------------
$ 0.40 - 31.25 8,963 7.7 years $ 4.42 4,276 $ 5.44
============ ===========
PRO FORMA FAIR VALUE ACCOUNTING FOR STOCK-BASED COMPENSATION SFAS No. 123,
"Accounting for Stock Based Compensation" requires pro forma information
regarding net income and earnings per share as if the Company had accounted for
its employee stock options and other stock-based compensation under the fair
value method. The fair value of the options granted under the Option Plan and
the Director Plan was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 2001,
2000, and 1999: risk-free interest rate of 4.91% for 2001, 6.31% for 2000, and
5.27% for 1999; dividend yield of 0%; volatility factor of the expected market
price of the Company's common stock of 87.5% for 2001, 75% for 2000 and 65% for
1999; an average turnover rate of 15% and a four year and five year expected
life for options granted to employees and executives, respectively.
40
The fair value for the Employee Stock Purchase Plan rights were also estimated
at the date of grant using a Black-Scholes option pricing model with the
following assumptions for 2001, 2000, and 1999: risk-free interest rates of
4.74%, 5.07%, and 4.91%, respectively; dividend yield of 0%; volatility factor
of 87.5% for 2001, 75% for 2000, and 65% for 1999; and six month expected life.
The weighted average fair value of the ESPP rights granted in 2001, 2000, and
1999 was $1.02, $2.86, and $1.31, respectively.
(In thousands, except Fiscal Years Ended
per share price) September 30,
--------------------------------------------
2001 2000 1999
------------ ------------ ------------
Pro forma net income (loss) $ (13,004) $ (67,423) $ 10,464
Pro forma earnings (loss) per share
Basic $ (0.33) $ (1.89) $ 0.31
Diluted $ (0.33) $ (1.89) $ 0.29
The pro forma effects of applying SFAS No. 123 for recognizing compensation
expense may not be representative of the effects on the reported net income or
loss for future years because the options granted by the Company vest over
several years and additional awards may be made in the future.
COMMON STOCK REPURCHASES The Company repurchases its common stock on the open
market, both systematically and non-systematically. Under the systematic stock
repurchase plan, shares of common stock are repurchased to help negate the
dilutive effects of the Incentive Stock Option Plan and the Employee Stock
Purchase Plan. For the fiscal years ended September 30, 2001, the company did
not repurchase any shares under the systematic plan, while in fiscal years ended
2000, and 1999, the purchases and retirements of common stock under the
systematic plan were 758,578 shares and 1,038,000 shares respectively. Under the
non-systematic repurchase plan, the Company may repurchase up to 6,000,000
shares of its common stock. During the fiscal years ended September 30, 2001 and
2000, the company did not repurchase any shares under the non-systematic plan,
while in fiscal years ended September 30, 1999, 1,386,000 were repurchased and
retired under the non-systematic plan. Both the systematic and non-systematic
plans have been approved for continuance into fiscal 2002.
SHAREHOLDER RIGHTS In September 1997, the Company adopted a Shareholder Rights
Plan which provides existing shareholders with the right to purchase a partial
share of preferred stock for each share of common stock owned by the shareholder
in the event of certain changes in the Company's ownership. These rights may
serve as a deterrent to certain takeover attempts not approved by the Company's
Board of Directors. The rights expire in September 2007.
WARRANTS On September 22, 2000 the Company entered into a private placement
agreement where the investors have subscribed for a total of 409,375 units at
$32 per unit. Each unit consists of 8 shares of common stock of the Company and
a warrant to purchase either 2 additional shares of the Company's stock at $3.75
per share or 1 share of Caldera common stock at $6.50 per share. The total fair
value of the Tarantella common stock plus either of the warrants was in excess
of the $32.00 received. The warrants have a two year life. Total proceeds from
the private placement, net of issuance costs of $331,000, were $12.8 million.
When the transaction with Caldera was consummated, the Company assessed the fair
value of the warrants in Caldera stock and reclassified $1.2 million, the amount
equal to this fair value, from equity to liabilities. In addition, the Company
will continue to reassess the fair value of this liability for every reporting
period until the warrants are exercised or expire. Any change in the fair value
of this liability is recorded into the statements of operations.
