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<SEC-DOCUMENT>0000950005-03-000982.txt : 20031014
<SEC-HEADER>0000950005-03-000982.hdr.sgml : 20031014
<ACCEPTANCE-DATETIME>20031014153930
ACCESSION NUMBER: 0000950005-03-000982
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 6
CONFORMED PERIOD OF REPORT: 20030731
FILED AS OF DATE: 20031014
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: VA SOFTWARE CORP
CENTRAL INDEX KEY: 0001096199
STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372]
IRS NUMBER: 770399299
STATE OF INCORPORATION: DE
FISCAL YEAR END: 0731
FILING VALUES:
FORM TYPE: 10-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 000-28369
FILM NUMBER: 03939486
BUSINESS ADDRESS:
STREET 1: 47071 BAYSIDE PARKWAY
CITY: FREMONT
STATE: CA
ZIP: 94538
BUSINESS PHONE: 4085428000
MAIL ADDRESS:
STREET 1: 47071 BAYSIDE PARKWAY
CITY: FREMONT
STATE: CA
ZIP: 94538
FORMER COMPANY:
FORMER CONFORMED NAME: VA LINUX SYSTEMS INC
DATE OF NAME CHANGE: 19991004
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>p17754_10-k.txt
<DESCRIPTION>ANNUAL REPORT
<TEXT>
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 31, 2003
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.)
47071 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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
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 [ ] No [X]
As of September 30, 2003, there were 57,047,288 shares of the Registrant's
Common Stock outstanding. The aggregate market value of the Common Stock held by
non-affiliates of the Registrant as of September 30, 2003 (based on the closing
price for the Common Stock on the NASDAQ National Market for such date) was
approximately $213,418,950. Shares of common stock held by each of our officers
and directors and by each person or group who owns 5% or more of our outstanding
common stock have been excluded in that such persons or groups may be deemed to
be our affiliate. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2003 Annual Meeting of Stockholders
("Proxy Statement") to be held on December 3, 2003, and to be filed pursuant to
Regulation 14A within 120 days after the Registrant's fiscal year ended July 31,
2003, are incorporated by reference into Part III of this Form 10-K.
================================================================================
1
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
PART I
Item 1 Business
<S> <C>
Overview.................................................................................................... 3
Sales and Marketing........................................................................................ 4
Research and Development.................................................................................... 5
Competition................................................................................................. 5
Significant Customers....................................................................................... 6
Seasonality................................................................................................. 6
Intellectual Property Rights................................................................................ 6
Employees................................................................................................... 6
Segments.................................................................................................... 6
Investor Information........................................................................................ 7
Item 2 Properties....................................................................................................... 7
Item 3 Legal Proceedings................................................................................................ 7
Item 4 Submission of Matters to a Vote of Security Holders.............................................................. 8
PART II
Item 5 Market for the Registrant's Common Stock and Related Stockholder Matters 8
Item 6 Selected Consolidated Financial Data............................................................................ 10
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations........................... 11
Item 7A Quantitative and Qualitative Disclosures About Market Risk...................................................... 33
Item 8 Financial Statements and Supplementary Data..................................................................... 34
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................ 58
Item 9A Controls and Procedures......................................................................................... 58
PART III
Item 10 Directors and Executive Officers of the Registrant 58
Item 11 Executive Compensation.......................................................................................... 58
Item 12 Security Ownership of Certain Beneficial Owners and Management.................................................. 58
Item 13 Certain Relationships and Related Transactions.................................................................. 59
Item 14 Principal Accounting Fees and Services. ........................................................................ 59
PART IV
Item 15 Exhibits, Financial Statement Schedules, and Reports on Form 8-K................................................ 60
Signatures..................................................................................................... 60
</TABLE>
2
<PAGE>
PART I
Item 1. Business
Special Note Regarding Forward-Looking Statements
This Form 10-K 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, reductions in force and new business model on
our operating expenses 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
the Risk Factors contained in the section of this Form 10-K 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-K.
Overview
We were incorporated in California in January 1995 and reincorporated in
Delaware in December 1999. We develop, market and support a software application
known as SourceForge Enterprise Edition ("SourceForge") and also own and operate
the Open Source Development Network, Inc. ("OSDN"), a network of Internet Web
sites.
SourceForge is proprietary software designed for corporate and
public-sector information technology ("IT") professionals and software
engineering organizations. SourceForge is a Web-based application that enables
IT and software engineering organizations to manage application development more
effectively. SourceForge combines software development and collaboration tools
with the ability to track, measure, and report on software project activity in
real-time. With SourceForge, developers and project managers gain access to the
information they need to reduce risk and become more productive. SourceForge is
a relatively new product and additional development and enhancements are
expected in the future.
