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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2004
Or
[ ] 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: 000-28369
VA Software Corporation
(Exact name of Registrant as specified in its charter)
Delaware 77-0399299
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
46939 Bayside Parkway, Fremont, California, 94538
(Address, including zip code, of principal executive offices)
(510) 687-7000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
(Title of Class)
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 [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Title Of Class Outstanding At December 3, 2004
Common Stock, $0.001 par value 61,404,794
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Table of Contents
PART I. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements (unaudited)............................................................................ 3
Condensed Consolidated Balance Sheets at October 31, 2004 and July 31, 2004............................. 3
Condensed Consolidated Statements of Operations for the three months ended October 31, 2004 and
October 31, 2003........................................................................................ 4
Condensed Consolidated Statements of Cash Flows for the three months ended October 31, 2004 and
October 31, 2003........................................................................................ 5
Notes to Condensed Consolidated Financial Statements.................................................... 6
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 15
Item 3 Quantitative and Qualitative Disclosures About Market Risk.................................................. 36
Item 4 Controls and Procedures..................................................................................... 36
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................................................... 38
Item 6. Exhibits and Reports on Form 8-K............................................................................ 38
Signatures................................................................................................................ 39
Certifications............................................................................................................ 42
2
PART I
VA SOFTWARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
October 31, July 31,
2004 2004
--------- ---------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents .................................................................... $ 10,032 $ 10,964
Short-term investments ....................................................................... 20,509 17,145
Restricted cash, current ..................................................................... 450 450
Accounts receivable, net of allowance of $128 and $127, respectively ......................... 4,041 3,909
Inventories .................................................................................. 855 1,069
Prepaid expenses and other assets ............................................................ 1,339 1,046
--------- ---------
Total current assets ................................................................. 37,226 34,583
Property and equipment, net .................................................................... 1,120 1,208
Long-term investments .......................................................................... 11,579 15,933
Restricted cash, non current ................................................................... 1,000 1,000
Other assets ................................................................................... 783 955
--------- ---------
Total assets ......................................................................... $ 51,708 $ 53,679
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................................................. $ 1,036 $ 1,674
Accrued restructuring liabilities, current portion ........................................... 3,019 3,440
Deferred revenue ............................................................................. 2,431 1,750
Accrued liabilities and other ................................................................ 2,211 1,853
--------- ---------
Total current liabilities ............................................................ 8,697 8,717
Accrued restructuring liabilities, net of current portion ...................................... 7,291 7,843
Other long-term liabilities .................................................................... 1,367 1,349
--------- ---------
Total liabilities .................................................................... 17,355 17,909
Commitments and contingencies (Notes 7 and 9)
Stockholders' equity:
Common stock ................................................................................. 62 62
Treasury stock ............................................................................... (4) (4)
Additional paid-in capital ................................................................... 783,477 783,246
Accumulated other comprehensive (loss) ....................................................... (203) (171)
Accumulated deficit .......................................................................... (748,979) (747,363)
--------- ---------
Total stockholders' equity ........................................................... 34,353 35,770
--------- ---------
Total liabilities and stockholders' equity ........................................... $ 51,708 $ 53,679
========= =========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
3
VA SOFTWARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts, unaudited)
Three Months Ended
October 31, October 31,
2004 2003
-------- --------
Net revenues:
SourceForge revenues .............................................. $ 1,931 $ 815
Online Media revenues ............................................. 1,849 2,276
E-commerce revenues ............................................... 2,694 2,242
Online Images revenues ............................................ 524 433
Other revenues .................................................... -- 31
-------- --------
Net revenues ................................................... 6,998 5,797
-------- --------
Cost of revenues:
SourceForge cost of revenues ...................................... 232 595
Online Media cost of revenues ..................................... 802 762
E-commerce cost of revenues ....................................... 2,355 1,777
Online Images cost of revenues .................................... 130 116
-------- --------
Cost of revenues ............................................... 3,519 3,250
-------- --------
Gross margin ................................................... 3,479 2,547
-------- --------
Operating expenses:
Sales and marketing ............................................... 2,411 2,392
Research and development .......................................... 1,471 1,827
General and administrative ........................................ 1,465 724
Restructuring costs and other special charges ..................... -- (17)
Amortization of deferred stock compensation ....................... -- 20
Amortization of intangible assets ................................. 3 3
-------- --------
Total operating expenses .................................. 5,350 4,949
-------- --------
Loss from operations ................................................ (1,871) (2,402)
Interest income, net ................................................ 190 248
Other income , net .................................................. 65 931
-------- --------
Net loss ............................................................ $ (1,616) $ (1,223)
======== ========
Other comprehensive income (loss):
Unrealized gain (loss) on marketable securities and investments 36 (80)
Foreign currency translation (loss) gain ...................... (68) 3
-------- --------
Comprehensive loss .................................................. $ (1,648) $ (1,300)
======== ========
Net loss ............................................................ $ (1,616) $ (1,223)
======== ========
Basic and diluted net loss per share ................................ $ (0.03) $ (0.02)
======== ========
Shares used in computing basic and diluted net loss per share ....... 61,296 56,255
======== ========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
4
VA SOFTWARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
Three Months Ended
October 31, October 31,
2004 2003
-------- -------
Cash flows from operating activities:
Net loss .................................................................. $ (1,616) $(1,223)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization of intangibles ............................ 250 489
Provision for bad debts ................................................. 1 8
Provision for excess and obsolete inventory ............................. 40 (1)
Amortization of deferred stock compensation ............................. -- 20
Changes in assets and liabilities:
Accounts receivable ................................................... (133) (619)
Inventories ........................................................... 174 (179)
Prepaid expenses and other assets ..................................... (123) (676)
Accounts payable ...................................................... (639) 114
Accrued restructuring liabilities ..................................... (973) (1,040)
Deferred revenue ...................................................... 681 649
Accrued liabilities and other ......................................... 318 (1,065)
Other long-term liabilities ........................................... 18 (15)
-------- -------
Net cash used in operating activities .............................. (2,002) (3,538)
-------- -------
Cash flows from investing activities:
Purchase of property and equipment ........................................ (119) (384)
Purchase of marketable securities ......................................... (1,162) (6,148)
Sale of marketable securities ............................................. 2,188 5,932
Other, net ................................................................ -- (80)
-------- -------
Net cash provided by (used in) investing activities ................ 907 (680)
-------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock, net ............................... 231 2,451
-------- -------
Net cash provided by financing activities .......................... 231 2,451
-------- -------
Effect of exchange rate changes on cash and cash equivalents ............... (68) 3
-------- -------
Net decrease in cash and cash equivalents .................................. (932) (1,764)
-------- -------
Cash and cash equivalents, beginning of period ............................. 10,964 6,303
-------- -------
Cash and cash equivalents, end of period ................................... $ 10,032 $ 4,539
======== =======
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
5
VA SOFTWARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
Overview
VA Software Corporation ("VA Software," "VA" or the "Company") was
incorporated in California in January 1995 and reincorporated in Delaware in
December 1999. From the date of its incorporation through October 2001, the
Company sold Linux-based hardware systems and services under the name VA Linux
Systems, Inc. On June 27, 2001, the Company announced its decision to exit its
Linux-based hardware business. Today, the Company does business under the name
VA Software Corporation and it develops, markets and supports a software
application known as SourceForge Enterprise Edition ("SourceForge") and owns and
operates OSTG, Inc. ("OSTG") and its wholly-owned subsidiaries, a network of
Internet Web sites offering advertising, retail and animation services and
products.
The interim financial information presented in this Form 10-Q is not
audited and is not necessarily indicative of the Company's future consolidated
financial position, results of operations or cash flows. The unaudited financial
statements contained in this Form 10-Q have been prepared on the same basis as
the annual financial statements and, in the opinion of management, reflect all
adjustments, which include only normal recurring adjustments, necessary to
present fairly the Company's financial position, results of operations and its
cash flows for the stated periods, in conformity with accounting principles
generally accepted in the United States of America.
2. Summary of Significant Accounting Policies:
Use of Estimates in Preparation of Consolidated Financial Statements
The preparation of the Company's consolidated financial statements and
related notes requires the Company to make estimates, which include judgments
and assumptions, that affect the reported amounts of assets, liabilities,
revenue and expenses, and related disclosure of contingent assets and
liabilities. The Company has based its estimates on historical experience and on
various assumptions that are believed to be reasonable under the circumstances
and the Company evaluates its estimates on a regular basis and makes changes
accordingly. Historically, the Company's estimates relative to its critical
accounting estimates have not differed materially from actual results, however
actual results may differ from these estimates under different conditions.
A critical accounting estimate is based on judgments and assumptions about
matters that are highly uncertain at the time the estimate is made. Different
estimates that reasonably could have been used, or changes in accounting
estimates could materially impact the financial statements.
Principles of Consolidation
These consolidated financial statements include the accounts of VA and its
wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. In September 2000, the
Company acquired 68% of the outstanding shares of common stock of VA Linux
Systems Japan, K.K. ("VA Linux Japan") for a cash purchase price of
approximately $6.9 million. Effective January 11, 2002, VA sold 13,500 shares of
VA Linux Japan stock to a third party for approximately $5.1 million, the effect
of which decreased the Company's investment in VA Linux Japan to approximately
11%. As of October 31, 2004, VA Software's investment in VA Linux Japan was
approximately 14%. As the Company holds less than 20% of the voting stock of VA
Linux Japan and does not otherwise exercise significant influence, VA Linux
Japan has been accounted for under the cost method as of January 11, 2002 and
thereafter. The operations of VA Linux Japan primarily relate to the Company's
former systems and services business, however VA Linux Japan also acts as a
reseller of the Company's SourceForge application to customers in Japan. There
are $0.2 million of related party receivables and deferred revenue associated
with VA Linux Japan as of October 31, 2004 that are included in trade
receivables and deferred revenue in the accompanying Condensed Consolidated
Balance Sheets. There were $22,000 related party revenues associated with VA
Linux Japan for the three months ended October 31, 2004 and October 31, 2003,
respectively. There were no related party receivables associated with VA Linux
Japan as of October 31, 2003.
6
Foreign Currency Translation
The functional currency of all the Company's foreign subsidiaries is the
respective country's local currency. Operations related to all of the Company's
foreign subsidiaries were discontinued in 2001 and were included in the fiscal
2001 restructuring plan. Although several of the legal entities still exist as
of October 31, 2004, no revenues were generated from these entities for the
periods presented and the expenses were administrative in nature and were
immaterial to the consolidated results of operations for the periods presented.
Minimal cash balances have been maintained in these entities for legal purposes.
Remaining balance sheet accounts are translated into U.S. dollars at exchange
rates prevailing at balance sheet dates. Expenses are translated into U.S.
dollars at average rates for the period. Gains and losses resulting from
translation are charged or credited in other comprehensive income as a component
of stockholders' equity. As of October 31, 2004 the Company did not hold any
foreign currency derivative instruments. The Company is in the process of
formally liquidating all of its foreign subsidiaries.
Segment and Geographic Information
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures
about Segments of an Enterprise and Related Information," establishes standards
for reporting information regarding operating segments in annual financial
statements and requires selected information for those segments to be presented
in interim financial reports issued to stockholders. SFAS No. 131 also
establishes standards for related disclosures about products and services and
geographic areas. Operating segments are identified as components of an
enterprise about which separate discrete financial information is available for
evaluation by the chief operating decision-maker, or decision-making group, in
making decisions how to allocate resources and assess performance. The Company's
chief decision-making group, as defined under SFAS No. 131, are the Chief
Executive Officer and the executive team. The Company currently operates as four
reportable business segments: SourceForge, Online Media, E-commerce and Online
Images.
The Company markets its products in the United States through its direct
sales force and online Web sites. Revenues for each of the three months ended
October 31, 2004 and October 31, 2003 were primarily generated from sales to end
users in the United States.
Revenue Recognition
SourceForge Revenues
Software revenues are derived from fees for licenses of the Company's
SourceForge software products, maintenance, consulting and training. The Company
recognizes all software revenue using the residual method in accordance with
Statement of Position ("SOP") 97-2, "Software Revenue Recognition," as amended
by SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition with
Respect to Certain Transactions." Under the residual method, the fair value of
the undelivered elements is deferred and the remaining portion of the
arrangement fee is recognized as revenue. If evidence of the vendor specific
fair value of one or more undelivered elements does not exist, revenues are
deferred and recognized when delivery of those elements occurs or when fair
value can be established. Company-specific objective evidence of fair value of
maintenance and other services is based on our customary pricing for such
maintenance and/or services when sold separately. At the outset of the
arrangement with the customer, the Company defers revenue for the fair value of
its undelivered elements (e.g., maintenance, consulting and training) and
recognizes revenue for the remainder of the arrangement fee attributable to the
elements initially delivered in the arrangement (i.e., software product) when
the basic criteria in SOP 97-2 have been met. If such evidence of fair value for
each undelivered element of the arrangement does not exist, the Company defers
all revenue from the arrangement until such time that evidence of fair value
does exist or until all elements of the arrangement are delivered.
Under SOP 97-2, revenue attributable to an element in a customer
arrangement is recognized when (i) persuasive evidence of an arrangement exists,
(ii) delivery has occurred, (iii) the fee is fixed or determinable, (iv)
collectibility is probable and (v) the arrangement does not require services
that are essential to the functionality of the software.
Persuasive evidence of an arrangement exists. The Company determines that
persuasive evidence of an arrangement exists with respect to a customer when the
Company has a written contract, which is signed by both the Company and the
customer, or a purchase order from the customer when the customer has previously
executed a standard license arrangement with the Company. The Company does not
offer product return rights.
Delivery has occurred. The Company's software may be either physically or
electronically delivered to the customer. The Company determines that delivery
has occurred upon shipment of the software pursuant to the billing terms of the
agreement or when the software is made available to the customer through
electronic delivery.
7
The fee is fixed or determinable. If at the outset of the customer
engagement the Company determines that the fee is not fixed or determinable, the
Company recognizes revenue when the fee becomes due and payable. Fees due under
a contract are generally deemed not to be fixed or determinable if a significant
portion of the fee is beyond the Company's normal payment terms, which are
generally no greater than 120 days from the date of invoice.
Collectibility is probable. The Company determines whether collectibility
is probable on a case-by-case basis. When assessing probability of collection,
the Company considers the number of years in business, history of collection,
and product acceptance for each customer. The Company typically sells to
customers, for whom there is a history of successful collection. New customers
are subject to a credit review process, which evaluates the customer's financial
position and ultimately such customer's ability to pay. If the Company
determines from the outset that collectibility is not probable based upon its
review process, revenue is recognized as payments are received.
The Company allocates revenue on software arrangements involving multiple
elements to each element based on the relative fair value of each element. The
Company's determination of fair value of each element in multiple-element
arrangements is based on vendor-specific objective evidence ("VSOE"). The
Company aligns its assessment of VSOE for each element to the price charged when
the same element is sold separately. The Company has analyzed all of the
elements included in its multiple-element arrangements and determined that it
has sufficient VSOE to allocate revenue to the maintenance, support and
professional services components of its perpetual license arrangements. The
Company sells its professional services separately, and has established VSOE for
professional services on that basis. VSOE for maintenance and support is
determined based upon the customer's annual renewal rates for these elements.
Accordingly, assuming all other revenue recognition criteria are met, the
Company recognizes revenue from perpetual licenses upon delivery using the
residual method in accordance with SOP 98-9.