41
Upon the initial issuance, the Company determined the fair value of the warrants
using the Black-Scholes option pricing model. Upon the closing of the Caldera
transaction the Company determined the fair value using a binomial valuation
model and the following assumptions: a two year exercise period, a 100%
volatility rate for Caldera, which is consistent with the rate disclosed in
their financial statements, and a dividend rate of zero. Based on the
assumptions above, the fair value of the warrants to purchase 439,375 shares as
of September 30, 2001 was zero and as of September 30, 2000 was approximately
$697,000.
During fiscal 2001, in connection with a line of credit (see Note 7); the
Company issued warrants to purchase 1,440,000 shares of common stock at an
exercise price of $1.5625 Per share. The warrant expires on January 8, 2003.
NOTE 12 -- INCOME TAXES
Income (loss) before income taxes for fiscal 2001, 2000 and 1999 include foreign
pretax profit of approximately $2.6 million, $3.2 million and $6.6 million
respectively.
The components of income taxes are as follows:
Fiscal Year Ended September 30,
--------------------------------------------
(In thousands) 2001 2000 1999
------------ ------------ ------------
Current:
Federal $ -- $ (147) $ 500
State -- 20 20
Foreign (1,070) 521 2,876
------------ ------------ ------------
Total current (1,070) 394 3,396
------------ ------------ ------------
Deferred:
Federal -- 6,289 --
State -- 139 --
Foreign -- 1,396 --
------------ ------------ ------------
Total deferred -- 7,824 --
------------ ------------ ------------
Total $ (1,070) $ 8,218 $ 3,396
============ ============ ============
Income taxes differ from the amount computed by applying the statutory federal
income tax rate to income (loss) before income taxes as follows:
42
Fiscal Year Ended September 30,
--------------------------------------------
(In thousands) 2001 2000 1999
------------ ------------ ------------
Statutory federal income tax
(benefit) at 34% $ (2,314) $ (16,570) $ 6,887
State income tax (benefit),
net of federal effect -- 159 247
Foreign taxes less related tax
benefit, if any (1,530) (229) 669
Losses and expenses without
tax benefit 2,774 17,034 --
Current utilization of losses -- -- (4,407)
Net deferred tax asset charge -- 7,824 --
------------ ------------ ------------
$ (1,070) $ 8,218 $ 3,396
============ ============ ============
The tax effect of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are as follows:
September 30,
--------------------------------------------
(In thousands) 2001 2000 1999
------------ ------------ ------------
Deferred tax assets:
Investment reserves $ 22,980 $ -- $ --
Accruals and reserve accounts 2,075 7,005 7,613
Property and equipment 1,972 931 1,641
Net operating loss carryforward 38,590 35,580 7,032
Research credit 10,120 9,299 7,602
Other credits 2,084 2,105 12,346
------------ ------------ ------------
Total gross deferred tax assets 77,821 54,920 36,234
Less valuation allowance (77,821) (52,801) (26,885)
------------ ------------ ------------
Net deferred tax assets -- 2,119 9,349
------------ ------------ ------------
Deferred tax liabilities:
Unrealized investment gain -- 2,119 --
Amortization -- -- 1,525
------------ ------------ ------------
Total deferred tax liabilities -- 2,119 1,525
------------ ------------ ------------
Net tax assets and liabilities $ -- $ -- $ 7,824
============ ============ ============
The net change in the total valuation allowance for fiscal years 2001, 2000 and
1999 was an increase of approximately $25.0 million, $25.9 million and $0.6
million, respectively. Subsequently recognized tax benefits relating to the
valuation allowance for deferred tax assets at September 30, 2001 will be
allocated to income tax benefit and additional paid in capital in the amounts of
$69.6 million and $8.2 million respectively.
The Company's management believes the uncertainty regarding the timing of the
realization of net deferred tax assets requires a valuation allowance.
43
At September 30, 2001, the Company has net operating loss carryforwards of
approximately $109.8 million which expire in fiscal years 2012 through 2021, and
foreign tax and research credit carryforwards of approximately $1.2 million and
$10.1 million respectively, which expire in fiscal 2002 through 2015.
Additionally, the Company has other tax credits of approximately $0.9 million
that have no expiration date.
At September 30, 2001, the cumulative unremitted foreign earnings of the Company
were not material. The Company intends to reinvest these earnings indefinitely.
NOTE 13 -- TRANSACTION WITH CALDERA SYSTEMS, INC.
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.