OSDN is a network of media and e-commerce Internet sites serving the IT
professionals and software development communities. As of September 30, 2003,
OSDN reaches 10 million unique visitors and serves more than 180 million page
views per month. Our OSDN Web sites include:
o SourceForge.net, our flagship Web site and software development center.
As of September 30, 2003, SourceForge.net was the development home for
more than 68,000 software development projects and had more than 707,000
registered users.
o Slashdot.org, our leading discussion site for technically-inclined
individuals. Slashdot is dedicated to providing the IT and software
development communities with cutting-edge technology, science and
culture news and interactive commentary.
o ThinkGeek.com, our e-commerce site, which provides online sales of a
variety of retail products of interest to the software development and
IT communities.
o Linux.com, our comprehensive Web site for Linux and open source news and
information. Linux.com caters to business and IT managers looking for
migration strategies to Linux.
o freshmeat.net, one of the Internet's most comprehensive indices of
downloadable Linux, Unix and cross-platform software.
o NewsForge.com, the online newspaper of record for Linux and open source
software.
o Animation Factory.com, a source for three-dimensional art, animations
and presentations. Animation Factory offers a dynamic collection of easy
to use animations that work in email, Web pages and presentations.
3
<PAGE>
SourceForge
Software application development organizations are increasingly under
pressure to manage software development more efficiently and effectively --
controlling costs and risks while improving software quality and process. We
believe that SourceForge will help our target IT and software engineering
customers efficiently address challenges associated with software process
improvement; quality standards certification; and software development
outsourcing in various sectors such as financial services, defense and
aerospace, technology, manufacturing and government. By aligning software
development with business goals, SourceForge helps organizations improve
operational efficiency and build better quality software.
SourceForge is a comprehensive solution: a single application integrating
software development, collaboration and management tools. It provides
organizations with a central repository for all software development activity
and information. SourceForge supports software development process improvement
initiatives by capturing and archiving software development code, documentation
and communication in a central location. SourceForge helps companies outsource
software development more effectively by providing a standard set of development
tools for in-house and third-party development teams, a central repository, and
a secure environment for managing and safeguarding intellectual property.
SourceForge is designed to integrate with, and enhance, best-of-breed
development tools from other vendors, and extend them with enhanced
functionality.
SourceForge helps companies build better quality software by providing
managers and developers with improved visibility into software development
activity, enabling better resource and requirements management, as well as
better defect tracking. SourceForge helps companies manage the costs and risks
associated with software development by enabling managers to gain insight into
project status and to resolve critical problems earlier in the development
cycle. Organizations with distributed teams and offshore development centers can
achieve improved productivity, communication, coordination, collaboration,
project clarity and insight. We therefore believe that adoption of SourceForge
can significantly improve our customers' operational efficiency.
OSDN
We believe that OSDN is the most dynamic community-driven media network on
the Web. The cornerstone of the open source software development community, OSDN
attracts every level of IT decision-maker and buyer, from chief technology
officers (CTOs) to project managers. Technologists, developers and system
administrators turn to OSDN sites to create, debate, and make or break IT news.
OSDN is supported by sponsors and advertisers who want to reach the unique
demographic of IT professionals and developers that visit the Web sites monthly.
In addition, OSDN runs e-commerce sites to allow its visitors to buy a variety
of retail goods of interest to the software development and IT communities.
Sales and Marketing
SourceForge
We primarily market and sell our products (software, professional services,
maintenance and support and training) directly to our end users through our
SourceForge field sales organization, on the Internet at vasoftware.com and on
our various OSDN Web sites. Our direct sales organization includes a telesales
operation to augment our direct sales presence.
We maintain a complete customer service and support organization for
SourceForge, which provides support for installation, software usage, updates
and system administration. Customer service and support are typically provided
as part of the SourceForge maintenance contract to ensure end user productivity.
We also release periodic bug or security fix updates and version upgrades.
OSDN
We primarily market and sell our Internet advertisements via OSDN's direct
sales organization and its Web sites. We primarily market and sell our
e-commerce products online via OSDN's Web sites. In addition, we have entered
into co-marketing agreements with certain third parties with respect to
marketing OSDN Web sites.
Research and Development
4
<PAGE>
SourceForge
We believe that the success of SourceForge will depend partly on our ability
to enhance our product to meet the needs of a rapidly evolving marketplace and
increasingly sophisticated and demanding customers. Therefore, we have devoted
the majority of our research and development budget to the goal of improving
SourceForge. We intend to extend and strengthen our software by enhancing
existing features, adding additional features and offering higher levels of
integration with popular software development tools. Although we primarily
develop SourceForge technology internally, we may, based on timing and cost
considerations, acquire technologies or products from third parties.