Services revenues consist of professional services and maintenance fees. In
general, the Company's professional services, which are comprised of software
installation and integration, business process consulting and training, are not
essential to the functionality of the software. The Company's software products
are fully functional upon delivery and implementation and do not require any
significant modification or alteration of products for customer use. Customers
purchase these professional services to facilitate the adoption of the Company's
technology and dedicate personnel to participate in the services being
performed, but they may also decide to use their own resources or appoint other
professional service organizations to provide these services. Software products
are billed separately from professional services, which are generally billed on
a time-and-materials basis. The Company recognizes revenue from professional
services as services are performed.
Maintenance agreements are typically priced based on a percentage of the
product license fee and have a one-year term, renewable annually. Services
provided to customers under maintenance agreements include technical product
support and unspecified product upgrades. Deferred revenues from advanced
payments for maintenance agreements are recognized ratably over the term of the
agreement, which is typically one year.
Online Media Revenues
Online media revenues are primarily derived from cash sales of advertising
space on the Company's various Web sites, as well as sponsorship and royalty
related arrangements associated with advertising on these Web sites. The Company
recognizes Online Media revenues over the period in which the advertisements are
displayed, provided that persuasive evidence of an arrangement exists, no
significant obligations remain, the fee is fixed or determinable, and collection
of the receivable is reasonably assured. The Company's obligations typically
include guarantees of a minimum number of "impressions" (times that an
advertisement is viewed by users of our online services). To the extent that
minimum guaranteed impressions are not met in the specified time frame, the
Company does not recognize the corresponding revenues until the guaranteed
impressions are achieved. Prior to the first quarter of fiscal year 2005, Online
Media revenues also included barter transactions. The Company recorded barter
revenue transactions at their estimated fair value based on our historical
experience of selling similar advertising for cash in accordance with Emerging
Issues Task Force ("EITF") Issue 99-17, "Accounting for Advertising Barter
Transactions." The Company broadcasted banner advertising in exchange for
similar banner advertising on third-party Web sites. The Company's barter
arrangements were documented with its standard customer insertion order (and
accompanying terms and conditions) or, in certain limited instances, via an
alternative written contract negotiated between the parties. The standard terms
and conditions included, but were not limited to, the Web sites for each company
that would display the impressions, the time frame that the impressions would be
displayed, and the number, type and size of impressions to be delivered. There
were no barter revenue transactions for the three months ended October 31, 2004.
Barter revenue transactions totaled $0.5 million for the three months ended
October 31, 2003.
8
E-commerce Revenues
E-commerce revenues are derived from the online sale of consumer goods. The
Company recognizes E-commerce revenues from the sale of consumer goods in
accordance with SEC Staff Accounting Bulletin ("SAB") No. 104, "Revenue
Recognition." Under SAB No. 104, product revenues are recognized when persuasive
evidence of an arrangement exists, delivery has occurred, the sale price is
fixed or determinable, and collectibility is reasonably assured. In general, the
Company recognizes E-commerce revenue upon the shipment of goods. The Company
does grant customers a right to return E-commerce products. Such returns are
recorded as incurred and have been immaterial for the periods presented.
The Company's E-commerce business is highly seasonal, reflecting the
general pattern associated with the retail industry of peak sales and earnings
during the holiday shopping season. In the past several years, a substantial
portion of the Company's E-commerce revenues occurred in its second fiscal
quarter, which will begin on November 1, 2004, and end on January 31, 2005. As
is typical in the retail industry, the Company generally experiences lower
E-commerce revenues during the other quarters. Therefore, the company's
E-commerce revenues in a particular quarter are not necessarily indicative of
future E-commerce revenues for a subsequent quarter or its full fiscal year.
Online Images Revenues
Online Images revenues are derived from the online sale of
three-dimensional art, animations and presentations that consist of fees for
software licenses and memberships for these animation software products.
Software revenues related to digital animations are recognized using the
residual method in accordance with SOP 97-2, as amended by SOP 98-9, as
described in detail above. Revenues recognized related to animation memberships
are recognized over the life of the membership, typically three months or 12
months.
Software Development Costs
In accordance with SFAS No. 86, "Accounting for the Cost of Computer
Software to be Sold, Leased, or Otherwise Marketed," development costs incurred
in the research and development of new software products are expensed as
incurred until technological feasibility in the form of a working model has been
established at which time such costs are capitalized, subject to a net
realizable value evaluation. Technological feasibility is established upon the
completion of an integrated working model. To date, the Company's software
development has been completed concurrent with the establishment of
technological feasibility and, accordingly, all software development costs have
been charged to research and development expense in the accompanying
Condensed Consolidated Statements of Operations.
In accordance with SOP 98-1, "Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use," costs incurred related to internal use
software are capitalized and amortized over their useful lives.
Stock Based Compensation
The Company has elected to account for its employee stock-based
compensation plans in accordance with Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and Financial
Accounting Standards Board ("FASB") Interpretation No. ("FIN") 44, "Accounting
for Certain Transactions Involving Stock Compensation--an Interpretation of APB
Opinion No. 25," and complies with the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, no compensation cost is
recognized for any of the Company's fixed stock options granted to employees
when the exercise price of the option equals or exceeds the fair value of the
underlying common stock as of the grant date for each stock option. The Company
accounts for equity instruments issued to non-employees in accordance with the
provisions of SFAS No. 123 and EITF No. 96-18, "Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services." Deferred stock-based compensation
is included as a component of stockholders' equity and is being amortized by
charges to operations over the vesting period of the options and restricted
stock consistent with the method described in FIN 28, "Accounting for Stock
Appreciation Rights and Other Variable Stock Option or Award Plans."
Had compensation cost been recognized based on the fair value at the date
of grant for options granted and Employee Stock Purchase Plan issuances during
the three months ended October 31, 2004 and October 31, 2003 the Company's pro
forma net loss and net loss per share would have been as follows (in thousands,
except per share amounts):
9
Three Months Ended
October 31, October 31,
2004 2003
-------- --------
Net loss as reported ...................................................... $ (1,616) $ (1,223)
Add back employee stock-based compensation expense related to
stock options included in reported net loss, net of related tax effects -- 20
Less employee stock-based compensation expense determined under fair
value based method for all employee stock option awards, net of
related tax effects .................................................... (1,492) (1,402)
-------- --------
Pro forma net loss ..................................................... $ (3,108) $ (2,605)
-------- --------
Shares used in computing basic and diluted net loss per share ............. 61,296 56,255
======== ========
Reported basic and diluted net loss per share ............................. $ (0.03) $ (0.02)
-------- --------
Pro forma basic and diluted net loss per share ............................ $ (0.05) $ (0.05)
-------- --------
The Company calculated the fair value of each option grant on the date of
the grant and stock purchase right using the Black-Scholes option-pricing model
as prescribed by SFAS. No. 123 using the following assumptions:
Stock Option Plans ESPP Plans
For The Three Months Ended For The Three Months Ended
--------------------------- ---------------------------
October 31, October 31, October 31, October 31,
2004 2003 2004 2003
--------- --------- --------- ---------
Expected life (years)........ 4.80 5.09 0.49 0.49
Risk-free interest rate...... 3.3% 3.3% 1.5% 1.1%
Volatility................... 99.8% 113.0% 69.0% 102.0%
Dividend yield............... None None None None
Property and Equipment
Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are amortized over the lesser of the estimated useful lives or the
corresponding lease term. Property and equipment consist of the following (in
thousands):
October 31, July 31,
2004 2004
-------- --------
Computer and office equipment (useful lives of 2 to 3 years) .................. $ 6,965 $ 6,820
Furniture and fixtures (useful lives of 2 to 4 years) ......................... 1,199 1,199
Leasehold improvements (useful lives of lesser of estimated life or lease term) 278 271
Software (useful lives of 2 to 5 years) ...................................... 2,099 2,092
-------- --------
Total property and equipment ........................................ 10,541 10,382
Less: Accumulated depreciation and amortization ............................... (9,421) (9,174)
-------- --------
Property and equipment, net ......................................... $ 1,120 $ 1,208
======== ========
Goodwill and Intangibles
Intangible assets are amortized on a straight-line basis over three to five
years. The Company continually evaluates whether events or circumstances have
occurred that indicate the remaining estimated useful lives of these intangible
assets may not be recoverable. When events or circumstances indicate that the
intangible assets should be evaluated for possible impairment, the Company uses
an estimate of the related business segment's undiscounted net income over the
remaining useful life of the intangible assets in measuring whether they are
recoverable. No events or circumstances occurred during the three months ended
October 31, 2004 that would indicate a possible impairment in the carrying value
of intangible assets at October 31, 2004.
10
The changes in the carrying amount of the intangible assets are as follows
(in thousands):
As of October 31, 2004 As of July 31, 2004
------------------------------ ------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
------ ------------ ------ ------------
Domain and trade names........ $5,927 $(5,916) $5,927 $(5,913)
Purchased technology.......... 2,534 (2,534) 2,534 (2,534)
------ ------- ------ -------
Total intangible assets....... $8,461 $(8,450) $8,461 $(8,447)
====== ======= ====== =======
The aggregate amortization expense of intangible assets was $3,000 for each
of the three-month periods ending October 31, 2004 and October 31, 2003,
respectively. The estimated total amortization expense of acquired intangible
assets is $10,200 and $1,700 for the fiscal years ending July 31, 2005 and July
31, 2006, respectively.
Inventories
Inventories related to the Company's E-commerce and Online Images segments
consist solely of finished goods that are valued using the average cost method.
Provisions, when required, are made to reduce excess and obsolete inventories to
their estimated net realizable values.
Concentrations of Credit Risk and Significant Customers
The Company's investments are held with two reputable financial
institutions; both institutions are headquartered in the United States. The
Company's investment policy limits the amount of risk exposure. Financial
instruments that potentially subject the Company to concentrations of credit
risk consist primarily of cash trade receivables. The Company provides credit,
in the normal course of business, to a number of companies and performs ongoing
credit evaluations of its customers. The credit risk in the Company's trade
receivables is substantially mitigated by its credit evaluation process and
reasonably short collection terms. The Company maintains reserves for potential
credit losses and such losses have been within management's expectations. As of
October 31, 2004, no gross accounts receivables were concentrated with one
customer.
For the three months ended October 31, 2004 and October 31, 2003 no one
customer represented more than 10% of net revenues. The company does not
anticipate that any one customer will represent more than 10% of net revenues in
the near future.
Reclassifications
Certain reclassifications have been made to the prior year consolidated
financial statements to conform to the current year presentation. These
reclassifications have no impact on previously reported net loss or cash flows.
3. Restructuring Costs and Other Special Charges
In fiscal 2001 and 2002, the Company adopted plans to exit its hardware
systems and hardware-related software engineering and professional services
businesses, as well as exit a sublease agreement and reduce its general and
administrative overhead costs. The Company exited these activities to pursue its
SourceForge, Online Media, E-commerce and Online Images businesses and reduce
its operating losses to improve cash flow. The Company recorded restructuring
charges of $168.5 million related to exiting these activities, $160.4 million of
which was included in restructuring charges and other special charges in
operating expenses and $8.1 million of which was included in cost of sales.
Included in the restructuring were charges related to excess facilities from
non-cancelable leases. During the third quarter of fiscal 2004, in connection
with its original 2002 restructuring plan which included an assumption to sublet
all idle facilities, the Company relocated its Fremont, California headquarters
to a smaller building in the same complex. As a result of the change in
circumstances, original accruals were reevaluated and accordingly the Company
recorded a restructuring adjustment of $2.9 million. Included in the $2.9
million dollar restructuring adjustment was $2.5 million of expense related to
writing off leasehold improvements and fixed assets and an additional $0.4
million expense related to excess facilities from non-cancelable leases. In
addition, during the third quarter of fiscal 2004, the Company reached
agreements in principal to sublet unoccupied portions of properties that it
leases in Sunnyvale, California and Fremont, California. As a result of the
change in circumstances due to the agreements in principal, which were
thereafter formalized in executed agreements, original accruals were reevaluated
and, accordingly, the Company recorded a restructuring adjustment of $0.3
million in the third quarter of fiscal 2004. The total adjustment to
restructuring expenses in fiscal 2004 was therefore $3.2 million. The remaining
accrual from non-cancelable lease payments is based on current circumstances.
These accruals are subject to change should actual circumstances change. The
Company will continue to evaluate and update, if applicable, these accruals
quarterly. As of October 31, 2004, the Company had an accrual of approximately
$10.3 million outstanding related to these non-cancelable leases, all of which
was originally included in operating expenses.
11
All charges as a result of restructuring activities have been recorded in
accordance with EITF 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs incurred in a Restructuring)." Restructuring charges recorded in fiscal
2004 were considered adjustments to the original restructuring plans, therefore,
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," was not applicable.
Below is a summary of the restructuring charges in operating expenses (in
thousands):
Total Charged Total
To Operations Total Charged Cash Restructuring
Fiscal To Operations Receipts/ Liabilities at
2001-2003 Fiscal 2004 (Payments) October 31, 2004
--------- ----------- ---------- ----------------
Cash Provisions:
Other special charges relating to
restructuring activities .................................. $ 1,349 $ -- $ (1,349) $ --
Facilities charges .......................................... 16,176 713 (6,579) 10,310
Employee severance and other related charges ................ 5,532 -- (5,532) --
-------- ------ -------- -------
Total cash provisions ................................... 23,057 713 $(13,460) $10,310
-------- ------ ======== =======
Non-cash:
Write-off of goodwill and intangibles ....................... 90,355 --
Write-off of other special charges relating to restructuring
activities ................................................ 9,323 2,496
Write-off of accelerated options from
terminated employees ...................................... 1,352 --
Acceleration of deferred stock compensation ................. 36,064 --
-------- ------
Total non-cash provisions ............................... 137,094 2,496
-------- ------
Total provisions ........................................ $160,151 $3,209
======== ======
Below is a summary of the changes to the restructuring liability (in thousands):
Balance at Charged to Balance at
Beginning Costs and End
Changes in the total accrued restructuring liability of Period Expenses Deductions of Period
- ----------------------------------------------------- --------- -------- ---------- ---------
From July 29, 2000 through July 31, 2003.................. $ -- $ 23,057 $(8,168) $ 14,889
For the year ended July 31, 2004........................... $ 14,889 $ 713 $(4,319) $ 11,283
For the quarter ended October 31, 2003..................... $ 14,889 $ (17) $(1,023) $ 13,849
For the quarter ended October 31, 2004..................... $ 11,283 $ -- $ (973) $ 10,310
Short Long Total
Components of the total accrued restructuring liability Term Term Liability
------------------------------------------------------- ---- ---- ---------
As of July 31, 2003........................................ $ 4,117 $ 10,772 $ 14,889
As of July 31, 2004........................................ $ 3,440 $ 7,843 $ 11,283
As of October 31, 2003..................................... $ 3,577 $ 10,272 $ 13,849
As of October 31, 2004..................................... $ 3,019 $ 7,291 $ 10,310
4. Computation of Per Share Amounts
In accordance with SFAS No. 128 "Earnings Per Share," basic net loss per
common share has been calculated using the weighted-average number of shares of
common stock outstanding during the period, less shares subject to repurchase.
For the three months ended October 31, 2004 and October 31, 2003, the Company
has excluded all stock options from the calculation of diluted net loss per
common share because all such securities are antidilutive for those periods.