As Tarantella retained a 28.2% interest in Caldera International, including the
server and professional services groups, the Company did not recognize a gain on
100% of the sale of the server and professional services groups. Tarantella
recorded a gain calculated at 71.8% of the fair value of the Caldera
International stock received less 71.8% of SCO's basis in the assets of the
server and professional services groups plus net cash consideration and the fair
value of the note receivable at the date of closing as follows (dollars in
thousands except per share amounts):
CONSIDERATION:
Fair value of Caldera International common stock (16
million at $2.56 per share times 71.8%) $ 29,440
Cash consideration 23,000
Note receivable discounted to present value at 10% per annum 6,828
Net cash equivalents transferred 3,384
Expenses (5,891)
------------
56,761
71.8% of net assets of server and professional services
groups to be sold (3,494)
------------
Recognized gain $ 53,267
============
The gain calculation used $2.56, the fair market value of Caldera International
common on May 4, 2001, the closing date of the transaction.
44
The basis of Tarantella's investment in Caldera International was determined as
follows (dollars in thousands):
Adjusted fair value of Caldera International common stock $ 29,440
Portion of investment in Caldera International with no step up in basis 1,371
Shares of Caldera Systems previously owned 250
------------
Basis of investment 31,061
Tarantella's share in Caldera International's net assets
after completion of the reorganization 39,600
------------
Excess of net assets acquired over the value of the investment $ 8,539
============
The excess of net assets acquired over the value of the investment represents
negative goodwill and is amortized over the estimated useful life of five years.
For the fourth fiscal quarter, the Company's operating results included 28.2% of
the operating results of Caldera International, adjusted for amortization of 5
months of negative goodwill of approximately $0.7 million. The net amount of the
losses included were $4.6 million. The Company also recorded an impairment of
the investment, net of the remaining negative goodwill of $7.8 million, in the
amount of $22.5 million. The impairment was recorded as the share price of
Caldera International was significantly below the fair market value of
Tarantella's and was deemed to be other than temporarily impaired.
NOTE 14 - 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 included 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 September 30, 2001,
all 28 positions have been eliminated and there are no remaining cash
expenditures.
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 anticipated that the sub-lease would be completed within three months,
however as of September 30, 2001, the space remained vacant.
The fiscal 2001 second quarter restructuring charge is summarized as follows:
45
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) 0 (885)
- ------------------------------------------- ------------ ------------ ------------
Accrual at March 31, 2001 614 64 678
Payments/utilization of the accrual (484) 0 (484)
- ------------------------------------------- ------------ ------------ ------------
Accruals at June 30, 2001 130 64 194
Payments/utilization of the accrual (91) (24) (115)
Provision Adjustment (39) 0 (39)
- ------------------------------------------- ------------ ------------ ------------
Accruals at September 30, 2001 $ -- $ 40 $ 40
- ------------------------------------------- ------------ ------------ ------------
During the fourth quarter of fiscal 2001, the Company announced and completed a
restructuring plan, which resulted in a one-time charge of $0.5 million. The
Company has reduced its spending levels to align its operating expenses with the
Company's revenues. The restructuring charge includes 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 have been eliminated,
however there were cash payments of $304,000 still to be paid.
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
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.
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 charge of $5.9 million. During fiscal
2001, the Company disposed of fixed assets related to this restructuring
accrual. During the Company's fourth fiscal quarter 2001, certain facilities
46
were not vacated and costs were not incurred, however Caldera assumed the lease
of these facilities subsequent to the completion of the sale of the Server and
Professional Services divisions. Accordingly, the remaining reserves related to
these facilities was adjusted. Additionally, the Company made payments on
facilities costs related to this restructuring during fiscal 2001.