In addition to our internal SourceForge software engineering efforts, we
also utilize an independent contractor, Cybernet Software Solutions, Inc.
("CSS"), for certain aspects of our SourceForge product development. CSS
utilizes software-engineering resources in India and the United States to
perform software development projects and consulting services for us on a
contractual time and material basis. We coordinate our internal software
engineering with ongoing development at CSS using SourceForge.
OSDN
We believe that the success of OSDN will depend partly on our ability to
enhance our Web sites and underlying technology to meet the needs of a rapidly
evolving marketplace and increasingly sophisticated and demanding customers. We
intend to extend and strengthen the software underlying our online sites by
enhancing existing features and adding additional features. These include adding
the ability to deliver new ad types as they are developed, as well as enhancing
our ability to track ads as they run. We continue to invest in improving the
E-commerce customer service, order processing, shipping and tracking systems. We
also continually develop new animations to meet the needs of Animation Factory's
markets.
Competition
SourceForge
We believe SourceForge gives us an opportunity to operate in the
collaborative software development market without an entrenched competitor.
However, we face competition from software development tools and processes
developed internally by customers, including ad hoc integrations of commercial
software development tools and applications as well as open source software.
There are also many entrenched competitors in closely related markets who
compete for customer budget allocations. Such competition could arise from,
among others, Collab.Net, Inc., IBM Corporation, Merant plc, Microsoft
Corporation, Oracle Corporation, Borland Software Corporation, as well as
numerous other public and privately held software application development and
tools suppliers. Additionally, recent and future business combinations among
companies in the software industry will permit the resulting consolidated
companies to offer more extensive suites of software products and broader arrays
of software solutions, some of which may compete directly with SourceForge.
Changes resulting from current and future software industry consolidation may
negatively impact our competitive position and operating results.
Many of these potential competitors are likely to have substantial
competitive advantages including greater resources that can be devoted to the
development, promotion and sale of their products; more established sales forces
and channels; greater software development experience; and greater name
recognition.
OSDN
The market for Internet products and services provided by OSDN is highly
competitive. Advertisers have many alternatives available to reach their target
audience, including print (e.g., Ziff Davis Media's eWeek and Computerworld,
Inc.'s Computerworld), general portal sites (e.g., aol.com, yahoo.com and
msn.com) and other Web sites focused on vertical markets (e.g., CNet Networks,
Inc.'s cnet.com and techrepublic.com).
Similar to our potential competitors in our software business, many of our
competitors in our online business have substantial competitive advantages
including greater resources that can be devoted to the development, promotion
and sale of their online products and services; more established sales forces
and channels; greater software and Web site development experience; and greater
name recognition.
5
<PAGE>
To be competitive, we must respond promptly and effectively to the
challenges of technological change, evolving standards and our competitors'
innovations by continuing to enhance our products and grow our sales and
professional services organizations. Any pricing pressures or loss of potential
customers resulting from our failure to compete effectively would reduce our
revenues.
Significant Customers
For the fiscal year ended July 31, 2003, one customer, Intel Corporation,
accounted for approximately 17% of net revenues. For the fiscal year ended July
27, 2002, one customer, Intel Corporation, accounted for approximately 20% of
net revenues. We do not anticipate that any customer will represent more than
10% of net revenues during the fiscal year ended July 31, 2004.
Seasonality
With the exception of our ThinkGeek e-commerce business, our revenues have
not been significantly impacted by seasonality. Our ThinkGeek e-commerce
business, however, 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 our ThinkGeek e-commerce
revenues occurred in our second fiscal quarter, which in fiscal year 2004 will
begin on November 1, 2003, and end on January 31, 2004. As is typical in the
retail industry, we generally experience lower e-commerce revenues during the
other quarters. Therefore, our e-commerce revenue in a particular quarter is not
necessarily indicative of future e-commerce revenue for a subsequent quarter or
our full fiscal year.
Intellectual Property Rights
We protect our property through a combination of copyright, trademark,
patent, trade-secret laws, employee and third-party nondisclosure agreements,
and other methods of protection.
SourceForge is licensed to our end-user customers as proprietary software
code and documentation. We require our customers to enter into license
agreements that impose restrictions on their ability to reproduce, distribute
and utilize our software. In addition, we seek to avoid disclosure of our trade
secrets through a number of means, including restricting access to our source
code and object code and requiring those entities and persons with access to
agree to confidentiality terms which restrict their use and disclosure.