12
The following table presents the calculation of basic and diluted net loss
per share (in thousands, except per share data):
Three Months Ended
------------------------
October 31, October 31,
2004 2003
-------- --------
Net loss ...................................................... $ (1,616) $ (1,223)
======== ========
Basic and diluted:
Weighted average shares of common stock outstanding ......... 61,296 56,255
-------- --------
Shares used in computing basic and diluted net loss per share 61,296 56,255
======== ========
Basic and diluted net loss per share ........................ $ (0.03) $ (0.02)
======== ========
The following potential common shares have been excluded from the
calculation of diluted net loss per share for all periods presented because they
are anti-dilutive (in thousands):
Three Months Ended
October 31, October 31,
2004 2003
------ ------
Anti-dilutive securities:
Options to purchase common stock.......... 11,962 8,347
------ ------
Total 11,962 8,347
====== ======
5. Comprehensive Loss
Comprehensive loss is comprised of net loss and other non-owner changes in
stockholders' equity, including foreign currency translation gains or loss and
unrealized gains or losses on available-for sale marketable securities.
6. Segment and Geographic Information
The Company's operating segments are significant strategic business units
that offer different products and services. The Company has four operating
segments: SourceForge, Online Media, E-commerce and Online Images.
The Company's SourceForge segment focuses on its SourceForge software
products. The Company's Online Media segment consists of a network of Internet
Web sites serving the IT professional and software development communities. The
Company's E-commerce segment provides online sales of a variety of retail
products of interest to the software development and IT communities. The
Company's Online Images segment provides online sales of three-dimensional art,
animations and presentations. Other includes revenues and costs associated with
the Company's former hardware business as well as all corporate expenses, such
as restructuring charges, legal judgments and settlements, amortization of
intangible assets and amortization of deferred stock, that are not allocated to
the individual operating segments and are not considered by the Company's chief
decision-making group in evaluating the performance of the operating segments.
The accounting policies of the segments are consistent with those described
in the summary of significant accounting policies. All intersegment sales have
been stated separately in the table below. The Company's chief decision-making
group, as defined under SFAS No. 131, consists of the Chief Executive Officer
and the executive team. The Company's chief decision-making group excludes all
intersegment sales when evaluating the performance of the segments. The
Company's assets and liabilities are not discretely allocated or reviewed by
operating segment. The depreciation of the Company's property, equipment and
leasehold improvements are allocated based on headcount, unless specifically
identified by operating segment.
Online Online Total
(in thousands) SourceForge Media E-commerce Images Other Eliminations Company
-------------- ----------- ----- ----------- ------ ----- ------------ -------
Three Months Ended October 31, 2004
Revenue from external customers ....... $ 1,931 $ 1,849 $ 2,694 $524 $ -- $ -- $ 6,998
Revenue from intersegments ............ $ -- $ 125 $ -- $ -- $ -- $(125) $ --
Cost of revenues ...................... $ 232 $ 802 $ 2,355 $130 $ -- $ -- $ 3,519
Gross margin .......................... $ 1,699 $ 1,047 $ 339 $394 $ -- $ -- $ 3,479
Operating income (loss) ............... $(1,128) $ (380) $ (303) $196 $(256) $ -- $(1,871)
Depreciation expense .................. $ 167 $ 73 $ 7 $ -- $ -- $ -- $ 247
13
Three Months Ended October 31, 2003
Revenue from external customers ....... $ 815 $ 2,276 $ 2,242 $433 $ 31 $ -- $ 5,797
Revenue from intersegments ............ $ -- $ 35 $ -- $ -- $ -- $ (35) $ --
Cost of revenues ...................... $ 595 $ 762 $ 1,777 $116 $ -- $ -- $ 3,250
Gross margin .......................... $ 220 $ 1,514 $ 465 $317 $ 31 $ -- $ 2,547
Operating income (loss) ............... $(2,875) $ (478) $ (6) $105 $ 852 $ -- $(2,402)
Depreciation expense .................. $ 394 $ 76 $ 4 $ 12 $ -- $ -- $ 486
During the time period covered by the table above, the Company marketed its
products in the United States through its direct sales force and its online Web
sites. Revenues for the three months ended October 31, 2004 and October 31, 2003
were primarily generated from sales to end users in the United States.
7. Litigation
The Company, two of its former officers (the "Former Officers"), and the
lead underwriter in its initial public offering ("IPO") were named as defendants
in a consolidated shareholder lawsuit in the United States District Court for
the Southern District of New York, captioned In re VA Software Corp. Initial
Public Offering Securities Litigation, 01-CV-0242. This is one of a number of
actions coordinated for pretrial purposes as In re Initial Public Offering
Securities Litigation, 21 MC 92 with the first action filed on January 12, 2001.
Plaintiffs in the coordinated proceeding are bringing claims under the federal
securities laws against numerous underwriters, companies, and individuals,
alleging generally that defendant underwriters engaged in improper and
undisclosed activities concerning the allocation of shares in the IPOs of more
than 300 companies during late 1998 through 2000. Among other things, the
plaintiffs allege that the underwriters' customers had to pay excessive
brokerage commissions and purchase additional shares of stock in the aftermarket
in order to receive favorable allocations of shares in an IPO. The consolidated
amended complaint in the Company's case seeks unspecified damages on behalf of a
purported class of purchasers of its common stock between December 9, 1999 and
December 6, 2000. Pursuant to a tolling agreement, the individual defendants
were dismissed without prejudice. On February 19, 2003, the court denied the
Company's motion to dismiss the claims against it. The litigation is now in
discovery. A proposal has been made for the settlement and release of claims
against the issuer defendants, including the Company. The settlement is subject
to a number of conditions, including approval of the court. If the settlement
does not occur, and litigation against the Company continues, the Company
believes it has meritorious defenses and intends to defend the case vigorously.
On Nov 9, 2001, a former employee of the Company, who had worked as a sales
person in the Company's former hardware business, filed a complaint captioned
Okerman v. VA Linux Systems, Inc. & Larry Augustin, Civil No. 01-01825 (Norfolk
Superior Court), in the Commonwealth of Massachusetts. As amended, the complaint
alleges that changes made to certain commission and bonus plans during the
plaintiff's tenure at the Company entitled him to recover damages for Breach of
Contract, Breach of the Implied Covenant of Good Faith and Fair Dealing,
violation of the Massachusetts Wage Act Statute, Promissory Estoppel, and
Quantum Meruit. On June 25, 2002, the Court dismissed the Massachusetts Wage Act
claim brought against the Company's former chief executive officer. On July 26,
2002, dismissal of the Wage Act claim in favor of the Company's former chief
executive officer was upheld on interlocutory appeal. On July 9, 2003, the Court
granted summary judgment in the Company's favor regarding claims for Breach of
Contract, Promissory Estoppel, and Quantum Meruit, and granted judgment on the
pleadings in favor of the Company regarding the Massachusetts Wage Act claim. On
September 24, 2004, following a jury trial on the sole remaining claim for
Breach of the Covenant of Good Faith and Fair Dealing, a jury awarded damages of
$136,876 to the plaintiff. The plaintiff has since filed a notice of appeal of
his previously-dismissed claims and the judgment for Breach of Contract and
Breach of the Covenant of Good Faith and Fair Dealing, and the Company has filed
a notice of appeal of the judgment for Breach of the Covenant of Good Faith and
Fair Dealing.
The Company is subject to various claims and legal actions arising in the
ordinary course of business. The Company has accrued for estimated losses in the
accompanying consolidated financial statements for those matters where it
believes that the likelihood that a loss will occur is probable and the amount
of loss is reasonably estimable.
8. Recent Accounting Pronouncements
In December 2003, the FASB revised Interpretation No. 46, "Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51" (FIN 46R), which
addresses how a business enterprise should evaluate whether it has a controlling
interest in an entity through means other than voting rights and accordingly
should consolidate the entity. FIN 46R replaces FIN 46, which was issued in
January 2003. Before concluding that it is appropriate to apply the voting
interest consolidation model to an entity, an enterprise must first determine
that the entity is not a variable interest entity or a special purpose entity.
FIN 46R became effective for VA Software during fiscal 2004 and the adoption of
this statement did not have a material impact on the Company's financial
position or results of operations.
14
In December 2003, the SEC issued SAB 104, "Revenue Recognition," which
supersedes SAB 101, "Revenue Recognition in Financial Statements." SAB 104's
primary purpose is to rescind accounting guidance contained in SAB 101 related
to multiple element revenue arrangements, which was superseded as a result of
the issuance of EITF 00-21, "Accounting for Revenue Arrangements with Multiple
Deliverables." While the wording of SAB 104 has changed to reflect the issuance
of EITF 00-21, the revenue recognition principles of SAB 101 remain largely
unchanged by the issuance of SAB 104. The adoption of SAB 104 has not had a
material impact on the Company's consolidated financial statements.
9. Guarantees and Indemnifications
As permitted under Delaware law, the Company has agreements whereby the
Company's officers and directors are indemnified for certain events or
occurrences while the officer or director is, or was, serving at the Company's
request in such capacity. The maximum potential amount of future payments the
Company could be required to make under these indemnification agreements is
unlimited; however, the Company has director and officer liability insurance
designed to limit the Company's exposure and to enable the Company to recover a
portion of any future amounts paid. As a result of the Company's insurance
policy coverage, the Company believes the estimated fair value of these
indemnification agreements is minimal. Accordingly, the Company has no
liabilities recorded for these agreements as of October 31, 2004.
The Company enters into standard indemnification agreements in the ordinary
course of business. Pursuant to these agreements, the Company indemnifies, holds
harmless, and agrees to reimburse the indemnified party for losses suffered or
incurred by the indemnified party, generally, the Company's business partners,
subsidiaries and/or customers, in connection with any patent, copyright or other
intellectual property infringement claim by any third party with respect to the
Company's products. The term of these indemnification agreements is generally
perpetual any time after execution of the agreement. The maximum potential
amount of future payments the Company could be required to make under these
indemnification agreements is unlimited. The Company has not incurred
significant costs to defend lawsuits or settle claims related to these
indemnification agreements. As a result, the Company believes the estimated fair
value of these agreements is insignificant. Accordingly, the Company has no
liabilities recorded for these agreements as of October 31, 2004.
The Company warrants that its software products will perform in all
material respects in accordance with the Company's standard published
specifications in effect at the time of delivery of the licensed products to the
customer for a specified period, which generally does not exceed ninety days.
Additionally, the Company warrants that its maintenance services will be
performed consistent with generally accepted industry standards through the
completion of the agreed upon services. If necessary, the Company would provide
for the estimated cost of product and service warranties based on specific
warranty claims and claim history, however, the Company has not incurred
significant expense under its product or services warranties. As a result, the
Company believes the estimated fair value of these agreements is minimal.
Accordingly, the Company has no liabilities recorded for these agreements as of
October 31, 2004.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Special Note Regarding Forward-Looking Statements
This Form 10-Q contains forward-looking statements that involve risks and
uncertainties. Words such as "intend," "expect," "believe," "in our view," and
variations of such words and similar expressions, are intended to identify such
forward-looking statements, which include, but are not limited to, statements
regarding our expectations and beliefs regarding future revenue growth; gross
margins; financial performance and results of operations; technological trends
in, and emergence of the market for collaborative software development
applications; the future functionality, business potential, demand for,
efficiencies created by and adoption of SourceForge; demand for online
advertising; management's strategy, plans and objectives for future operations;
the impact of our restructuring and the amount of cash utilized by operations;
our intent to continue to invest significant resources in development;
competition, competitors and our ability to compete; liquidity and capital
resources; the outcome of any litigation to which we are a party; our accounting
policies; and sufficiency of our cash resources, cash generated from operations
and investments to meet our operating and working capital requirements. Actual
results may differ materially from those expressed or implied in such
forward-looking statements due to various factors, including those set forth in
this Business section under "Competition" and in the Risk Factors contained in
the section of this Form 10-Q entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations." We undertake no obligation to
update the forward-looking statements to reflect events or circumstances
occurring after the date of this Form 10-Q.
15
Critical Accounting Estimates
We believe there have been no significant changes in our critical
accounting estimates during the three months ended October 31, 2004 as compared
to what was previously disclosed in Management's Discussion and Analysis of
Financial Condition and Results of Operations included in our Annual Report on
Form 10-K for the year ended July 31, 2004.
Overview
We were incorporated in California in January 1995 and reincorporated in
Delaware in December 1999. From the date of our incorporation through October
2001, we sold Linux-based hardware systems and services under the name VA Linux
Systems, Inc. On June 27, 2001, we announced our decision to exit our
Linux-based hardware business. Today, we do business under the name VA Software
Corporation and we develop, market and support a software application known as
SourceForge Enterprise Edition ("SourceForge") and also own and operate OSTG,
Inc. ("OSTG") and its wholly-owned subsidiaries, a network of Internet Web
sites, offering advertising, retail and animation services and products.
We currently view our business in four operating segments: SourceForge,
Online Media, E-commerce and Online Images. Our SourceForge segment focuses on
our SourceForge software products and services. Our Online Media segment
represents a network of Internet Web sites serving the IT professional and
software development communities. Our E-commerce segment provides online sales
of a variety of retail products of interest to the software development and IT
communities through ThinkGeek, Inc. ("ThinkGeek") a wholly-owned subsidiary of
OSTG. Our Online Images segment provides online sales of digital animation sold
in the form of CD's or as a subscription offered through Animation Factory,
Inc., a wholly-owned subsidiary of OSTG.
During the first quarter of fiscal 2005, within the SourceForge segment, we
continued to increase the number of customers to whom we have sold our
SourceForge products to, totaling 108 at October 31, 2004. In addition, we
increased the average contract value to $146,000, representing an increase of
204% compared to the average contract value of $48,000 at the same time the
previous year.
Within the Online Media segment, we reached record levels of page views,
unique visitors and advertisers. As of October 31, 2004, OSTG reaches more than
16 million unique visitors and serves more than 250 million page views per
month.
Net revenues during the three months ended October 31, 2004 increased as
compared to the three months ended October 31, 2003 primarily due to increased
sales in our SourceForge, E-commerce and Online Images businesses, offset by a
decrease in our Online Media business and other revenue derived from our
previous hardware business. SourceForge sales increased due to an increase in
the number of customers to whom we have licensed SourceForge and an increase in
the average contract value. E-commerce and Online Images sales increased due to
an increase in our customer base related to these segments. Online Media
revenues decreased as a result of the Company's decision to eliminate its
revenue generating barter transactions.
Our sales continue to be primarily attributable to customers located in the
United States of America.
For total operations, the net loss was $1.6 million and $1.2 million during
the three months ended October 31, 2004 and October 31, 2003, respectively, or
$0.03 and $0.02, respectively, in basic and diluted net loss per share.
Results of Operations
We believe that the application of accounting standards is central to a
company's reported financial position, results of operations and cash flows. We
review our annual and quarterly results, along with key accounting policies,
with our audit committee prior to the release of financial results. We do not
use off-balance-sheet arrangements with unconsolidated related parties, nor do
we use other forms of off-balance-sheet arrangements such as research and
development arrangements.
We have completed thirteen quarters of operations focused on building our
application software business, and accordingly have a limited operating history
in this business. While we believe that we are making good progress in our
application software business, a substantial majority of our revenues continue
to be derived from our other businesses and we face numerous risks and
uncertainties that commonly confront businesses in emerging markets, some of
which we have identified in the "Risk Factors" section below.
16
The following table sets forth our operating results for the periods
indicated as a percentage of net revenues, represented by selected items from
the unaudited condensed consolidated statements of operations. This table should
be read in conjunction with the consolidated financial statements and the
accompanying notes included in this Form 10-Q.