The fiscal 2000 second quarter restructuring charge is summarized as follows:
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)
- ------------------------------------------- ------------ ------------ ------------ ------------ ------------
Accruals at December 31, 2000 -- 883 -- 334 1,217
Payments/utilization of the accrual -- (169) -- (334) (503)
- ------------------------------------------- ------------ ------------ ------------ ------------ ------------
Accruals at March 31, 2001 -- 714 -- -- 714
Payments/utilization of the accrual -- (97) -- -- (97)
- ------------------------------------------- ------------ ------------ ------------ ------------ ------------
Accruals at June 30, 2001 -- 617 -- -- 617
Payments/utilization of the accrual -- (39) -- -- (39)
Provision Adjustment -- (578) -- -- (578)
- ------------------------------------------- ------------ ------------ ------------ ------------ ------------
Accruals at September 30, 2001 $ -- $ -- $ -- $ -- $ --
- ------------------------------------------- ------------ ------------ ------------ ------------ ------------
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 $4.8 million. During fiscal 2001 the
Company made payments related to facilities costs and severance costs associated
with this restructuring. Also during 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:
47
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)
- ------------------------------------------- ------------ ------------ ------------ ------------
Accruals at December 31, 2000 822 637 227 1,686
Payments/utilization of the accrual (392) (157) (41) (590)
Provision Adjustment (430) -- -- (430)
- ------------------------------------------- ------------ ------------ ------------ ------------
Accruals at March 31, 2001 -- 480 186 666
Payments/utilization of the accrual -- (480) (186) (666)
- ------------------------------------------- ------------ ------------ ------------ ------------
Accruals at June 30, 2001 -- -- -- --
Payments/utilization of the accrual -- -- -- --
Provision Adjustment -- -- -- --
- ------------------------------------------- ------------ ------------ ------------ ------------
Accruals at September 30, 2001 $ -- $ -- $ -- $ --
- ------------------------------------------- ------------ ------------ ------------ ------------
NOTE 15 -- INVESTMENTS
In November 1996, the Company purchased $2.0 million of convertible debentures
from a domestic distribution channel partner. In February 1999, the Company
elected to convert, in its entirety, the debenture into shares of preferred
stock. In January 2000 the Company redeemed 68,805 shares at their cost of
$2.181 per share. After the redemption the Company had 848,259 shares of
preferred stock at a cost of $1.85 million. On January 4, 2001 the channel
distribution partner was purchased by Ebiz Enterprises, Inc., and the Company
received 2,367,999 shares of Ebiz common stock.
In March 2000, the Company purchased $2.0 million of preferred stock in a
private Linux distribution company. On October 5, 2000 this company was
purchased by Ebiz Enterprises, Inc. The Company received 2,208,749 shares of
Ebiz common stock and 787,878 warrants to purchase shares.
As of September 30, 2001 the Company's ownership of Ebiz is approximately 14%,
and the Company has the right to have one Board member. The Company accounts for
the investment using the cost method as it is not deemed to exert significant
influence. 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 investment.
At September 30, 2001, the Company had gross accounts receivable with Ebiz of
$1.1 million, however this amount is fully reserved as the company has declared
bankruptcy and may not have the ability to pay. At September 30, 2000, the
Company had net accounts receivable outstanding with this domestic distribution
channel partner of $1.0 million. Sales to this related party was $2.0 million
for fiscal 2001, $5.3 million for fiscal 2000 and $8.0 million for fiscal 1999.
Sales in fiscal 2001 include product and services sold to the Company's channel
distribution partner prior to its acquisition by Ebiz.
In January 1995, the Company purchased 10% of the preferred stock of Rainmaker
Systems, Inc. ("Rainmaker"), another of the Company's domestic distribution
partners, in exchange for cash, product and equipment valued at $1.0 million. In
addition, the Company loaned $1.0 million to Rainmaker in exchange for
convertible debentures. In February 1999, the Company exchanged the preferred
stock and debentures for shares of Series D Convertible Participating Preferred
Stock (the "Series D Preferred"). During fiscal
48
year 1999, the Company sold approximately 1,704,011 shares of Series D with a
cost basis of $0.6 million, and received cash proceeds of $3.8 million. The
Company's interest of ownership of Rainmaker before and after the sale was 15.3%
and 10.3% respectively. On November 17, 1999, Rainmaker completed an initial
public offering of its common stock, at which time, the shares of Series D
Preferred held by the Company automatically converted into shares of Rainmaker's
common stock on a one-for-one basis. At September 30, 2001, the Company held
505,767 shares of Rainmaker's common stock. The Company accounts for these
shares as available-for-sale securities and records them at fair market value,
based on quoted market prices with any unrealized gains or losses included as
part of accumulated other comprehensive income. During fiscal 2001, the Company
sold 3,200,000 shares of Rainmaker stock with a cost basis of $1.1 million, and
received cash proceeds of $3.2 million. During fiscal 2000, the Company sold
307,692 shares of Rainmaker stock with a cost basis of $0.1 million, and
received cash proceeds of $2.0 million.