SourceForge, Slashdot, ThinkGeek, Freshmeat, OSDN, VA Software and the VA
logo are some of our trademarks and/or registered trademarks that we use in the
United States and in other countries.
Because the software industry is characterized by rapid technological
change, we believe that factors such as the technological and creative skills of
our personnel, new product developments, frequent product enhancements, name
recognition and reliable product maintenance are more important to establishing
and maintaining a technology leadership position than the various legal
protections of our technology.
Employees
We believe our success will depend in part on our continued ability to
attract and retain highly qualified personnel in a competitive market for
experienced and talented software engineers and sales and marketing personnel.
Our employees are not represented by any collective bargaining organization, we
have never experienced a work stoppage, and we believe that our relations with
our employees are good. As of July 31, 2003, our employee base totaled 115,
including 37 in operations, 27 in sales and marketing, 34 in research and
development and 17 in finance and administration.
Segment and Geographic Information
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. During fiscal 2001, the Company had two reportable business
segments for revenue: systems and services and OSDN. The Company allocated its
resources and evaluated performance of its separate segments based on revenue.
As a result of the Company's decision to exit the systems business in the fourth
quarter of fiscal 2001 and focus on its software application business, during
fiscal 2002 the Company operated as one business segment, providing application
software products and related
6
<PAGE>
OSDN products and services. During the fourth quarter of fiscal 2003, two
separate businesses emerged and as of July 31, 2003, we operate as two
reportable business segments: software and online. Due to the significant amount
of shared operating resources that are utilized by both of the business
segments, the Company only reports segment information for revenues and cost of
sales. See Note 11 to the Consolidated Financial Statements.
The Company markets its products in the United States through its direct
sales force. Revenues for each of the fiscal years ended July 31, 2003, July 27,
2002 and July 28, 2001 were primarily generated from sales to end users in the
United States.
Investor Information
We are subject to the informational requirements of the Securities Exchange
Act of 1934 (the "Exchange Act"). Therefore, we file periodic reports, proxy
statements and other information with the Securities and Exchange Commission
(the "SEC"). Such reports, proxy statements and other information may be
obtained by visiting the Public Reference Room of the SEC at 450 Fifth Street,
NW, Washington, DC 20549 or by calling the SEC at 1-800-SEC-0330. In addition,
the SEC maintains an Internet site (http://www.sec.gov) that contains reports,
proxy and information statements and other information regarding issuers that
file electronically.
You can access other information at our Investor Relations web site. The
address is www.vasoftware.com. We make available, free of charge, copies of our
annual report on Form 10-K as soon as reasonably practicable after filing such
material electronically or otherwise furnishing it to the SEC, and have made the
Form 10-K reports available on our web site since November 2002.
Item 2. Properties
Our headquarters is located in Fremont, California. At July 31, 2003, VA
Software's facilities in the United States represented leased aggregate floor
space of 266,630 square feet. Of this amount at July 31, 2003, 145,457 square
feet was vacant and 64,299 square feet was being leased to non-VA Software
businesses. VA Software has no facilities outside of the United States. For
additional information regarding obligations under leases, see Note 5 to the
Consolidated Financial Statements.
Item 3. 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. In October 2002, the court, pursuant to a stipulation,
dismissed all claims against the Company's Former Officers without prejudice. On
February 19, 2003, the court denied in part and granted in part the motion to
dismiss filed on behalf of the defendants, including the Company. The court's
order did not dismiss any claims against the Company. As a result, discovery may
now proceed. A proposal has been made for the settlement and release of claims
against the issuer defendants, including VA Software. The settlement is subject
to a number of conditions, including approval of the proposed settling parties
and 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 February 28, 2003, a related case, captioned Liu v. Credit Suisse First
Boston, et al., Case No. 03-20459, was filed in the United States District Court
for the Southern District of Florida. The Liu plaintiff was not alleged to have
bought or sold VA Software stock. The Company was not served with the Liu
complaint. The Complaint related generally to the ongoing IPO-related litigation
currently pending in the United States District Court for the Southern District
of New York, described above. On June 19, 2003, the Liu plaintiff filed an
amended complaint that dropped the VA Software defendants from the litigation.
7
<PAGE>
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 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of VA Software's stockholders, through the
solicitation of proxies or otherwise, during the fourth quarter of fiscal 2003.