Three Months Ended
October 31, October 31,
2004 2003
---- ----
Consolidated Statements of Operations Data:
SourceForge revenues ................................ 27.6% 14.1%
Online Media revenues ............................... 26.4 39.2
E-commerce revenues ................................. 38.5 38.7
Online Images revenues .............................. 7.5 7.5
Other revenues ...................................... 0.0 0.5
----- -----
Net revenues ..................................... 100.0% 100.0%
----- -----
SourceForge cost of revenues ........................ 3.2 10.3
Online Media cost of revenues ....................... 11.5 13.1
E-commerce cost of revenues ......................... 33.7 30.7
Online Images cost of revenues 1.9 2.0
----- -----
Cost of revenues ................................. 50.3 56.1
----- -----
Gross margin ........................................ 49.7 43.9
----- -----
Operating expenses:
Sales and marketing .............................. 34.5 41.3
Research and development ......................... 21.0 31.5
General and administrative ....................... 20.8 12.5
Restructuring costs and other special charges .... 0.0 (0.3)
Amortization of deferred stock compensation ...... 0.0 0.3
Amortization of goodwill and intangible assets ... 0.1 0.1
----- -----
Total operating expenses ....................... 76.4 85.4
----- -----
Loss from operations ................................ (26.7) (41.5)
Interest Income, net ................................ 2.7 4.3
Interest and other income, net ...................... 0.9 16.0
----- -----
Net loss ............................................ (23.1)% (21.2)%
===== =====
Net Revenues
Three Months Ended
($ in thousands) October 31, 2004 October 31, 2003 $ Change % Change
---------------- ---------------- -------- --------
SourceForge revenues $ 1,931 $ 815 $ 1,116 137%
Online Media revenues 1,849 2,276 (427) (19%)
E-commerce revenues 2,694 2,242 452 20%
Online Images revenues 524 433 91 21%
Other revenues -- 31 (31) (100%)
----------- ----------- -----------
Net revenues $ 6,998 $ 5,797 $ 1,201 21%
=========== =========== ===========
Net revenues increased during the three months ended October 31, 2004 as
compared to the three months ended October 31, 2003 due primarily to an increase
in our SourceForge, E-commerce and Online Images businesses, offset by a
decrease in Online Images business and other revenues derived from our previous
hardware business.
Sales for the three months ended October 31, 2004 and October 31, 2003 were
primarily to customers located in the United States of America.
For the three months ended October 31, 2004 and October 31, 2003 no one
customer represented 10% or greater of net revenues. We do not anticipate that
any one customer will represent more than 10% of net revenues in the near
future.
17
Net Revenues by Segment
SourceForge Revenues
Three Months Ended
($ in thousands) October 31, 2004 October 31, 2003 $ Change % Change
---------------- ---------------- -------- --------
SourceForge revenues $1,931 $815 $1,116 137%
Percentage of total net
revenues 28% 14%
Aggregate # of customers
sold to 108 66 42 64%
Avg. contract value $ 146 $ 48 $ 98 204%
SourceForge revenues consist principally of fees for licenses of our
SourceForge software products, maintenance, consulting and training.
The growth during the three months ended October 31, 2004 was primarily
related to the SourceForge licensing component of SourceForge revenue. We have
increased the number of customers to whom we have licensed SourceForge to 108
and increased our average value of contracts sold during the quarter ended
October 31, 2004 to $146,000. This is compared to 66 customers to whom we had
licensed SourceForge to with an average value of contracts sold during the
quarter ended October 31, 2003 of $48,000.
We expect SourceForge revenues to continue to increase as our new and
returning customer base grows, our average contract value increases and the
length of the sales cycle decreases.
Online Media Revenues
Three Months Ended
($ in thousands) October 31, 2004 October 31, 2003 $ Change % Change
---------------- ---------------- -------- --------
Online Media revenues $1,849 $2,276 $(427) (19%)
Percentage of total net
revenues 26% 39%
During the three months ended October 31, 2004, Online Media revenues were
primarily derived from cash sales of advertising space on our various Web sites,
as well as sponsorship and royalty related arrangements associated with
advertising on these Web sites. During the three months ended October 31, 2003,
Online Media revenues also included $0.5 million of barter revenue.
Three Months Ended
($ in thousands) October 31, 2004 October 31, 2003 $ Change % Change
---------------- ---------------- -------- --------
Cash advertising $ 1,755 $ 1,510 $ 245 16%
Barter advertising -- 513 (513) (100%)
Sponsorships 88 253 (165) (65%)
Donations 6 -- 6 100%
---------- ---------- ----------
Online Media revenues $ 1,849 $ 2,276 $ (427) (19%)
========== ========== ==========
Cash advertising revenue is derived from the number of impressions
delivered and the average CPM rate (i.e., the average rate at which we receive
revenue per 1,000 banner advertisements (impressions) we display to users of our
online services) charged for the impressions delivered.
Barter advertising is derived from banner advertising delivered in exchange
for similar banner advertising on third-party Web sites. We record barter
revenue transactions at their estimated fair value based on our historical
experience of selling similar advertising for cash. Beginning in the first
quarter of fiscal 2005, we eliminated our revenue generating barter related
programs. Going forward, we do not anticipate any Online Media revenue to be
associated with barter programs.
Sponsorship revenue is derived from non-CPM rate Web marketing programs
that are used to increase brand awareness. Revenue related to sponsorships is
recognized ratably over the term of the marketing program. Sponsorship revenue
in the three months ended October 31, 2004 and October 31, 2003 relates to
certain contracts with one customer, IBM. The decrease in sponsorship revenue in
the three months ended October 31, 2004 as compared to the three months ended
October 31, 2003 was due to the expiration of one of those certain IBM contracts
in the fourth quarter of fiscal 2004.
18
Three Months Ended
($ in thousands) October 31, 2004 October 31, 2003 $ Change % Change
---------------- ---------------- -------- --------
Cash advertising $ 1,755 $ 1,510 $ 245 16%
Impressions delivered 126,022 219,505 (93,483) (43%)
Average CPM rate $ 13.93 $ 6.88 $ 7.05 102%
The increase in cash advertising revenue during the three months ended
October 31, 2004 as compared to the three months ended October 31, 2003 was due
to the substantial increase in the average contract CPM rate, offset by a
significant decrease in the number of impressions delivered. The increase in
average CPM rates was the result of the decline in advertising associated with
an individually significant customer who had received a volume discount, driving
the average CPM rate for the first quarter of fiscal 2004 down. The decrease in
the number of impressions delivered was primarily due the decline in online
advertising associated with this individually significant customer. In the first
quarter of fiscal 2004, this customer represented 31% of total cash advertising
revenues. In the first quarter of fiscal 2005, this same customer only
represented 5% of cash advertising revenues. We believe that our prominent
position in serving the growing Open Source software and Linux markets, along
with our favorable online visitor demographics, make us an attractive
advertising vehicle for advertising customers.
E-commerce Revenues
Three Months Ended
($ in thousands) October 31, 2004 October 31, 2003 $ Change % Change
---------------- ---------------- -------- --------
E-commerce revenues $ 2,694 $ 2,242 $ 452 20%
Percentage of total net
revenues 39% 39%
# of Orders (per quarter) 41,657 35,963 5,694 16%
Avg. order size (in whole
dollars) $ 64.67 $ 62.34 $ 2.33 4%
E-commerce revenues are derived from the online sale of consumer goods,
including shipping, net of any returns and allowances. The growth in the three
months ended October 31, 2004 as compared to the three months ended October 31,
2003 is primarily due to increased consumer awareness of our site as a result of
expanded advertising, a broader product offering which attracted a larger
customer base, as well as Web site enhancements and affiliate programs that
drove more traffic to our site. As a result of our efforts we experienced a 16%
increase in the number of orders placed year over year. We expect E-commerce
revenues to continue to grow as our E-commerce customer base grows.
Online Images Revenues
Three Months Ended
($ in thousands) October 31, 2004 October 31, 2003 $ Change % Change
---------------- ---------------- -------- --------
Online Images revenues $ 524 $ 433 $ 91 21%
Percentage of total net
revenues 8% 8%
Online Images revenues are derived from the online sale of
three-dimensional art, animations and presentations.
The growth in the three months ended October 31, 2004 as compared to the
three months ended October 31, 2003 is primarily due to increased consumer
awareness of our site as a result of a broader product offering which attracted
a larger customer base, as well as Web site enhancements and affiliate programs
that drove more traffic to our site. We expect Online Images revenues to
continue to grow as our customer base grows.
Other Revenues
Three Months Ended
($ in thousands) October 31, 2004 October 31, 2003 $ Change % Change
---------------- ---------------- -------- --------
Other revenues $ -- $ 31 $ (31) (100%)
Percentage of total net
revenues 0% 1%
19
Other revenues were derived from our former hardware, and related customer
support, and professional services businesses. The decrease in other revenues in
the three months ended October 31, 2004 as compared to the three months ended
October 31, 2003 is the direct result of exiting these former businesses. We
expect other revenues to remain at zero throughout fiscal 2005 and thereafter.
Cost of Revenues/Gross Margin
Three Months Ended
($ in thousands) October 31, 2004 October 31, 2003 $ Change % Change
---------------- ---------------- -------- --------
Cost of revenues $3,519 $3,250 $269 8%
Gross margin $3,479 $2,547 $932 37%
Gross margin % 50% 44%
Cost of revenues consist of personnel costs and related overhead associated
with providing software professional services, personnel costs and related
overhead associated with providing and running advertising campaigns and product
costs associated with our E-commerce business.
The increase in gross margins was primarily the result of improvements in
the SourceForge and Online Images businesses, offset by a decline in the Online
Media and E-commerce margins.
Cost of Revenues/Gross Margin by Segment
SourceForge Cost of Revenues/Gross Margin
Three Months Ended
($ in thousands) October 31, 2004 October 31, 2003 $ Change % Change
---------------- ---------------- -------- --------
SourceForge cost of revenues $ 232 $595 $(363) (61%)
SourceForge gross margin $1,699 $220 $1,479 672%
SourceForge gross margin % 88% 27%
SourceForge cost of revenues consist of personnel and outside contractor
costs associated with providing software customer and professional services. The
increase in our SourceForge gross margin percentages for the three months ended
October 31, 2004 as compared to the three months ended October 31, 2003 was
primarily the result of lower outside contractor costs and leveraging our fixed
personnel costs while increasing revenue levels.
Online Media Cost of Revenues/Gross Margin
Three Months Ended
($ in thousands) October 31, 2004 October 31, 2003 $ Change % Change
---------------- ---------------- -------- --------
Online Media cost of revenues $ 802 $ 762 $ 40 5%
Online Media gross margin $1,047 $ 1,514 $(467) (31%)
Online Media gross margin % 57% 67%
Online Media cost of revenues consist of personnel costs and related
overhead associated with developing the editorial content of the sites and
providing and running advertising campaigns. The decrease in Online Media gross
margin percentages for the three months ended October 31, 2004 as compared to
the three months ended October 31, 2003 was primarily driven by the slight
increase in Online Media cost of revenues on lower revenue volumes. The increase
in cost of revenues was primarily due to an increase in personnel costs and
costs associated with editorial content, offset by a decrease in depreciation
expense and bandwidth costs associated with delivering advertising.
E-commerce Cost of Revenues/Gross Margin
Three Months Ended
($ in thousands) October 31, 2004 October 31, 2003 $ Change % Change
---------------- ---------------- -------- --------
E-commerce cost of revenues $ 2,355 $1,777 $ 578 33%
E-commerce gross margin $ 339 $ 465 $ (126) (27%)
E-commerce gross margin % 13% 21%
20
E-commerce cost of revenues consist of product costs, shipping and
fulfillment costs and personnel costs associated with the operations and
merchandising functions. The increase in E-commerce cost of revenues in absolute
dollars was primarily due to increased product costs, shipping costs and
fulfillment costs. The increase in product costs was the result of increased
E-commerce revenue levels. The increase in shipping and fulfillment costs was
primarily related to the transition associated with changing our third party
fulfillment partner in the later part of the fourth quarter of fiscal year 2004.
E-commerce gross margin percentages have decreased for the three months ended
October 31, 2004 as compared to the three months ended October 31, 2003 as a
direct result of the increased shipping and fulfillment costs. We expect
E-commerce cost of revenues in absolute dollars to grow proportionately with
E-commerce revenues in the future. In addition, we expect E-commerce overall
gross margins to improve slightly as volume grows.
Online Images Cost of Revenues/Gross Margin
Three Months Ended
($ in thousands) October 31, 2004 October 31, 2003 $ Change % Change
---------------- ---------------- -------- --------
Online Images cost of revenues $ 130 $ 116 $14 12%
Online Images gross margin $ 394 $ 317 $77 24%
Online Images gross margin % 75% 73%
Online Images cost of revenues consist of direct material and production
costs for animation CDs. The increase in our Online Images gross margin
percentages for the three months ended October 31, 2004 as compared to the three
months ended October 31, 2003 was primarily due to increased material costs
consistent with the increase in revenues, offset by a decrease in costs
associated with bandwidth.
Operating Expenses
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of salaries, commissions and
related expenses for personnel engaged in sales, marketing and sales support
functions, as well as costs associated with trade shows, advertising and
promotional activities.
Three Months Ended
($ in thousands) October 31, 2004 October 31, 2003 $ Change % Change
---------------- ---------------- -------- --------
Sales & Marketing $2,411 $2,392 $19 1%
Percentage of total net
revenues 35% 41%
Headcount 30 28
The slight increase in absolute dollars in the three months ended October
31, 2004 as compared to the three months ended October 31, 2003 was primarily
related to an increase in employee expenses of $0.2 million and commission
expenses of $0.2 million, offset by a decrease in our Online Media marketing
expense related to barter of $0.5 million. The $0.2 million in commission
expense was a direct result of increased revenue related to our SourceForge
segment. The decline in our barter marketing expense was due to the elimination
of our revenue generating barter related programs in the first quarter of fiscal
2005. Going forward, we do not anticipate any expense related to barter
programs. The decrease as a percentage of net revenues was due to increased
revenue levels. We believe our sales and marketing expenses in absolute dollars
will increase in the future as we intend to grow our sales force. However, in
the future, we expect sales and marketing expenses to decrease slightly as a
percentage of revenue.
Research and Development Expenses
Research and development expenses consist primarily of salaries and related
expenses for software engineers. We expense all of our research and development
costs as they are incurred.
Three Months Ended
($ in thousands) October 31, 2004 October 31, 2003 $ Change % Change
---------------- ---------------- -------- --------
SourceForge Research & Development $ 905 $ 1,328 $ (423) (32%)
Online Media Research & Development 408 367 41 11%
E-commerce Research & Development 59 34 25 74%
Online Images Research & Development 99 98 1 1%
---------------- ---------------- --------
Total Research & Development $ 1,471 $ 1,827 $ (356) (19%)
---------------- ---------------- --------
Percentage of total net revenues 21% 32%
Headcount 36 37
21
The decrease in absolute dollars in the three months ended October 31, 2004
as compared to the three months ended October 31, 2003 was primarily due to a
decrease in allocated facility expenses of $0.2 million, a decrease in the use
of SourceForge contractors of $0.1 million and decreased employee related
expenses of $0.1 million. The decrease in allocated facility expenses was
primarily related to rent and depreciation. Rent expense has decreased for the
three months ended October 31, 2004 as compared to the three months ended
October 31, 2003 as a result of moving into a smaller facility late in the third
quarter of fiscal 2004. Depreciation expense has decreased as well due to moving
into the smaller facility and writing off the remaining assets associated with
the larger facility occupied in the first quarter of fiscal 2004. The decrease
in SourceForge contractors was specifically related to Cybernet Software
Solutions, Inc. and was the direct result of completing the development phase of
SourceForge 3.4 in the later part of the first quarter of fiscal 2004. The
decrease in employee-related expenses was primarily due to a reduction in salary
expense as headcount declined to 36 from 37. The decrease as a percentage of net
revenues was primarily due to our decreased spending levels as described above
as well as increased revenue levels. We expect research and development expenses
to increase slightly in absolute dollars and decrease as a percentage of revenue
in the future.