At September 30, 2001 the Company did not have any accounts receivable for
Rainmaker. At September 30, 2000, the Company had accounts receivable
outstanding with Rainmaker for $0.4 million. Sales to this related party were
$3.7 million for fiscal 2001, $12.0 million for fiscal 2000 and $16.8 million
for fiscal 1999.
Unrealized gain (loss) on available-for-sale investments as of September 30,
2001 are as follows (in thousands):
Unrealized
FMV Cost Impairment Gain/(Loss)
------------ ------------ ------------ ------------
Rainmaker 101 171 -- (70)
------------ ------------ ------------ ------------
Ebiz -- 3,139 (3,139) --
------------ ------------ ------------ ------------
Total stock 101 3,310 (3,139) (70)
------------ ------------ ------------ ------------
Ebiz warrants -- 176 (176) --
------------ ------------ ------------ ------------
Total available-for-Sale Securities $ 101 $ 3,486 $ (3,315) $ (70)
============ ============ ============ ============
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.
NOTE 16 -- INDUSTRY AND GEOGRAPHIC 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
Division, and the Professional Services Division. Prior to fiscal 2000, the
Company reviewed performance on the basis of geographical segments. The Company
used analysis of segment revenues and gross margin in order to make preliminary
decisions of resource allocation. No information on total assets by segment was
ever reviewed. The accounting policies used by each segment complied with the
policies used in the consolidated financial statements.
The following table presents information about reportable segments as well as
information on long-lived assets by geography. Revenue is allocated to segments
based on the location from which the sale is satisfied and long-lived asset
information is based on the physical location of the asset.
49
Fiscal Years Ended September 30,
--------------------------------------------
(in thousands) 2001 2000 1999
------------ ------------ ------------
Net revenues:
Server software division $ 52,342 $ 135,433 $ 210,954
Tarantella division 14,344 12,834 10,617
Professional services division 1,363 4,199 3,129
Corporate adjustments (1,387) (3,543) (1,076)
------------ ------------ ------------
Total net revenues $ 66,662 $ 148,923 $ 223,624
============ ============ ============
Gross margin:
Server software division 38,446 100,120 168,091
Tarantella division 11,944 9,893 8,288
Professional services division (718) (1,899) (2,533)
Corporate adjustments (325) (987) --
------------ ------------ ------------
Total gross margin $ 49,347 $ 107,127 $ 173,846
============ ============ ============
Operating income (loss):
Server software division $ (3,591) $ (28,196) $ 26,987
Tarantella division (24,480) (18,656) (6,889)
Professional services division (2,766) (4,381) (3,725)
Corporate adjustments (3,540) -- --
------------ ------------ ------------
Total operating income (loss) $ (34,377) $ (51,233) $ 16,373
============ ============ ============
Fiscal Year Ended September 30,
--------------------------------------------
(In thousands) 2001 2000 1999
------------ ------------ ------------
Net revenues:
United States $ 31,920 $ 68,622 $ 97,587
Canada and Latin America 4,034 7,770 12,606
EMEIA (1) 24,930 62,834 95,270
Asia Pacific 5,778 9,697 18,161
------------ ------------ ------------
Total net revenues $ 66,662 $ 148,923 $ 223,624
============ ============ ============
Long-lived assets:
United States $ 11,853 $ 16,367 $ 31,058
Canada and Latin America 13 3,234 122
EMEIA (1) 663 168 5,234
Asia Pacific 97 241 155
Other international operations -- -- 50
------------ ------------ ------------
Total long-lived assets $ 12,626 $ 20,010 $ 36,619
============ ============ ============
(1) Europe, Middle East, India and Africa
NOTE 17 -- EMPLOYEE BENEFIT PLAN
The Company maintains an employee savings plan, which qualifies under section
401(k) of the Internal Revenue Code. Under the plan, participating U.S.
employees may defer up to 20% of their pre-tax salary, up to certain statutory
limits. The Company matches 50% of employee contributions up to the lower of 6%
50
of the employee's annual salary or $3,000. For fiscal 2001, 2000 and 1999, the
Company's total contributions towards the 401(k) plan amounted to $0.6 million,
$1.1 million and $1.0 million, respectively.
NOTE 18 -- SUBSEQUENT EVENTS
On October 11, 2001 the Company announced that during the first quarter of
fiscal 2002 they would lower their expense run-rate by 30% or $3 million per
quarter. In order to do this the company is reducing headcount by 53 people,
consolidating operations in Santa Cruz to only a portion of the building the
Company currently occupies and closing their office in Japan. As a result of
these actions the Company will be recording a one-time charge of approximately
$2.2 million in the first quarter of fiscal 2002.