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters
Our common stock is traded in the NASDAQ National Market System under the
symbol LNUX. As of October 6, 2003, there were 944 holders of record of our
common stock. We have not declared any cash dividends since our inception and do
not expect to pay any dividends in the foreseeable future. The high and low
closing sales prices, as reported by NASDAQ, of our common stock are as follows:
High Low
---- ---
Fiscal Year Ended July 31, 2003:
Fourth Quarter............................. $ 2.49 $ 0.88
Third Quarter.............................. $ 1.09 $ 0.84
Second Quarter............................. $ 1.36 $ 0.85
First Quarter.............................. $ 1.54 $ 0.63
Fiscal Year Ended July 27, 2002:
Fourth Quarter............................. $ 1.37 $ 0.61
Third Quarter.............................. $ 2.42 $ 1.20
Second Quarter............................. $ 3.23 $ 1.22
First Quarter.............................. $ 2.26 $ 0.78
The foregoing reflects interdealer prices without retail markup, markdown,
or commissions and may not necessarily reflect actual transactions.
Equity Compensation Plans
The following table summarizes our equity compensation plans as of July
31, 2003, all of which have been approved by our stockholders:
<TABLE>
<CAPTION>
A B C
<S> <C> <C> <C> <C>
Plan Category (1) Number of securities to Weighted average Number of securities remaining available for
be issued upon exercise exercise price of future issuance under equity compensation plan
of outstanding options outstanding options (excluding securities reflected in column A)
Equity compensation plan
approved by stockholders 9,318,632 (2) $3.19 15,081,997 (3) - (6)
</TABLE>
(1) The table does not include information for equity compensation plans
assumed by the Company in acquisitions. As of July 31, 2003, a total of
113,880 shares of the Company's common stock remain issuable and
outstanding upon exercise of options granted under plans assumed by the
Company in its acquisition of OSDN. The weighted average exercise price
of all outstanding options granted under these plans at July 31, 2003
is $37.78. The Company does not grant additional awards under these
assumed plans.
(2) Includes 8,818,632 options outstanding under the Company's 1998 Stock
Plan and 500,000 options outstanding under the Company's 1999
Director's Plan.
(3) Includes 2,225,391 shares of common stock reserved for issuance under
the Company's 1999 Employee Stock Purchase Plan.
8
<PAGE>
(4) Subject to the terms of the 1998 Stock Plan, an annual increase is to
be added on the first day of the Company's fiscal year equal to the
lesser of: 4,000,000 shares, or 4.9% of the outstanding shares on the
first day of the new fiscal year or an amount determined by the Board
of Directors.
(5) Subject to the terms of the 1999 Directors Plan, an annual increase is
to be added on the first day of the Company's fiscal year equal to the
lesser of: 250,000 shares, 0.5% of the outstanding shares on the first
day of the new fiscal year or an amount determined by the Board of
Directors.
(6) Subject to the terms of the 1999 Employee Stock Purchase Plan, an
annual increase is to be added on the first day of the Company's fiscal
year equal to the lesser of: 500,000 shares, 1% of the outstanding
shares on the first day of the new fiscal year or an amount determined
by the Board of Directors.
9
<PAGE>
Item 6. Selected Consolidated Financial Data
You should read the selected consolidated financial data set forth below in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our financial statements and the related notes
included elsewhere in this Form 10-K. The statement of operations data for the
fiscal years ended July 31, 2003, July 27, 2002 and July 28, 2001 and the
balance sheet data as of July 31, 2003 and July 27, 2002 are derived from the
audited financial statements and related notes appearing elsewhere in this Form
10-K. The statement of operations data for the fiscal years ended July 28, 2000
and July 31, 1999 and the balance sheet data as of July 28, 2001, July 28, 2000
and July 31, 1999 are derived from audited financial statements not appearing in
this Form 10-K. Historical results are not necessarily indicative of results
that may be expected for any future period.