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
86, "Accounting for the Cost of Computer Software to be Sold, Leased, or
Otherwise Marketed," development costs incurred in the research and development
of new software products are expensed as incurred until technological
feasibility in the form of a working model has been established at which time
such costs are capitalized, subject to a net realizable value evaluation.
Technological feasibility is established upon the completion of an integrated
working model. To date, our software development has been completed concurrent
with the establishment of technological feasibility and, accordingly, all
software development costs have been charged to research and development expense
in the accompanying consolidated statements of operations. Going forward, should
technological feasibility occur prior to the completion of our software
development, all costs incurred between technological feasibility and software
development completion will be capitalized.
General and Administrative Expenses
General and administrative expenses consist of salaries and related
expenses for finance and administrative personnel, bad debts and professional
fees for accounting and legal services.
Three Months Ended
($ in thousands) October 31, 2004 October 31, 2003 $ Change % Change
---------------- ---------------- -------- --------
General & Administrative $ 1,465 $ 724 $741 102%
Percentage of total net revenues 21% 13%
Headcount 19 18
The increase in absolute dollars in the three months ended October 31, 2004
as compared to the three months ended October 31, 2003 was primarily related to
the reversal of legal expenses in the first quarter of fiscal 2004 of $1.2
million, $0.9 million of which was associated with the IPO Securities Litigation
that was ultimately paid by one of our insurers and $0.3 million of which
related to a lawsuit that was favorably resolved. Excluding these reversals,
general and administrative expenses decreased $0.4 million in the three months
ended October 31, 2004 as compared to the three months ended October 31, 2003.
The decrease, excluding legal reversals, was primarily related to decreased
employee expenses, consulting expenses, and allocated facility expenses. The
decrease in employee expenses of $0.3 million was associated with bonuses. The
decrease in consulting expenses of $0.1 million was related to engaging an
outside firm to assist us in a sales tax audit in fiscal 2004. The audit was
concluded in fiscal 2004, therefore, no such expenses were incurred in the first
quarter of fiscal 2005. The decrease in allocated facility expenses of $0.1
million was primarily related to rent and depreciation. Rent expense has
decreased for the three months ended October 31, 2004 as compared to the three
months ended October 31, 2003 as a result of moving into a smaller facility late
in the third quarter of fiscal 2004. Depreciation expense has decreased as well
due to moving into the smaller facility and writing off the remaining assets
associated with the larger facility occupied in the first quarter of fiscal
2004. The increase as a percentage of net revenues was primarily due to our
increased expense levels related to legal accrual reversals in the first quarter
of fiscal 2004. We expect general and administrative expenses to return to
fiscal 2003 levels in absolute dollars and decrease as a percentage of revenue
in the future.
22
Restructuring Costs and Other Special Charges
In fiscal 2001 and 2002, we adopted plans to exit our hardware systems and
hardware-related software engineering and professional services businesses, as
well as exit a sublease agreement and reduce our general and administrative
overhead costs. We exited these activities to pursue our current SourceForge,
Online Media, E-commerce and Online Images businesses and reduce our operating
losses to improve cash flow. We recorded restructuring charges of $168.5 million
related to exiting these activities, $160.4 million of which was included in
restructuring charges and other special charges in operating expenses and $8.1
million of which was included in cost of sales. Included in the restructuring
were charges related to excess facilities from non-cancelable leases. During the
third quarter of fiscal 2004, in connection with our original 2002 restructuring
plan which included an assumption to sublet all idle facilities, we relocated
our Fremont, California headquarters to a smaller building in the same complex.
As a result of the change in circumstances, original accruals were reevaluated
and we accordingly recorded a restructuring adjustment of $2.9 million. Included
in the $2.9 million dollar restructuring adjustment was $2.5 million of expense
related to writing off leasehold improvements and fixed assets and an additional
$0.4 million expense related to excess facilities from non-cancelable leases. In
addition, during the third quarter of fiscal 2004, we reached agreements in
principal to sublet unoccupied portions of properties that we lease in
Sunnyvale, California and Fremont, California, which was finalized in the fourth
quarter of fiscal 2004. As a result of the change in circumstances due to the
agreements in principal, which were thereafter formalized in executed
agreements, original accruals were reevaluated and we accordingly recorded a
restructuring adjustment of $0.3 million in the third quarter of fiscal 2004.
The $3.2 million total adjustment to restructuring expenses in fiscal 2004 has
been recorded in the consolidated statement of operations for that period. The
remaining accrual from non-cancelable lease payments is based on current
circumstances. These accruals are subject to change should actual circumstances
change. We will continue to evaluate and update, if applicable, these accruals
quarterly. As of October 31, 2004, we had an accrual of approximately $10.3
million outstanding related to these non-cancelable leases, all of which was
originally included in operating expenses.
All charges as a result of restructuring activities have been recorded in
accordance with Emerging Issues Task Force "EITF" 94-3 "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs incurred in a Restructuring)". Restructuring charges
recorded in fiscal 2004 were considered adjustments to the original
restructuring plans, therefore, SFAS No. 146 "Accounting for Costs Associated
with Exit or Disposal Activities" was not applicable.
Below is a summary of the restructuring charges in operating expenses (in
thousands):
Total Charged Total
To Operations Total Charged Cash Restructuring
Fiscal To Operations Receipts/ Liabilities at
2001-2003 Fiscal 2004 (Payments) October 31, 2004
--------- ----------- ---------- ----------------
Cash Provisions:
Other special charges relating to
restructuring activities................................... $ 1,349 $ -- $ (1,349) $ --
Facilities charges........................................... 16,176 713 (6,579) 10,310
Employee severance and other related charges 5,532 -- (5,532) --
-------- -------- -------- --------
Total cash provisions.................................... 23,057 713 $(13,460) $ 10,310
-------- -------- ======== ========
Non-cash:
Write-off of goodwill and intangibles........................ 90,355 --
Write-off of other special charges relating to restructuring
activities.................................................. 9,323 2,496
Write-off of accelerated options from
terminated employees....................................... 1,352 --
Acceleration of deferred stock compensation.................. 36,064 --
-------- --------
Total non-cash provisions................................ 137,094 2,496
-------- --------
Total provisions.......................................... $160,151 $ 3,209
======== ========
23
Below is a summary of the changes to the restructuring liability (in thousands):
Balance at Charged to Balance at
Beginning Costs and End
Changes in the total accrued restructuring liability of Period Expenses Deductions of Period
- ----------------------------------------------------- ------------ ------------- ---------- ---------
From July 29, 2000 through July 31, 2003............................ $ -- $23,057 $ (8,168) $ 14,889
For the year ended July 31, 2004.................................... $14,889 $ 713 $ (4,319) $ 11,283
For the quarter ended October 31, 2003.............................. $14,889 $ (17) $ (1,023) $ 13,849
For the quarter ended October 31, 2004.............................. $11,283 $ -- $ (973) $ 10,310
Short Long Total
Components of the total accrued restructuring liability Term Term Liability
- ------------------------------------------------------- ---- ---- ---------
As of July 31, 2003................................................. $ 4,117 $10,772 $ 14,889
As of July 31, 2004................................................. $ 3,440 $ 7,843 $ 11,283
As of October 31, 2003.............................................. $ 3,577 $10,272 $ 13,849
As of October 31, 2004.............................................. $ 3,019 $ 7,291 $ 10,310
Amortization of Deferred Stock Compensation
In connection with the grant of stock options to employees during fiscal
1999 and prior to our initial public offering in fiscal 2000, we recorded
deferred stock compensation within stockholders' equity that was amortized on an
accelerated basis over the vesting period over the individual award. We expensed
deferred stock compensation of $20,000 during the three months ended October 31,
2003. Deferred stock compensation was fully amortized as of October 31, 2003. As
such, there was no deferred stock compensation expense during the three months
ended October 31, 2004.
Amortization of Intangible Assets
We amortized $3,000 of intangibles for each of the three months ended
October 31, 2004 and October 31, 2003. The estimated total amortization expense
of acquired intangible assets is $10,200 and $1,700 for the fiscal years ending
July 31, 2005 and July 31, 2006, respectively.
We periodically evaluate the carrying amount of our long-lived assets and
apply the provisions of SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets." SFAS No. 144 requires that long-lived assets and certain
identifiable intangibles to be held and used or disposed of by an entity be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. No changes occurred
during the three months ended October 31, 2004 that would indicate a possible
impairment in the carrying value of intangible assets at October 31, 2004. The
carrying value of intangible assets as of October 31, 2004 is $11,000 and is
included in Other assets in the Condensed Consolidated Balance Sheets.
Interest and Other Income, Net
Three Months Ended
($ in thousands) October 31, 2004 October 31, 2003 $ Change % Change
---------------- ---------------- -------- --------
Interest Income $ 193 $ 249 $ (56) (22%)
Interest Expense $ (3) $ (1) 2 200%
Other Income (Expense) $ 65 $ 931 (866) (93%)
The decrease in interest income in the three months ended October 31, 2004
as compared to the three months ended October 31, 2003 was due to decreased
returns on our cash as a result of declining interest rates from the same period
for the prior year.
Other income and expenses decreased in the three months ended October 31,
2004 as compared to the three months ended October 31, 2003 primarily due to
proceeds received from a legal settlement in the first quarter of fiscal 2004 of
$1.0 million.
Income Taxes
As of October 31, 2004, we had federal and state net operating loss
carry-forwards for tax reporting purposes available to offset future taxable
income. A valuation allowance has been recorded for the total deferred tax
assets as a result of uncertainties regarding realization of the assets based on
the lack of consistent profitability to date and the uncertainty of future
profitability. The federal and state net operating loss carry-forwards expire at
various dates through fiscal year 2024 and fiscal year 2014, respectively, to
the extent that they are not utilized. We have not recognized any benefit from
these net operating loss carry-forwards because of uncertainty surrounding their
realization. The amount of net operating losses that we can utilize is limited
under tax regulations because we have experienced a cumulative stock ownership
change of more than 50% over the last three years.
24
Liquidity and Capital Resources
Three Months Ended
(in thousands) October 31, October 31,
----------- -----------
2004 2003
---- ----
Net cash provided by (used in):
Operating activities ........................... $ (2,002) $ (3,538)
Investing activities ........................... 907 (680)
Financing activities ........................... 231 2,451
Effect of exchange rate changes on cash and cash
equivalents .................................... (68) 3
---------- ----------
Net change in cash and cash equivalents ............ $ (932) $ (1,764)
========== ==========
Our principal sources of cash as of October 31, 2004 are our existing cash,
cash equivalents, short-term and long-term investments of $42.1 million, which
excludes restricted cash of $1.5 million. Cash and cash equivalents increased by
$5.5 million, and short-term and long-term investments increased by $1.2 million
at October 31, 2004 when compared to October 31, 2003. This increase is
primarily due to cash provided by proceeds from the private placement offering
in the second quarter of fiscal 2004 and sale of common stock through our
employee benefit plans, offset by cash used in operations and payments for
capital expenditures.
The cash flow discussion below describes the cash used or provided in one
period as compared to the cash used or provided in the same period for the
previous year. As such, the year to year fluctuations discussed can be
calculated from the Consolidated Statements of Cash Flows.
Operating Activities
The decrease in cash usage related to operating activities in the first
quarter of fiscal 2005, as compared to the first quarter of fiscal 2004, was
primarily the result of a decrease in accounts receivable of $0.5 million, a
decrease in inventories of $0.4 million, a decrease in prepaids and other assets
of $0.6 million and an increase in accrued liabilities and other of $1.4
million. The increased cash inflow related to accounts receivable was primarily
the result of increased collections in the first quarter of fiscal 2005 compared
to the first quarter of fiscal 2004. The increased cash inflow related to
inventories was primarily the result of decreased purchasing levels in the first
quarter of fiscal 2005 compared to the first quarter of fiscal 2004. The
increased cash inflow related to prepaid expenses and other assets was primarily
the result of increased receivables in the first quarter of fiscal 2004
associated with a legal settlement and tax refunds which were utilized during
fiscal 2004. No significant receivables were recorded in the first quarter of
fiscal 2005, therefore, creating a smaller cash usage for the first quarter of
fiscal 2005 as compared to the first quarter of fiscal 2004. The increase in
cash inflow was offset by an increase in net loss (excluding all non-cash items)
of $0.4 million and an increase in accounts payable of $0.8 million as a result
of the timing of payments.
Investing Activities
Our investing activities primarily include purchases of property and
equipment and purchases and sales of marketable securities.
The decrease in cash usage related to investing activities in the first
quarter of fiscal 2005, as compared to the first quarter of fiscal 2004, was
primarily the result of a decrease in net purchases of marketable securities of
$1.2 million and a decrease in capital expenditures of $0.3 million. During the
first quarter of fiscal 2005, we sold (net) $1.0 million in short and long-term
marketable securities compared to a net purchase of $0.2 million in the first
quarter of fiscal 2004. The decrease in cash usage related to capital
expenditures was primarily related to a significant purchase of servers
associated with our Online Media segment in the first quarter of 2004.
Financing Activities
The increase in cash usage related to financing activities in the first
quarter of fiscal 2005, as compared to the first quarter of fiscal 2004, was the
result of a decline in the cash generated from the issuance of common stock to
our employees. We are uncertain of the level of cash that will be generated in
the future from the issuance of common stock to our employees as the exercising
of options is dependant upon several factors such as the price of our common
stock and the number of employees participating in our stock option plans.
25
For the first quarter of fiscal 2005 and 2004, exchange rate changes had an
immaterial effect on cash and cash equivalents. We expect that exchange rate
changes will have an immaterial effect on cash and cash equivalents in the near
future due to our focus on US-based business.
As of October 31, 2004 and July 31, 2004, we had outstanding letters of
credit issued under a line of credit of approximately $1.5 million related to
the corporate facility lease. The amount related to this letter of credit is
recorded in the "Restricted cash" section of the condensed consolidated balance
sheet. We anticipate that this balance will decline by $0.5 million in the
fourth quarter of fiscal year 2005 under the terms of our existing lease
agreement. The remaining $1.0 million will decline as the Company meets certain
financial covenants.
Our liquidity and capital requirements depend on numerous factors,
including market acceptance of our products, the resources we devote to
developing, marketing, selling and supporting our products, the timing and
expense associated with expanding our distribution channels, potential
acquisitions and other factors. We expect to devote capital resources to
continue our research and development efforts, to invest in our sales, support,
marketing and product development organizations, to enhance and introduce
marketing programs, and for other general corporate activities. We believe that
our existing cash balances will be sufficient to fund our operations through
fiscal 2006 under our current business strategy, however, if we fail to
adequately monitor and minimize our use of existing cash, we may need additional
capital to fund continued operations beyond fiscal year 2006. We expect to
continue to experience negative cash flow from operations for at least the
foreseeable future. Unless we monitor and minimize the level of use of our
existing cash, cash equivalents and marketable securities, we may require
additional capital to fund continued operations beyond our fiscal year 2006. See
"Risks Related to our Financial Results" in the Risk Factors section of this
Form 10-Q.