As part of the plan to reduce operating expense, the Company is executing a
one-year compensation reduction plan. Executive officers cash compensation will
be reduce by 30%, with the entire senior management team taking tiered
reductions, with an average 20% reduction overall. Employees that were required
to participate in this reduction in compensation were given discounted stock
options, fully vested, equivalent to two shares for every dollar of cash
compensation reduction. A total of 2.1 million shares were granted to 27
employees. The Company will record a $579,000 charge in relation to this
discounted grant. In addition to these shares, 2.0 million shares were granted
to employees as part of an employee retention program.
51
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders' of
Tarantella, Inc.
Santa Cruz, CA
We have audited the accompanying consolidated balance sheet of Tarantella, Inc.
(formerly The Santa Cruz Operation) and its subsidiaries (the "Company"), as of
September 30, 2001, and the related statements of operations, shareholders'
equity, and cash flows for the year ended September 30, 2001. Our audit also
included the financial statement schedule for the year ended September 30, 2001
as listed in the Index at Item 14. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company as of September 30, 2001, and the results of its operations and its
cash flows for the year ended September 30, 2001 in conformity with accounting
principles generally accepted in the United States of America. Also in our
opinion, such financial statement schedule referred to above, when considered in
relation to the basic consolidated financial statements taken as a whole
presents fairly in all material respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
November 1, 2001
52
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Tarantella, Inc.:
In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of Tarantella, Inc. and its
subsidiaries at September 30, 2000, and the results of their operations and
their cash flows for each of the two years in the period ended September 30,
2000 in conformity with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial statement schedule
listed in the index appearing on page 55 present fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
San Jose, California
October 23, 2000
53
The following tables present Tarantella's condensed operating results for each
of the eight fiscal quarters for the period ended September 30, 2001. The
information for each of these quarters is unaudited and has been prepared on the
same basis as the audited consolidated financial statements included in this
Form 10-K. In the opinion of management, all necessary adjustments, which
consists only of normal and recurring accruals, have been included to fairly
present the unaudited quarterly results. This data should be read together with
Tarantella's consolidated financial statements and the notes to those statements
included in this Form 10-K.
For periods prior to the sale of the server and professional services divisions
to Caldera, the historical financial information may not be indicative of
Tarantella's future performance.
TARANTELLA, INC.
QUARTERLY RESULTS OF OPERATIONS
(Unaudited)
Fiscal Year Ended September 30, 2001 Fiscal Year Ended September 30, 2000
--------------------------------------------------------------------------------------------
Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1
-------------------------------------------- --------------------------------------------
(In thousands, except per share data)
Net revenues $ 4,019 $ 8,837 $ 27,351 $ 26,455 $ 32,797 $ 26,931 $ 35,542 $ 53,653
Cost of revenues 627 2,476 7,131 7,081 10,027 9,680 10,257 11,832
-------------------------------------------- --------------------------------------------
Gross margin 3,392 6,361 20,220 19,374 22,770 17,251 25,285 41,821
Operating expenses 9,414 18,449 28,831 27,030 36,884 35,849 45,914 39,713
-------------------------------------------- --------------------------------------------
Operating income (loss) (6,022) (12,088) (8,611) (7,656) (14,114) (18,598) (20,629) 2,108
Other income (expense):
Gain on Caldera transaction -- 53,267 -- -- -- -- -- --
Loss and impairment of equity
investment in Caldera (27,066) -- -- -- -- -- -- --
Interest income, net 330 98 284 406 79 408 592 600
Other income (expense), net (368) (3,036) 3,071 586 (758) (168) 908 837
-------------------------------------------- --------------------------------------------
Income (loss) before
income taxes (33,126) 38,241 (5,256) (6,664) (14,793) (18,358) (19,129) 3,545
Income taxes (1,023) 154 (817) 616 5,986 882 680 670