Summary Financial Information
(In thousands, except per share data)
<TABLE>
<CAPTION>
For the years ended
------------------------------------------------------------------
July 31, July 27, July 28, July 28, July 31,
2003 2002 2001 2000 1999
------------ ------------ ----------- ---------- ----------
Selected Consolidated Statements of Operations Data:
<S> <C> <C> <C> <C> <C>
Net revenues.................................................. $ 24,228 $ 20,385 $ 134,890 $ 120,296 $ 17,710
Cost of revenues.............................................. 12,780 9,661 154,103 98,181 17,766
------------ ------------ ----------- ---------- ---------
Gross margin.................................................. 11,448 10,724 (19,213) 22,115 (56)
Loss from operations.......................................... (14,643) (93,248) (531,798) (95,387) (14,531)
Net loss...................................................... (13,798) (91,038) (525,268) (89,758) (14,512)
============ ============= =========== ========== =========
Dividend related to convertible preferred stock............... -- -- -- (4,900) --
------------ ------------ ----------- ---------- ---------
Net loss attributable to common stockholders.................. $ (13,798) $ (91,038) $ (525,268) $ (94,658) $ (14,512)
============ ============= =========== ========== =========
Basic and diluted net loss per share.......................... $ (0.25) $ (1.72) $ (10.78) $ (3.52) $ (2.62)
============ ============ =========== ========== =========
Shares used in computing basic and diluted net loss per share. 54,110 53,064 48,741 26,863 5,530
============ ============ =========== ========== =========
Selected Balance Sheet data at year-end:
Cash, cash equivalents and investments........................ $ 38,847 $ 53,046 $ 80,083 $ 174,032 $ 18,653
Working capital............................................... $ 28,825 $ 33,486 $ 62,444 $ 169,930 $ 16,230
Total assets.................................................. $ 48,495 $ 66,968 $ 173,033 $ 585,099 $ 27,595
Liabilities, net of current portion........................... $ 11,953 $ 15,575 $ 13,178 $ 1,656 $ 424
Total stockholders' equity (deficit).......................... $ 27,202 $ 39,388 $ 126,362 $ 543,875 $ 18,363
</TABLE>
Quarterly Financial Data
<TABLE>
<CAPTION>
Fiscal Year 2003
----------------
For the three months ended
-----------------------------------------------------
October 26 January 25 April 26 July 31
------------ ------------ ---------- -----------
<S> <C> <C> <C> <C>
Net revenues......................................................... $ 5,075 $ 6,560 $ 6,037 $ 6,556
Loss from operations................................................. (4,459) (3,909) (3,862) (2,413)
Net loss attributable to common stockholders......................... $ (4,133) $ (3,672) $ (3,610) $ (2,383)
Per share amounts:
Basic and diluted net loss per share............................... $ (0.08) $ (0.07) $ (0.07) $ (0.04)
Shares used in computing basic and diluted net loss per share...... 53,717 53,859 53,935 54,895
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year 2002
----------------
For the three months ended
-----------------------------------------------------
October 28 January 27 April 27 July 27
------------ ------------ ---------- -----------
<S> <C> <C> <C> <C>
Net revenues......................................................... $ 5,578 $ 5,052 $ 5,140 $ 4,615
Loss from operations................................................. (55,963) (10,701) (7,906) (18,678)
Net loss attributable to common stockholders......................... $ (54,881) $ (9,656) $ (7,729) $ (18,772)
Per share amounts:
Basic and diluted net loss per share............................... $ (1.04) $ (0.18) $ (0.15) $ (0.35)
Shares used in computing basic and diluted net loss per share...... 52,678 53,005 53,210 53,485
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
10
<PAGE>
The following discussion and analysis should be read in conjunction with
"Selected Financial Data" and our financial statements and the related notes
included elsewhere in this Form 10-K. This discussion contains forward-looking
statements that involve risks and uncertainties. Our actual results could differ
materially from those anticipated in the forward-looking statements as a result
of certain factors including the risks discussed in "Risk Factors" and elsewhere
in this Form 10-K. See Part I -- Item 1 -- "Special Note Regarding Forward
Looking Statements."
Overview
We were incorporated in California in January 1995 and reincorporated in
Delaware in December 1999. We develop, market and support a software application
known as SourceForge Enterprise Edition ("SourceForge") and also own and operate
the Open Source Development Network, Inc. ("OSDN"), a network of Internet Web
sites.
SourceForge is proprietary software designed for corporate and public-sector
information technology ("IT") professionals and software engineering
organizations. SourceForge is a Web-based application that enables IT and
software engineering organizations to manage application development more
effectively. SourceForge combines software development and collaboration tools
with the ability to track, measure, and report on software project activity in
real-time. With SourceForge, developers and project managers gain access to the
information they need to reduce risk and become more productive. SourceForge is
a relatively new product and additional development and enhancements are
expected in the future.
OSDN is a network of media and e-commerce Internet sites serving the IT
professionals and software development communities. As of September 30, 2003,
OSDN reaches 10 million unique visitors and serves more than 180 million page
views per month. Our OSDN Web sites include:
o SourceForge.net, our flagship Web site and software development center.