Contractual Obligations
The contractual obligations presented in the table below represent our
estimates of future payments under fixed contractual obligations and
commitments. Changes in our business needs, cancellation provisions and other
factors may result in actual payments differing from the estimates. We cannot
provide certainty regarding the timing and amounts of payments. The following
table summarizes our fixed contractual obligations and commitments as of October
31, 2004 (in thousands):
Contractual Obligations
- ----------------------- Less than More than 5
Total 1 year 1-3 years 3-5 years years
------- ------- ------- ------- -------
Gross Operating Lease Obligations $21,569 $ 3,791 $ 7,257 $ 7,341 $ 3,180
Sublease Income 5,996 742 2,156 2,160 938
------- ------- ------- ------- -------
Net Operating Lease Obligations 15,573 3,049 5,101 5,181 2,242
Capital Lease Obligations 40 40
Purchase Obligations 1,223 1,223 -- -- --
------- ------- ------- ------- -------
Total Obligations $16,836 $ 4,312 $ 5,101 $ 5,181 $ 2,242
======= ======= ======= ======= =======
Financial Risk Management
As a primarily US-centric company, we face limited exposure to adverse
movements in foreign currency exchange rates and we do not engage in hedging
activity. We do not anticipate significant currency gains or losses in the near
term. These exposures may change over time as business practices evolve and
could have a material adverse impact on our financial results.
We maintain investment portfolio holdings of various issuers, types and
maturities. These securities are classified as available-for-sale, and
consequently are recorded on the consolidated balance sheet at fair value with
unrealized gains and losses reported as a separate component of accumulated
other comprehensive income (loss). These securities are not leveraged and are
held for purposes other than trading.
26
Recent Accounting Pronouncements
In December 2003, the FASB issued FIN 46R (revising FIN 46, which was
issued in January 2003), entitled "Consolidation of Variable Interest Entities,
an Interpretation of ARB No. 51." FIN 46R addresses how a business enterprise
should evaluate whether it has a controlling interest in an entity through means
other than voting rights and accordingly should consolidate the entity. Before
concluding that it is appropriate to apply the voting interest consolidation
model to an entity, an enterprise must first determine that the entity is not a
variable interest entity or a special purpose entity. FIN 46R became effective
for VA Software during fiscal 2004 and the adoption of this statement did not
have a material impact on our financial position or results of operations.
In December 2003, the SEC issued SAB 104, "Revenue Recognition," which
supersedes SAB 101, "Revenue Recognition in Financial Statements." SAB 104's
primary purpose is to rescind accounting guidance contained in SAB 101 related
to multiple element revenue arrangements, which was superseded as a result of
the issuance of EITF 00-21, "Accounting for Revenue Arrangements with Multiple
Deliverables." While the wording of SAB 104 has changed to reflect the issuance
of EITF 00-21, the revenue recognition principles of SAB 101 remain largely
unchanged by the issuance of SAB 104. The adoption of SAB 104 has not had a
material impact on our financial position or results of operations.
Risk Factors
CURRENT AND PROSPECTIVE INVESTORS IN VA SOFTWARE SECURITIES SHOULD CAREFULLY
CONSIDER THE RISKS DESCRIBED BELOW BEFORE MAKING AN INVESTMENT DECISION. IN
ADDITION, THESE RISKS ARE NOT THE ONLY ONES FACING OUR COMPANY. ADDITIONAL RISKS
OF WHICH WE ARE NOT PRESENTLY AWARE OR THAT WE CURRENTLY BELIEVE ARE IMMATERIAL
MAY ALSO IMPAIR OUR BUSINESS OPERATIONS. OUR BUSINESS COULD BE HARMED BY ANY OF
THESE RISKS. THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE DUE TO ANY OF
THESE RISKS, AND INVESTORS MAY LOSE ALL OR PART OF THEIR INVESTMENT.
Risks Related To Our SourceForge Business
Because the market for our SourceForge application software is still emerging,
we do not know whether existing and potential customers will license SourceForge
in sufficient quantities for us to achieve profitability.
Our future growth and financial performance will depend on market acceptance of
SourceForge and our ability to license our software in sufficient quantities and
under acceptable terms. The number of customers using SourceForge is still
relatively small. We expect that we will continue to need intensive marketing
and sales efforts to educate prospective clients about the uses and benefits of
SourceForge. Various factors could inhibit the growth of the market for and
market acceptance of SourceForge. In particular, potential customers may be
unwilling to make the significant capital investment needed to license
SourceForge. Many of our customers have licensed only limited quantities of
SourceForge, and these or new customers may decide not to deploy our software
more broadly. We cannot be certain that a viable market for SourceForge will
emerge or, if it does emerge, that it will be sustainable. If a sustainable
viable market for SourceForge fails to emerge, this would have a significant,
adverse effect upon our software business and operating results.
We are devoting the majority of our research and development spending on our
SourceForge application, so if this software does not achieve market acceptance
we are likely to experience continued operating losses.
Although in the first quarter of our fiscal year 2005, which ended on October
31, 2004, approximately 28% of our revenue was derived from our SourceForge
business, we devoted 62%, or $0.9 million, of our research and development
spending to research and development associated with our SourceForge software
application. We expect to continue to allocate the majority of our research and
development resources to SourceForge for the foreseeable future. There can be no
assurance, however, that we will be sufficiently successful in marketing,
licensing, upgrading and supporting SourceForge to offset our substantial
software research and development expenditures. A failure to grow SourceForge
revenue sufficiently to offset SourceForge's significant research and
development costs will materially and adversely affect our business and
operating results.
If we fail to attract and retain larger corporate and enterprise-level
customers, our revenues will not grow and may decline.
We have focused our sales and marketing efforts upon larger corporate and
enterprise-level customers. This strategy may fail to generate sufficient
revenue to offset the substantial demands that this strategy will place on our
business, in particular the longer sales cycles, higher levels of service and
support and volume pricing and terms that larger corporate and enterprise
accounts often demand. In addition, these larger customers generally have
significant financial and personnel resources. As a result, rather than license
27
SourceForge, our target customers may develop collaborative software development
applications internally, including ad hoc development of applications based on
open source code. A failure to successfully obtain revenues from larger
corporate or enterprise-level customers will materially and adversely affect our
operating results.
If we fail to anticipate or respond adequately to technology developments,
industry standards or practices, and customer requirements, or if we experience
any significant delays in product development, introduction, or integration,
SourceForge may become obsolete or unmarketable, our ability to compete may be
impaired, and our SourceForge revenues may not grow or may decline.
Rapid technological advances, changes in customer requirements, and frequent new
product introductions and enhancements characterize the software industry
generally. We must respond rapidly to developments related to hardware
platforms, operating systems, and software development tools. These developments
will require us to make substantial product development investments. We believe
the success of our SourceForge business will become increasingly dependent on
our ability to:
o support multiple platforms, including Linux, commercial UNIX and Microsoft
Windows;
o use the latest technologies to continue to support Web-based collaborative
software development; and
o continually support the rapidly changing standards, tools and technologies
used in software development.
Our SourceForge application software has a long and unpredictable sales cycle,
which makes it difficult to forecast our future results and may cause our
operating results to vary significantly.
The period between initial contact with a prospective customer and the licensing
of SourceForge varies and has often exceeded three and occasionally exceeded
twelve months. Additionally, our sales cycle is complex because customers
consider a number of factors before committing to license SourceForge. Factors
that our customers and potential customers have informed us that they considered
when evaluating SourceForge include product benefits, cost and time of
implementation, and the ability to operate with existing and future computer
systems and applications. We have found that customer evaluation, purchasing and
budgeting processes vary significantly from company to company. We spend
significant time and resources informing prospective customers about our
SourceForge products, which may not result in completed transactions and
associated revenue. Even if SourceForge has been chosen by a customer,
completion of the transaction is subject to a number of contingencies, which
make our quarterly revenues difficult to forecast. These contingencies include
but are not limited to the following:
o Our ability to sell SourceForge licenses may be impacted by changes in
the strategic importance of software projects due to our customers'
budgetary constraints or changes in customer personnel;
o A customer's internal approval and expenditure authorization process
can be difficult and time consuming. Delays in approvals, even after we
are selected as a vendor, could impact the timing and amount of
revenues recognized in a quarterly period; and
o The number, timing and significance of enhancements to our SourceForge
products and future introductions of new software by our competitors
and us may affect customer-purchasing decisions.
If we do not continue to receive repeat business from existing SourceForge
customers, our revenue will not grow and may decline.
We generate a significant amount of our SourceForge license revenues from
existing customers. Generally, our customers initially purchase a limited number
of licenses as they evaluate, implement and adopt SourceForge. Even if customers
successfully use SourceForge, such customers may not purchase additional
licenses to expand the use of our product. Purchases of additional licenses by
these customers will depend on their success in deploying SourceForge, their
satisfaction with our product and support services and their use of competitive
alternatives. A customer's decision to widely deploy SourceForge and purchase
additional licenses may also be affected by factors that are outside of our
control or which are not related to our product or services. In addition, as we
deploy new versions of SourceForge, or introduce new products, our current
customers may not require the functionality of our new versions or products and
may decide not to license these products.
28
If we fail to maintain our strategic relationship with IBM, the market
acceptance of our products and our financial performance may suffer.
To date, the majority of our SourceForge revenue continues to come from our
direct sales efforts. To offer products and services to a larger customer base,
in August 2002 we entered into a commercial relationship with IBM. If we are
unable to maintain this relationship with IBM, which is up for renewal in August
of 2005, our ability to increase our sales may be harmed. We would also lose
anticipated customer introductions and co-marketing benefits. In addition, IBM
could terminate its relationship with us, pursue other relationships, or attempt
to develop or acquire products or services that compete with our products and
services. Even if we succeed in maintaining or expanding our relationship with
IBM, the relationship may not result in additional customers or revenues. We
have begun exploring other possible relationships and marketing alliances to
obtain customer leads, referrals and distribution opportunities. Even if we
succeed in securing such additional strategic relationships, the relationships
may not result in additional customers or revenues.
Increased utilization and costs of our technical support services may adversely
affect our financial results.
Over the short term, we may be unable to respond to fluctuations in customer
demand for support services. We may also be unable to modify the format of our
support services to compete with changes in support services provided by
competitors. Further, customer demand for these services could cause increases
in the costs of providing such services and adversely affect our operating
results.
Contractual issues may arise during the negotiation process that may delay the
anticipated closure of a transaction and our ability to recognize revenue as
anticipated. The occurrence of such issues might cause our SourceForge revenue
and operating results to fall below our publicly-stated expectations, the
expectations of securities analysts or the expectations of investors. Failure to
meet public expectations is likely to materially and adversely affect the
trading price of our common stock.
Because we focus on selling enterprise solutions, the process of contractual
negotiation is critical and may be lengthy. Additionally, several factors may
require us to defer recognition of license revenue for a significant period of
time after entering into a license agreement, including instances where we are
required to deliver either unspecified additional products or specified upgrades
for which we do not have vendor-specific objective evidence of fair value. While
we have a standard software license agreement that provides for revenue
recognition provided that delivery has taken place, collectibility from the
customer is reasonably assured and assuming no significant future obligations or
customer acceptance rights exist, customer negotiations and revisions to these
terms could impact our ability to recognize revenues at the time of delivery.
Many enterprise customers negotiate software licenses near the end of each
quarter. In part, this is because enterprise customers are able, or believe that
they are able, to negotiate lower prices and more favorable terms at that time.
Our reliance on a large portion of SourceForge revenue occurring at the end of
the quarter and the increase in the dollar value of transactions that occur at
the end of a quarter can result in increased uncertainty relating to quarterly
revenues. Due to end-of-period variances, forecasts may not be achieved, either
because expected sales do not occur or because they occur at lower prices or on
terms that are less favorable to us.
In addition, slowdowns in our quarterly license contracting activities may
impact our service offerings and may result in lower revenues from our customer
training, professional services and customer support organizations. Our ability
to maintain or increase service revenues is highly dependent on our ability to
increase the number of license agreements we enter into with customers.
Risks Related To Our Online Media Business
If our online business fails to continue to deliver original and compelling
content and services, we will be unable to attract and retain users, which will
adversely affect our financial results.
The successful development and production of content and services is subject to
numerous uncertainties, including our ability to:
o anticipate and successfully respond to rapidly changing consumer tastes
and preferences;
o fund new program development; and
o attract and retain qualified editors, writers and technical personnel.
29
We cannot assure you that our online content and services will be attractive to
a sufficient number of users to generate revenues consistent with our estimates
or sufficient to sustain operations. In addition, we cannot assure you that any
new content or services will be developed in a timely or cost-effective manner.
If we are unable to develop content and services that allow us to attract,
retain and expand a loyal user base that is attractive to advertisers, we will
be unable to generate sufficient revenue to grow our online business.
Decreases or delays in advertising spending due to general economic conditions
could harm our ability to generate advertising revenue, which would adversely
affect our financial results.
Expenditures by advertisers tend to be cyclical, reflecting overall economic
conditions as well as budgeting and buying patterns. The overall market for
advertising, including Internet advertising, has been generally characterized in
recent quarters by modest growth of marketing and advertising budgets. Because
we derive a large part of our revenues from advertising fees, the decreases in
or delays of advertising spending could reduce our revenues or negatively impact
our ability to grow our revenues. Even if economic conditions continue to
improve, marketing budgets and advertising spending may not increase from
current levels.
If we fail to maintain our strategic relationship with IDG, our advertising
revenue will not grow as anticipated and may decline, and our financial
performance will suffer.
During the first quarter of fiscal year 2005, we entered into a marketing and
sales agreement with International Data Group ("IDG"). Under the agreement with
IDG, IDG's Global Solution's sales force will sell international advertising on
OSTG's network of Web sites. If we are unable to maintain this strategic
relationship with IDG, our ability to increase our online advertising sales may
be harmed. In addition, IDG can terminate this relationship with us, pursue
other relationships, or attempt to develop or acquire Web sites that compete
with our Web sites for online advertising revenue. Even if we succeed in
maintaining or expanding our relationship with IDG, the relationship may not
result in additional online advertising customers or revenues.
Risks Related To Our E-Commerce Business
We cannot predict our E-commerce customers' preferences with certainty and such
preferences may change rapidly. If we fail to accurately assess and predict our
E-commerce customers' preferences, it will adversely impact our financial
results.
Our E-commerce offerings on our ThinkGeek.com Web site are designed to appeal to
IT professionals, software developers and others in technical fields. Misjudging
either the market for our products or our customers' purchasing habits will
cause our sales to decline, our inventories to increase and/or require us to
sell our products at lower prices, all of which would have a negative effect on
our business.
We are exposed to significant inventory risks as a result of seasonality, new
product launches, rapid changes in product cycles and changes in consumer tastes
with respect to our products offered at our ThinkGeek E-commerce Web site.
Failure to properly assess our inventory needs will adversely affect our
financial results.
In order to be successful, we must accurately predict our consumer tastes and
avoid overstocking or under-stocking products. Demand for products can change
significantly between the time inventory is ordered and the date of sale. In
addition, when we begin selling a new product, it is particularly difficult to
forecast product demand accurately. The acquisition of certain types of
inventory, or inventory from certain sources, may require significant lead-time
and prepayment, and such inventory may not be returnable. We carry a broad
selection and significant inventory levels of certain products and we may be
unable to sell products in sufficient quantities or during the relevant selling
seasons.
If we do not maintain sufficient E-commerce inventory levels, or if we are
unable to deliver our E-commerce products to our customers in sufficient
quantities, our E-commerce business operating results will be adversely
affected.
We must be able to deliver our merchandise in sufficient quantities to meet the
demands of our customers and deliver this merchandise to customers in a timely
manner. We must be able to maintain sufficient inventory levels, particularly
during the peak holiday selling seasons. If we fail to achieve these goals, we
may be unable to meet customer demand, and our financial results will be
adversely affected.