-------------------------------------------- --------------------------------------------
Net income (loss) (32,103) 38,087 (4,439) (7,280) (20,779) (19,240) (19,809) 2,875
Comprehensive income (loss) $(32,368) $ 36,466 $ (4,277) $(11,209) $(20,813) $(35,715) $(54,086) $ 58,739
Earnings (loss) per
share-basic $ (0.80) $ 0.95 $ (0.11) $ (0.18) $ (0.56) $ (0.54) $ (0.56) $ 0.08
Earnings (loss) per
share-diluted $ (0.80) $ 0.95 $ (0.11) $ (0.18) $ (0.56) $ (0.54) $ (0.56) $ 0.07
-------------------------------------------- --------------------------------------------
Shares used in per share
calculation-basic 40,117 40,030 39,733 39,443 36,789 35,860 35,596 34,713
Shares used in per share
calculation-diluted 40,117 40,077 39,733 39,443 36,789 35,860 35,596 41,258
-------------------------------------------- --------------------------------------------
54
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
On May 11, 2001 the Company changed its independent auditors from
PricewaterhouseCoopers LLP to Deloitte and Touche LLP as previously reported on
Form 8-K filed with the Securities and Exchange Commission on May 18, 2001 (File
No 0-21484). There were no disagreements with any of the Company's independent
accountants during the fiscal years ended September 30, 2001, 2000 and 1999.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to Directors may be found under the caption "Election
of Directors" of the Company's definitive Proxy Statement for the Annual Meeting
of Shareholders to be held February 21, 2002 (the "Proxy Statement"). Such
information is incorporated herein by reference. Information with respect to
Executive Officers and Officers may be found on pages 10 through 11 hereof,
under the caption "Executive Officers and Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "Executive Compensation and Other
Matters" of the Company's Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Record Date and Principal Share
Ownership" of the Company's Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the captions "Certain Transactions with
Management" and "Compensation Committee Interlocks and Insider Participation" of
the Company's Proxy Statement is incorporated herein by reference.
55
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) Documents filed as part of Form 10-K
1. Financial Statement Schedule
Schedule Page
Number Description Number
-------- ----------- ------
II Valuation and Qualifying Accounts 59
The independent auditors' reports with respect to the
above-listed financial statement schedule appears on page 57 of
this report on Form 10-K. Financial statement schedules other
than those listed above have been omitted since they are either
not required, not applicable, or the information is shown in the
financial statements or notes thereto.
2. Exhibit Listing
Exhibit
Number Description
------- ------------
2.0 Asset Purchase Agreement By and Between The Santa
Cruz Operation, Inc. and Novell, Inc. (4)
3.1 Restated Articles of Incorporation of Registrant.
(2)
3.2 Bylaws of Registrant, as amended. (5)
4.1 Specimen Common Stock Certificate of Registrant. (1)
10.13 Lease with Encinal Partnership No. 1 commencing
January 1, 1989 (425 Encinal Street). (1)
10.17 Form of Indemnification Agreement. (1)
10.18 Master Registration Rights Agreement as amended. (1)
10.19 1993 Stock Purchase Plan and form of Stock Purchase
Agreement. (3)(8)
10.20 1994 Incentive Stock Option Plan and form of
Incentive Stock Option Agreement. (3)(8)
10.21 401(k) Plan, as amended. (1) (8)
10.23 Revised 1993 Employee Stock Purchase Plan. (5) (8)
10.24 1993 Director Stock Option Plan. (1) (8)
10.34 Shareholders' Rights Agreement. (6)
10.35 Change-in-control agreement between the Company and
certain key management. (7) (8)
10.36 Revised Employment Agreement with Alok Mohan.
21.1 Subsidiaries of Registrant.
23.1 Independent Auditors Consent.
23.2 Consent of Independent Accountants.
(1) Incorporated by reference to Registration Statement 33-60548 on Form S-1.
(2) Incorporated by reference to the Form 10-K filed on December 24, 1993.
(3) Incorporated by reference to the Form 10-K filed on December 23, 1994.
56
(4) Incorporated by reference to the Form 8-K filed on December 20, 1995.
(5) Incorporated by reference to the Form 10-K filed on December 22, 1995.
(6) Incorporated by reference to the Form 8-A12G filed on September 18, 1997.
(7) Incorporated by reference to the Form 10-K filed on December 23, 1998.
(8) Designates management contracts or compensatory plans, contracts or
arrangements.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the last quarter of fiscal 2001.
57
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Annual Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TARANTELLA, INC.