As of September 30, 2003, SourceForge.net was the development home for
more than 68,000 software development projects and had more than 707,000
registered users.
o Slashdot.org, our leading discussion site for technically-inclined
individuals. Slashdot is dedicated to providing the IT and software
development communities with cutting-edge technology, science and
culture news and interactive commentary.
o ThinkGeek.com, our e-commerce site, which provides online sales of a
variety of retail products of interest to the software development and
IT communities.
o Linux.com, our comprehensive Web site for Linux and open source news and
information. Linux.com caters to business and IT managers looking for
migration strategies to Linux.
o freshmeat.net, one of the Internet's most comprehensive indices of
downloadable Linux, Unix and cross-platform software.
o NewsForge.com, the online newspaper of record for Linux and open source
software.
o Animation Factory.com, a source for three-dimensional art, animations
and presentations. Animation Factory offers a dynamic collection of easy
to use animations that work in email, Web pages and presentations.
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. In addition,
we have not entered into any significant transactions with related parties. 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 eight quarters of operations focused on building our
application software business, and accordingly have a very short 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
continues to be derived from our online business and we face numerous risks and
uncertainties that commonly confront new and emerging businesses in emerging
markets, some of which we have identified in the "Risk Factors" section below.
11
<PAGE>
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 thereto included in this Form 10-K.
<TABLE>
<CAPTION>
For the years ended
---------------------------------
July 31, July 27, July 28,
2003 2002 2001
---- ---- ----
Consolidated Statements of Operations Data:
<S> <C> <C> <C>
Software revenues................................................ 12.1% 5.3% 0.0%
Online revenues.................................................. 84.8 78.4 10.9
Other revenues................................................... 3.1 16.3 89.1
----- ----- -----
Net revenues.................................................. 100.0 100.0 100.0
Software cost of revenues........................................ 8.2 11.7 0.0
Online cost of revenues.......................................... 46.1 51.0 7.8
Other cost of revenues........................................... (1.6) (15.3) 106.4
----- ----- -----
Cost of revenues.............................................. 52.7 47.4 114.2
----- ----- -----
Gross margin..................................................... 47.3 52.6 (14.2)
----- ----- -----
Operating expenses:
Sales and marketing........................................... 40.4 61.4 29.6
Research and development...................................... 32.3 39.8 13.3
General and administrative.................................... 26.6 53.2 16.3
Restructuring costs and other special charges................. (1.1) 230.2 84.1
Amortization of deferred stock compensation................... 0.6 8.2 45.4
Amortization of goodwill and intangible assets................ 8.9 57.5 72.6
Impairment of long-lived assets............................... 0.0 59.6 118.6
----- ----- -----
Total operating expenses.................................... 107.7 509.9 379.9
----- ----- -----
Loss from operations............................................. (60.4) (457.3) (394.1)
Interest and other income, net................................... 3.5 10.8 4.8
----- ----- -----
Net loss......................................................... (56.9)% (446.5)% (389.3)%
===== ===== =====
</TABLE>
Net Revenues
We had two reportable business segments for revenue during fiscal year 2001:
systems and services and OSDN. We allocated our resources and evaluated
performance of our separate segments based on revenue. As a result of our
decision to exit the systems business in the fourth quarter of fiscal 2001 and
focus on our software application business, during fiscal 2002 we operated as
one business segment, providing application software products and related OSDN
products and services. During the fourth quarter of fiscal 2003, two separate
businesses emerged and as of July 31, 2003,we operate as two reportable business
segments: software and online.
Software Revenues
Software revenues are derived from our application software business and
include software licenses, professional services, maintenance, support and
training. Software revenues represent $2.9 million, or 12.1%, and $1.1 million,
or 5.3%, of total revenues for fiscal years ended July 31, 2003 and July 27,
2002 respectively. There were no software revenues for the fiscal year ended
July 28, 2001.
Revenues from software license agreements are accounted for in accordance
with American Institute of Certified Public Accountants ("AICPA") Statement of
Position ("SOP") 97-2 and are recognized when objective, persuasive evidence of
an agreement exists, delivery of the product has occurred, provided the
arrangement does not require significant customization of the software, the fee
is fixed or determinable and collectibility is probable.
For perpetual licenses, we use the residual method to recognize revenues.
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 objective evidence of the 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. A typical perpetual
license agreement may include professional services, maintenance and training.
Revenue from non-essential professional services is recognized as the work is
performed based on fair
12
<PAGE>
value derived from published professional service rates. When an agreement
includes professional services that are significant or essential to the
functionality of the software, and we can reasonably estimate the cost to
complete the contract, we use the percentage of completion contract accounting
method for the entire arrangement, including license fees. Maintenance revenues
are recognized ratably over the term of the maintenance period (generally one
year). Software maintenance agreements provide technical support and the right
to unspecified updates/upgrades on an if-and-when-available basis. Fair value
for the ongoing maintenance obligations are based upon renewal rates, if stated,
or separate sales of maintenance sold to customers. The unrecognized portion of
amounts paid in advance for licenses, maintenance and professional services are
recorded as deferred revenue.