Our ThinkGeek E-commerce Web site is dependent upon a single third party
fulfillment and warehouse provider. The satisfaction of our E-commerce customers
is highly dependent upon fulfillment of orders in a professional and timely
manner, so any decrease in the quality of service offered by our fulfillment and
warehouse provider will adversely affect our reputation and the growth of our
E-commerce business.
30
Our ThinkGeek E-commerce Web site's ability to receive inbound inventory and
ship completed orders efficiently to our customers is substantially dependent on
a third-party contract fulfillment and warehouse provider. We previously
utilized the services of efillit Inc., a third-party contract fulfillment and
warehouse provider located in Baltimore, Maryland. However, effective June 4,
2004, we transitioned from efillit to a new provider, Dotcom Distribution, Inc.
("Dotcom Distribution"), located in Edison, New Jersey, whom we believe will be
able to satisfactorily accommodate ThinkGeek's future growth. If Dotcom
Distribution fails to meet our future distribution and fulfillment needs, our
relationship with and reputation among our E-commerce customers will suffer and
this will adversely affect our E-commerce growth. Additionally, if Dotcom
Distribution cannot meet our distribution and fulfillment needs, particularly
during the peak holiday selling seasons, or our contract with Dotcom
Distribution terminates, we may fail to secure a suitable replacement or
second-source distribution and fulfillment provider on comparable terms, which
would adversely affect our E-commerce financial results.
Risks Related To Our Financial Results
If we fail to adequately monitor and minimize our use of existing cash, we may
need additional capital to fund continued operations beyond fiscal year 2006.
Since becoming a public company, we have experienced negative cash flow from
operations and expect to experience negative cash flow from operations for all
or part of fiscal year 2005. Our average net monthly cash flow shortfall during
the quarter ended October 31, 2004 was approximately $0.6 million. Although this
average net monthly cash flow shortfall approximation should not be relied upon
as an indicator of our average net monthly cash flow shortfall in the future, it
further illustrates that unless we monitor and minimize the level of use of our
existing cash, cash equivalents and marketable securities, we may require
additional capital to fund continued operations beyond our fiscal year 2006.
While we believe we will not require additional capital to fund continued
operations through fiscal year 2006, we may require additional funding within
this time frame, and this additional funding, if needed, may not be available on
terms acceptable to us, or at all. A slowdown in technology or advertising
spending, as well as other factors that may arise, could affect our future
capital requirements and the adequacy of our available funds. As a result, we
may be required to raise additional funds through private or public financing
facilities, strategic relationships or other arrangements. Any additional equity
financing would likely be dilutive to our stockholders. Debt financing, if
available, may involve restrictive covenants on our operations and financial
condition. Our inability to raise capital when needed could seriously harm our
business.
Certain factors specific to our businesses over which we have limited or no
control may nonetheless adversely impact our quarterly total revenues and
financial results.
The primary factors over which we have limited or no control that may adversely
impact our quarterly total revenues and financial results include the following:
o specific economic conditions relating to IT spending;
o the discretionary nature of our software customers' purchase and budget
cycles;
o the size and timing of software customer orders;
o long software sales cycles;
o our ability to retain skilled software engineers and sales personnel;
o economic conditions relating to online advertising and sponsorship, and
E-commerce;
o our ability to demonstrate and maintain attractive online user
demographics;
o our ability to retain a skilled online advertising and sponsorship
sales force;
o the addition or loss of specific online advertisers or sponsors, and
the size and timing of advertising or sponsorship purchases by
individual customers; and
o our ability to keep our Web sites operational at a reasonable cost.
31
If our revenues and operating results fall below our expectations, the
expectations of securities analysts or the expectations of investors, the
trading price of our common stock will likely be materially and adversely
affected. You should not rely on the results of our business in any past periods
as an indication of our future financial performance.
Future guidelines and interpretations regarding software revenue recognition
could cause delays in our ability to recognize revenue, which will adversely
impact our quarterly financial results.
From time to time, the American Institute of Certified Public Accountants
(AICPA), the Public Company Accounting Oversight Board (PCAOB) and the SEC will
issue guidelines and interpretations regarding the recognition of revenue from
software and other activities. These new guidelines and interpretations could
result in a delay in our ability to recognize revenue. If the company has to
delay the recognition of a significant amount of revenue in the future, this
will have a material impact on the company's reported financial results.
We have a history of losses and expect to continue to incur net losses for the
foreseeable future. Failure to become and remain profitable may materially and
adversely affect the market price of our common stock and our ability to raise
capital and continue operations.
We incurred a loss of $1.6 million for our fiscal quarter ended October 31,
2004, and we had an accumulated deficit of $749.0 million as of October 31,
2004. We may continue to incur net losses in the future. If we do achieve
profitability, we may not be able to sustain it. Failure to become and remain
profitable may materially and adversely affect the market price of our common
stock and our ability to raise capital and continue operations beyond our fiscal
year 2006.
Despite reductions in the size of our workforce, our business may fail to grow
rapidly enough to offset our ongoing operating expenses.
During fiscal years 2001, 2002 and 2003, we substantially reduced the size of
our workforce. As of October 31, 2004, we had 119 employees. Despite these
reductions in our workforce, our business may fail to grow rapidly enough to
offset our ongoing operating expenses. As a result, our quarterly operating
results could fluctuate, and such fluctuation could adversely affect the market
price of our common stock.
Risks Related To Competition
If we do not effectively compete with new and existing competitors, our revenues
will not grow and may decline, which will adversely impact our financial
results.
We believe that the newly emerging collaborative software development market is
fragmented, subject to rapid change and highly sensitive to new product
introductions and marketing efforts by industry participants. Competition in
related markets is intense. If our products gain market acceptance, we expect
the competition to rapidly intensify as new competitors enter the marketplace.
Our potential competitors include companies entrenched in closely related
markets who may choose to enter and focus on collaborative software development.
Although we do not believe that we presently have an entrenched competitor, we
expect competition to intensify in the future if the market for collaborative
software development applications continues to expand. Our potential competitors
include providers of software and related services as well as providers of
hosted application services. Many of our potential competitors have
significantly more resources, more experience, longer operating histories and
greater financial, technical, sales and marketing resources than we do. We
cannot guarantee that we will be able to compete successfully against current
and future competitors or that competitive pressure will not result in price
reductions, reduced operating margins and loss of market share, any one of which
could seriously harm our business. Because individual product sales often lead
to a broader customer relationship, our products must be able to successfully
compete with and complement numerous competitors' current and potential
offerings. Moreover, we may be forced to compete with our strategic partners,
and potential strategic partners, and this may adversely impact our relationship
with an individual partner or a number of partners. Consolidation is underway
among companies in the software industry as firms seek to offer more extensive
suites of software products and broader arrays of software solutions. Changes
resulting from this consolidation may negatively impact our competitive position
and operating results.
Online competition is intense. Our failure to compete successfully could
adversely affect our revenue and financial results.
32
The market for Internet content and services is intensely competitive and
rapidly evolving. It is not difficult to enter this market and current and new
competitors can launch new Internet sites at relatively low cost. We derive
revenue from online advertising and sponsorships, for which we compete with
various media including newspapers, radio, magazines and various Internet sites.
We also derive revenue from E-commerce, for which we compete with other
E-commerce companies as well as traditional, "brick and mortar" retailers. We
may fail to compete successfully with current or future competitors. Moreover,
increased competition could result in price reductions, reduced margins or loss
of market share, any of which could have a material adverse effect on our future
revenue and financial results. If we do not compete successfully for new users
and advertisers, our financial results may be materially and adversely affected.
Risks Related To Intellectual Property
We are vulnerable to claims that our products infringe third-party intellectual
property rights. Any resulting claims against us could be costly to defend or
subject us to significant damages.
We expect that our software products will increasingly be subject to
infringement claims as the number of products and competitors in our industry
segment grows and the functionality of products in different industry segments
overlaps. In addition, we may receive patent infringement claims as companies
increasingly seek to patent their software. Our developers may fail to perform
patent searches and may therefore unwittingly infringe on third-party patent
rights. We cannot prevent current or future patent holders or other owners of
intellectual property from suing us and others seeking monetary damages or an
injunction against shipment of our software offerings. A patent holder may deny
us a license or force us to pay royalties. In either event, our operating
results could be seriously harmed. In addition, employees hired from competitors
might utilize proprietary and trade secret information from their former
employers without our knowledge, even though our employment agreements and
policies clearly prohibit such practices.
Any litigation regarding our intellectual property, with or without merit, could
be costly and time consuming to defend, divert the attention of our management
and key personnel from our business operations and cause product shipment
delays. Claims of intellectual property infringement may require us to enter
into royalty and licensing agreements that may not be available on terms
acceptable to us, or at all. In addition, parties making claims against us may
be able to obtain injunctive or other equitable relief that could effectively
block our ability to sell our products in the United States and abroad and could
result in an award of substantial damages against us. Defense of any lawsuit or
failure to obtain any required license could delay shipment of our products and
increase our costs. If a successful claim is made against us and we fail to
develop or license a substitute technology, our business, results of operations,
financial condition or cash flows could be immediately and materially adversely
affected.
If we fail to adequately protect our intellectual property rights, competitors
may use our technology and trademarks, which could weaken our competitive
position, reduce our revenues, and increase our costs.
We rely on a combination of copyright, trademark and trade-secret laws, employee
and third-party nondisclosure agreements, and other arrangements to protect our
proprietary rights. Despite these precautions, it may be possible for
unauthorized third parties to copy our products or obtain and use information
that we regard as proprietary to create products that compete against ours. Some
license provisions protecting against unauthorized use, copying, transfer, and
disclosure of our licensed programs may be unenforceable under the laws of
certain jurisdictions and foreign countries.
In addition, the laws of some countries do not protect proprietary rights to the
same extent as do the laws of the United States. To the extent that we increase
our international activities, our exposure to unauthorized copying and use of
our products and proprietary information will increase.
Our collection of trademarks is important to our business. The protective steps
we take or have taken may be inadequate to deter misappropriation of our
trademark rights. We have filed applications for registration of some of our
trademarks in the United States and internationally. Effective trademark
protection may not be available in every country in which we offer or intend to
offer our products and services. Failure to protect our trademark rights
adequately could damage our brand identity and impair our ability to compete
effectively. Furthermore, defending or enforcing our trademark rights could
result in the expenditure of significant financial and managerial resources.
The scope of United States patent protection in the software industry is not
well defined and will evolve as the United States Patent and Trademark Office
grants additional patents. Because patent applications in the United States are
not publicly disclosed until the patent is issued, applications may have been
filed that would relate to our products.
33
Our software business success depends significantly upon our proprietary
technology. Despite our efforts to protect our proprietary technology, it may be
possible for unauthorized third parties to copy certain portions of our products
or to reverse engineer or otherwise obtain and use our proprietary information.
We do not have any software patents, and existing copyright laws afford only
limited protection. In addition, we cannot be certain that others will not
develop substantially equivalent or superseding proprietary technology, or that
equivalent products will not be marketed in competition with our products,
thereby substantially reducing the value of our proprietary rights. We cannot
assure you that we will develop proprietary products or technologies that are
patentable, that any patent, if issued, would provide us with any competitive
advantages or would not be challenged by third parties, or that the patents of
others will not adversely affect our ability to do business. Litigation may be
necessary to protect our proprietary technology. This litigation may be
time-consuming and expensive.
Other Risks Related To Our Overall Business
If we fail to complete our internal control evaluations or if our independent
registered public accounting firm does not attest to our evaluation in a timely
manner, we could be subject to regulatory scrutiny and a loss of public
confidence in our internal controls.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 ("Section 404"), we
will be required, beginning in our fiscal year 2005, to perform an evaluation of
our internal controls over financial reporting and have our independent
registered public accounting firm test and evaluate the design and operating
effectiveness of such internal controls and publicly attest to such evaluation.
We have prepared an internal plan of action for compliance with the requirements
of Section 404, which includes a timeline and scheduled activities, although as
of the date of this filing we have not yet completed the evaluation. Compliance
with the requirements of Section 404 is expected to be expensive and
time-consuming. If we fail to complete this evaluation in a timely manner, or if
our independent registered public accounting firm cannot timely attest to our
evaluation, we could be subject to regulatory scrutiny and a loss of public
confidence in our internal controls. In addition, any failure to implement
required new or improved controls, or difficulties encountered in their
implementation, could harm our operating results or cause us to fail to meet our
reporting obligations.
We may be subject to claims as a result of information published on, posted on
or accessible from our Internet sites, which could be costly to defend and
subject us to significant damage claims.
We may be subject to claims of defamation, negligence, copyright or trademark
infringement (including contributory infringement) or other claims relating to
the information contained on our Internet sites, whether written by third
parties or us. These types of claims have been brought against online services
in the past and can be costly to defend regardless of the merit of the lawsuit.
Although federal legislation protects online services from some claims when
third parties write the material, this protection is limited. Furthermore, the
law in this area remains in flux and varies from state to state. We receive
notification from time to time of potential claims, but have not been named as a
party to litigation involving such claims. While no formal complaints have been
filed against us to date, our business could be seriously harmed if one were
asserted.
We may be subject to product liability claims if people or property are harmed
by the products we sell on our E-commerce Web sites, which could be costly to
defend and subject us to significant damage claims.
Some of the products we offer for sale on our E-commerce Web sites, such as
consumer electronics, toys, computers and peripherals, toiletries, beverages and
clothing, may expose us to product liability claims relating to personal injury,
death or property damage caused by such products, and may require us to take
actions such as product recalls. Although we maintain liability insurance, we
cannot be certain that our coverage will be adequate for liabilities actually
incurred or that insurance will continue to be available to us on economically
reasonable terms, or at all. In addition, some of our vendor agreements with our
suppliers do not indemnify us from product liability.
If we are unable to implement appropriate systems, procedures and controls, we
may not be able to successfully offer our services and grow our business.
Our ability to successfully offer our services and grow our business requires an
effective planning and management process. We updated our operations and
financial systems, procedures and controls following our strategic decision to
exit the hardware business. Our systems will continue to require additional
modifications and improvements to respond to current and future changes in our
business. If we cannot grow our businesses, and manage that growth effectively,
or if we fail to timely implement appropriate internal systems, procedures,
controls and necessary modifications and improvements to these systems, our
businesses will suffer.
Our stock price has been volatile historically and may continue to be volatile.
34
The trading price of our common stock has been and may continue to be subject to
wide fluctuations. During the first quarter of fiscal year 2005, the closing
sale prices of our common stock on the Nasdaq ranged from $1.58 to $2.13 per
share and the closing sale price on October 29, 2004 was $2.10 per share. Our
stock price may fluctuate in response to a number of events and factors, such as
quarterly variations in operating results, announcements of technological
innovations or new products and media properties by us or our competitors,
changes in financial estimates and recommendations by securities analysts, the
operating and stock price performance of other companies that investors may deem
comparable to us, and news reports relating to trends in our markets or general
economic conditions.
In addition, the stock market in general, and the market prices for
Internet-related companies in particular, have experienced volatility that often
has been unrelated to the operating performance of such companies. These broad
market and industry fluctuations may adversely affect the price of our stock,
regardless of our operating performance. Additionally, volatility or a lack of
positive performance in our stock price may adversely affect our ability to
retain key employees, all of whom have been granted stock options.
Sales of our common stock by significant stockholders may cause the price of our
common stock to decrease.