By: /s/ Randall Bresee By: /s/ Steven M. Sabbath
-------------------------- -------------------------------------
Randall Bresee Steven M. Sabbath
Senior Vice President, Senior Vice President,
Chief Financial Officer Law and Corporate Affairs & Secretary
Date: December 21, 2001 Date: December 21, 2001
KNOW ALL PERSONS BY THEIR PRESENCE, that each person whose signature appears
below constitutes and appoints Steven M. Sabbath, his attorney-in-fact, with the
power of substitution, for him in any and all capacities, to sign any amendments
to this report on Form 10-K and to file the same, with exhibits thereto other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that said attorney-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:
/s/ Douglas L. Michels
- ----------------------------------
Douglas L. Michels
President, Chief Executive Officer
and Director
Date:
/s/ Alok Mohan /s/ Robert M. McClure
- ---------------------------------- ----------------------------------
Alok Mohan Robert M. McClure
Chairman of the Board of Directors Director
Date: Date:
/s/ Gilbert P. Williamson /s/ R. Duff Thompson
- ---------------------------------- ----------------------------------
Gilbert P. Williamson R. Duff Thompson
Director Director
Date: Date:
/s/ Ronald Lachman /s/ Ninian Eadie
- ---------------------------------- ----------------------------------
Ronald Lachman Ninian Eadie
Director Director
Date: Date:
58
TARANTELLA, INC.
SCHEDULE II/RULE 5-04
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED SEPTEMBER 30, 2001, 2000 AND 1999
(In thousands)
BALANCE AT CHARGED TO BALANCE
BEGINNING REVENUES OR AT END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
- ----------- ---------- ----------- ---------- ---------
Year Ended September 30, 2001
Allowance for returns $ 2,330 $ 2,408 $ 3,818 $ 920
Allowance for doubtful accounts 862 950 397 1,415
------- ------- ------- -------
Total allowance $ 3,192 $ 3,358 $ 4,215 $ 2,335
======= ======= ======= =======
Year Ended September 30, 2000
Allowance for returns $ 7,108 $ (269) $ 4,509 $ 2,330
Allowance for doubtful accounts 1,114 (19) 233 862
------- ------- ------- -------
Total allowance $ 8,222 $ (288) $ 4,742 $ 3,192
======= ======= ======= =======
Year Ended September 30, 1999
Allowance for returns $10,637 $ 9,505 $13,034 $ 7,108
Allowance for doubtful accounts 1,545 209 640 1,114
------- ------- ------- -------
Total allowance $12,182 $ 9,714 $13,674 $ 8,222
======= ======= ======= =======
59
INDEX TO EXHIBITS
Exhibit
Number Description
- ------- ------------
2.0 Asset Purchase Agreement By and Between The Santa Cruz Operation,
Inc. and Novell, Inc. (4)
3.1 Restated Articles of Incorporation of Registrant. (2)
3.2 Bylaws of Registrant, as amended. (5)
4.1 Specimen Common Stock Certificate of Registrant. (1)
10.13 Lease with Encinal Partnership No. 1 commencing January 1, 1989
(425 Encinal Street). (1)
10.17 Form of Indemnification Agreement. (1)
10.18 Master Registration Rights Agreement as amended. (1)
10.19 1993 Stock Purchase Plan and form of Stock Purchase Agreement.
(3)(8)
10.20 1994 Incentive Stock Option Plan and form of Incentive Stock
Option Agreement. (3)(8)
10.21 401(k) Plan, as amended. (1) (8)
10.23 Revised 1993 Employee Stock Purchase Plan. (5) (8)
10.24 1993 Director Stock Option Plan. (1) (8)
10.34 Shareholders' Rights Agreement. (6)
10.35 Change-in-control agreement between the Company and certain key
management. (8)
10.36 Revised Employment Agreement with Alok Mohan.
21.1 Subsidiaries of Registrant.
23.1 Independent Auditors Consent.
23.2 Consent of Independent Accountants.
(1) Incorporated by reference to Registration Statement 33-60548 on Form S-1.
(2) Incorporated by reference to the Form 10-K filed on December 24, 1993.
(3) Incorporated by reference to the Form 10-K filed on December 23, 1994.
(4) Incorporated by reference to the Form 8-K filed on December 20, 1995.
(5) Incorporated by reference to the Form 10-K filed on December 22, 1995.
(6) Incorporated by reference to the Form 8-A12G filed on September 18, 1997.
(7) Incorporated by reference to the Form 10-K filed on December 23, 1998.
(8) Designates management contracts or compensatory plans, contracts or
arrangements.