Several of our stockholders own significant portions of our common stock. If
these stockholders were to sell significant amounts of their holdings of our
common stock, then the market price of our common stock could be negatively
impacted. The effect of such sales, or of significant portions of our stock
being offered or made available for sale, could result in strong downward
pressure on our stock. Investors should be aware that they could experience
significant short-term volatility in our stock if such stockholders decide to
sell a substantial amount of their holdings of our common stock at once or
within a short period of time.
Our networks may be vulnerable to unauthorized persons accessing our systems,
which could disrupt our operations and result in the theft of our proprietary
information.
A party who is able to circumvent our security measures could misappropriate
proprietary information or cause interruptions or malfunctions in our Internet
operations. We may be required to expend significant capital and resources to
protect against the threat of security breaches or to alleviate problems caused
by breaches in security.
Increasing regulation of the Internet or imposition of sales and other taxes on
products sold or distributed over the internet could harm our business.
The electronic commerce market on the Internet is relatively new and rapidly
evolving. While this is an evolving area of the law in the United States and
overseas, currently there are relatively few laws or regulations that directly
apply to commerce on the Internet. Changes in laws or regulations governing the
Internet and electronic commerce, including, without limitation, those governing
an individual's privacy rights, pricing, content, encryption, security,
acceptable payment methods and quality of products or services could have a
material adverse effect on our business, operating results and financial
condition. Taxation of Internet commerce, or other charges imposed by government
agencies or by private organizations, may also be imposed. Any of these
regulations could have an adverse effect on our future sales and revenue growth.
Business disruptions could affect our future operating results.
Our operating results and financial condition could be materially and adversely
affected in the event of a major earthquake, fire or other catastrophic event.
Our corporate headquarters, the majority of our research and development
activities and certain other critical business operations are located in
California, near major earthquake faults. A catastrophic event that results in
the destruction of any of our critical business or information technology
systems could severely affect our ability to conduct normal business operations
and as a result our future operating results could be adversely affected.
System disruptions could adversely affect our future operating results.
Our ability to attract and maintain relationships with users, advertisers,
merchants and strategic partners will depend on the satisfactory performance,
reliability and availability of our Internet channels and network
infrastructure. Our Internet advertising revenues relate directly to the number
of advertisements delivered to our users. System interruptions or delays that
result in the unavailability of Internet channels or slower response times for
users would reduce the number of advertisements and sales leads delivered to
such users and reduce the attractiveness of our Internet channels to users,
strategic partners and advertisers or reduce the number of impressions delivered
and thereby reduce revenue. In the past twelve months, some of our sites have
experienced a small number of brief service interruptions. We will continue to
suffer future interruptions from time to time whether due to natural disasters,
telecommunications failures, other system failures, rolling blackouts, viruses,
hacking or other events. System interruptions or slower response times could
have a material adverse effect on our revenues and financial condition.
35
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The primary objective of our investment activities is to preserve principal
while at the same time maximizing the income we receive from our investments
without significantly increasing risk. Some of the securities that we have
invested in may be subject to market risk. This means that a change in
prevailing interest rates may cause the principal amount of the investment to
fluctuate. For example, if we hold a security that was issued with a fixed
interest rate at the then-prevailing rate and the prevailing interest rate later
rises, the principal amount of our investment will probably decline. To minimize
this risk, we maintain a portfolio of cash equivalents, short-term investments
and long-term investments in a variety of securities, including commercial
paper, money market funds and government and non-government debt securities. In
general, money market funds are not subject to market risk because the interest
paid on such funds fluctuates with the prevailing interest rate.
The following table presents the amounts of our cash equivalents,
short-term investments and long-term investments (in thousands) that are subject
to market risk and weighted-average interest rates, categorized by expected
maturity dates, as of October 31, 2004. This table does not include money market
funds because those funds are not subject to market risk.
Maturing Maturing within Maturing
(in thousands) within three months three months to one year Greater than one year
------------------- ------------------------ ---------------------
As of October 31, 2004
Cash equivalents $6,450
Weighted-average interest rate 1.98%
Short-term investments $20,509
Weighted-average interest rate 4.07%
Long-term investments $11,579
Weighted-average interest rate 2.50%
We have operated primarily in the United States, and virtually all sales
have been made in U.S. dollars. Accordingly, we have not had any material
exposure to foreign currency rate fluctuations.
The estimated fair value of our cash, cash equivalents and investments
approximate carrying value. We do not currently hold any derivative instruments
and do not engage in hedging activities.
Item 4. Controls and Procedures
a) Evaluation of disclosure controls and procedures.
The Company's management evaluated, with the participation of its Chief
Executive Officer (CEO) and its Chief Financial Officer (CFO) , the
effectiveness of the design and operation of its disclosure controls
and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the
Securities Exchange Act of 1934 (the "'34 Act")) as of the end of the
period covered by this report.
Disclosure controls and procedures are designed with the objective of
ensuring that (i) information required to be disclosed in the Company's
reports filed under the '34 Act is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and
forms; and (ii) information is accumulated and communicated to
management, including the CEO and CFO, as appropriate to allow timely
decisions regarding required disclosure. Internal control procedures,
which are designed with the objective of providing reasonable assurance
that the Company's transactions are properly authorized, its assets are
safeguarded against unauthorized or improper use and its transactions
are properly recorded and reported, all to permit the preparation of
the Company's financial statements in conformity with generally
accepted accounting principles. To the extent that elements of our
internal control over financial reporting are included within our
disclosure controls and procedures, they are included in the scope of
our quarterly controls evaluation.
Based on that evaluation, the CEO and CFO concluded that the disclosure
controls and procedures were effective in ensuring that all material
information required to be disclosed in the reports the Company files
and submits under the '34 has been made known to them on a timely basis
and that such information has been properly recorded, processed,
summarized and reported, as required.
36
b) Changes in internal controls over financial reporting.
Except as described below, there were no changes in the Company's
internal controls over financial reporting (as defined in Rule
13a-15(f) of the '34) as of the date of this report that has materially
affected, or is reasonably likely to materially affect, its internal
controls over financial reporting.
c) Limitations on the Effectiveness of Controls.
The Company's management, including its CEO and our CFO, does not
expect that its disclosure controls or its internal controls will
prevent all error or fraud. A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further,
the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any,
within the company have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty,
and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of
some persons, by collusion of two or more people, or by management
override of the control. The design of any system of controls also is
based in part upon certain assumptions about the likelihood of future
events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions; over
time, control may become inadequate because of changes in conditions,
or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective
control system, misstatements due to error or fraud may occur and not
be detected on a timely basis .
d) Sarbanes-Oxley Section 404 Compliance.
Section 404 of the Sarbanes-Oxley Act of 2002 (the "Act") will require
the Company to include an internal control report in its Annual Report
on Form 10-K for the year ended July 31, 2005 and in subsequent Annual
Reports thereafter. The internal control report must include the
following: (i) a statement of management's responsibility for
establishing and maintaining adequate internal control over financial
reporting, (ii) a statement identifying the framework used by
management to conduct the required evaluation of the effectiveness of
the Company's internal control over financial reporting, (iii)
management's assessment of the effectiveness of the Company's internal
control over financial reporting as of July 31, 2005, including a
statement as to whether or not internal control over financial
reporting is effective, and (iv) a statement that the Company's
independent auditors have issued an attestation report on management's
assessment of internal control over financial reporting.
The Company acknowledges its responsibility for establishing and
maintaining internal controls over financial reporting and seeks to
continually improve those controls. In addition, in order to achieve
compliance with Section 404 of the Act within the required timeframe,
the Company has been conducting a process to document and evaluate
internal controls over financial reporting since mid fiscal 2004. In
this regard, the Company has dedicated internal resources, engaged
outside consultants and adopted a detailed work plan to: (i) assess and
document the adequacy of internal control over financial reporting;
(ii) take steps to improve control processes where required; (iii)
validate through testing that controls are functioning as documented;
and (iv) implement a continuous reporting and improvement process for
internal control over financial reporting. The Company believes its
process for documenting, evaluating and monitoring internal control
over financial reporting is consistent with the objectives of Section
404 of the Act.
The Company will commence testing of its internal controls in the
second quarter of fiscal 2005. The Company has initially identified
certain areas for improvement in the documentation, design and
effectiveness of internal controls over financial reporting, none of
which are material weaknesses in internal controls as defined by the
Public Company Accounting Oversight Board. Given the risks inherent in
the design and operation of internal controls over financial reporting,
the Company can provide no current assurance as to its, or its
independent auditor's, conclusions at July 31, 2005 with respect to the
effectiveness of its internal controls over financial reporting.
37
PART II
Item 1. Legal Proceedings
The Company, two of its former officers (the "Former Officers"), and the
lead underwriter in its initial public offering ("IPO") were named as defendants
in a consolidated shareholder lawsuit in the United States District Court for
the Southern District of New York, captioned In re VA Software Corp. Initial
Public Offering Securities Litigation, 01-CV-0242. This is one of a number of
actions coordinated for pretrial purposes as In re Initial Public Offering
Securities Litigation, 21 MC 92 with the first action filed on January 12, 2001.
Plaintiffs in the coordinated proceeding are bringing claims under the federal
securities laws against numerous underwriters, companies, and individuals,
alleging generally that defendant underwriters engaged in improper and
undisclosed activities concerning the allocation of shares in the IPOs of more
than 300 companies during late 1998 through 2000. Among other things, the
plaintiffs allege that the underwriters' customers had to pay excessive
brokerage commissions and purchase additional shares of stock in the aftermarket
in order to receive favorable allocations of shares in an IPO. The consolidated
amended complaint in the Company's case seeks unspecified damages on behalf of a
purported class of purchasers of its common stock between December 9, 1999 and
December 6, 2000. Pursuant to a tolling agreement, the individual defendants
were dismissed without prejudice. On February 19, 2003, the court denied the
Company's motion to dismiss the claims against it. The litigation is now in
discovery. A proposal has been made for the settlement and release of claims
against the issuer defendants, including the Company. The settlement is subject
to a number of conditions, including approval of the court. If the settlement
does not occur, and litigation against the Company continues, the Company
believes it has meritorious defenses and intends to defend the case vigorously.
On Nov 9, 2001, a former employee of the Company, who had worked as a sales
person in the Company's former hardware business, filed a complaint captioned
Okerman v. VA Linux Systems, Inc. & Larry Augustin, Civil No. 01-01825 (Norfolk
Superior Court), in the Commonwealth of Massachusetts. As amended, the complaint
alleges that changes made to certain commission and bonus plans during the
plaintiff's tenure at the Company entitled him to recover damages for Breach of
Contract, Breach of the Implied Covenant of Good Faith and Fair Dealing,
violation of the Massachusetts Wage Act Statute, Promissory Estoppel, and
Quantum Meruit. On June 25, 2002, the Court dismissed the Massachusetts Wage Act
claim brought against the Company's former chief executive officer. On July 26,
2002, dismissal of the Wage Act claim in favor of the Company's former chief
executive officer was upheld on interlocutory appeal. On July 9, 2003, the Court
granted summary judgment in the Company's favor regarding claims for Breach of
Contract, Promissory Estoppel, and Quantum Meruit, and granted judgment on the
pleadings in favor of the Company regarding the Massachusetts Wage Act claim. On
September 24, 2004, following a jury trial on the sole remaining claim for
Breach of the Covenant of Good Faith and Fair Dealing, a jury awarded damages of
$136,876 to the plaintiff. The plaintiff has since filed a notice of appeal of
his previously-dismissed claims and the judgment for Breach of Contract and
Breach of the Covenant of Good Faith and Fair Dealing, and the Company has filed
a notice of appeal of the judgment for Breach of the Covenant of Good Faith and
Fair Dealing.
The Company is subject to various claims and legal actions arising in the
ordinary course of business. The Company has accrued for estimated losses in the
accompanying consolidated financial statements for those matters where it
believes that the likelihood that a loss will occur is probable and the amount
of loss is reasonably estimable.
Item 6. Exhibits and Reports On Form 8-K
(a) Exhibits
- --------------- ----------------------------------------------------------------
Exhibit No. Description
- --------------- ----------------------------------------------------------------
31.1 Rule 13a-14(a) Certification of Chief Executive Officer.
----
- --------------- ----------------------------------------------------------------
31.2 Rule 13a-14(a) Certification of Chief Financial Officer.
----
- --------------- ----------------------------------------------------------------
32.1 Certification Of Chief Executive Officer and Chief Financial
Officer Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant
To Section 906 Of The Sarbanes-Oxley Act Of 2002.
- --------------- ----------------------------------------------------------------
(b) Reports on Form 8-K
38
On August 26, 2004, the Company furnished a Current Report on Form 8-K
under Items 2.02 (Results of Operations and Financial Condition) and 9.01
(Financial Statements and Exhibits) disclosing the issuance of a press release
announcing its financial results for the fourth quarter and fiscal year ended
July 31, 2004. In addition, the Company filed Exhibit 99.2 (Financial
Statements) to this August 26, 2004 Current Report on Form 8-K with the
Securities and Exchange Commission.
On September 14, 2004, the Company filed a Current Report on Form 8-K under
Items 1.01 (Entry into a Material Definitive Agreement) and 9.01 (Financial
Statements and Exhibits) disclosing the approval of the Company's Fiscal 2005
Named Executive Officer Bonus Policy and Plan by the Company's Compensation
Committee.
On October 1, 2004, the Company filed a Current Report on Form 8-K under
Item 5.02 (Departure of Directors or Principal Officers; Election of Directors;
Appointment of Principal Officers) disclosing that, effective September 20,
2004, the Company's Board of Directors appointed Andrew Anker as a member of the
Company's Board of Directors.
On October 5, 2004, the Company filed a Current Report on Form 8-K under
Item 1.01 (Entry into a Material Definitive Agreement) disclosing that,
following Andrew Anker's appointment as a member of the Company's Board of
Directors, the Company entered into an indemnification agreement with Mr. Anker
on October 4, 2004.
On October 15, 2004, the Company filed a Current Report on Form 8-K under
Item 1.01 (Entry into a Material Definitive Agreement) disclosing the First
Amendment to the Registration Rights Agreement which amends certain provisions
of the Registration Rights Agreement entered into by and between the Registrant
and The Riverview Group LLC on November 6, 2003.
On November 18, 2004, the Company furnished a Current Report on Form 8-K
under Items 2.02 (Results of Operations and Financial Condition) and 9.01
(Financial Statements and Exhibits) disclosing the issuance of a press release
announcing its financial results for the first quarter ended October 31, 2004.
On November 23, 2004, the Company filed a Current Report on Form 8-K under
Item 1.01 (Entry into a Material Definitive Agreement), Item 5.02 (Departure of
Directors or Principal Officers; Election of Directors; Appointment of Principal
Officers) and Item 9.01 (Financial Statements and Exhibits), disclosing that on
November 19, 2004, the Registrant entered into a Separation Agreement and
Release (the "Separation Agreement") with Patrick Ferrell, former senior vice
president and general manager of the Registrant's OSTG, Inc. subsidiary. This
Separation Agreement became effective on November 26, 2004.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
VA SOFTWARE CORPORATION
By: /s/ ALI JENAB
----------------------------------------------
Ali Jenab
President and Chief Executive Officer
By: /s/ KATHLEEN R. MCELWEE
----------------------------------------------
Kathleen R. McElwee
Senior Vice President and Chief Financial Officer
Date: December 9, 2004
39
EXHIBIT INDEX
Exhibit
Number
- ------
31.1 -- Rule 13a-14(a) Certification of Chief Executive Officer.
31.2 -- Rule 13a-14(a) Certification of Chief Financial Officer.
32.1 -- Certification Of Chief Executive Officer and Chief Financial
Officer Pursuant To 18 U.S.C. Section 1350, As Adopted
Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002
40