For term arrangements where we are unable to establish fair value for the
individual contract components such as software license, maintenance and
support, we recognize the entire contract value ratably over the term of the
contract. In the event that the contract includes essential professional
services, we defer revenue until the professional services have been fully
delivered. At that time, we then recognize the revenue ratably over the
remaining contract term.
If the fee due from the customer is not fixed or determinable, we recognize
revenues at the earlier of the due date or when cash is received from the
customer, assuming all other revenue recognition criteria have been met. If a
significant portion of the fee is due after the shorter of our normal payment
terms or 120 days, we presume the fee not to be fixed or determinable.
Online Revenues
Online revenues include online advertising and e-commerce revenues. Total
Online revenues of $20.6 million, $16.0 million and $14.7 million, represented
84.8%, 78.4% and 10.9% of total revenues for the fiscal years ended July 31,
2003, July 27, 2002 and July 28, 2001, respectively. Online advertising revenues
of $10.4 million, $9.0 million and $9.4 million, represented 43.0%, 44.2% and
7.0% of total revenues for the fiscal years ended July 31, 2003, July 27, 2002
and July 28, 2001, respectively. Online advertising revenues included $2.0
million, $2.0 million and $2.4 million of barter revenue for the fiscal years
ended July 31, 2003, July 27, 2002 and July 28, 2001, respectively. E-commerce
revenues of $10.1 million, $7.0 million and $5.3 million, represented 41.8%,
34.2% and 3.9% of total revenues for the fiscal years ended July 31, 2003, July
27, 2002 and July 28, 2001, respectively.
Advertising revenues are derived from the sale of advertising space on our
various Web sites. We recognize advertising 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. Our
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, we do not recognize the corresponding revenues until the guaranteed
impressions are achieved. We record 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." We broadcast
banner advertising in exchange for similar banner advertising on third party Web
sites.
E-commerce revenues are derived from the online sale of consumer goods and
digital animations. We recognize e-commerce revenues from the sale of consumer
goods in accordance with SEC Staff Accounting Bulletin ("SAB") No. 101, "Revenue
Recognition in Financial Statements." Under SAB 101, 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, we recognize e-commerce revenue upon the
shipment of goods. We do grant customers a right to return e-commerce products.
Such returns are recorded as incurred and have been immaterial for the periods
presented. The majority of the revenues derived from digital animation sales are
related to membership arrangements. As a result, we recognize the value ratably
over the term of the contract, normally 3 or 12 months.
Other Revenues
Other revenues are derived from our former hardware, customer support, and
professional services businesses. Other revenues represent $0.8 million, or
3.1%, of total revenues for fiscal year 2003, $3.3 million, or 16.3% for fiscal
year 2002 and $120.2 million, or 89.1% for fiscal year 2001.
Our revenue recognition policy related to our former hardware systems
business follows SEC SAB No. 101, "Revenue Recognition in Financial Statements."
Under SAB No. 101, we recognized product revenues from the sale of Linux-based
servers, components, and desktop computers when persuasive evidence of an
arrangement existed, delivery occurred, the sales price was fixed or
determinable and collectibility was reasonably assured. In general, we
recognized product revenue upon shipment of the goods.
13
<PAGE>
We did not grant our customers any rights to return products.
We recognized revenues from customer support services, including on-site
maintenance and technical support on a pro-rata basis over the term of the
related service agreement. We recognized revenues from professional service
contracts upon completion of the project, or using the percentage of completion
method of the project where project costs could be reasonably estimated. We
recorded any payments received prior to revenue recognition as deferred revenue.
Our net revenues increased to $24.2 million in fiscal year 2003, from $20.4
million in fiscal year 2002. The $3.8 million increase in net revenues was due
primarily to an increase in our current software and online businesses, offset
by a decrease in other revenue derived from our previous hardware business. In
fiscal year 2003, online revenue increased by $4.6 million to $20.6 million from
$16.0 million in fiscal year 2002. For each of the fiscal years 2003 and 2002
online revenue included approximately $2.0 million, of barter revenue arising
from web advertising. In fiscal year 2003, software revenue increased by $1.8
million to $2.9 million from $1.1 million in fiscal year 2003. In fiscal year
2003, systems and services revenue decreased $2.6 million to $0.8 million from
$3.3 million in fiscal year 2002.
Our net revenues decreased to $20.4 million in fiscal year 2002, from $134.9
million in fiscal year 2001. The $114.5 million decrease in net revenues was due
primarily to the exiting of the systems and services business segment. In fiscal
year 2002, systems and services revenue decreased $116.9 million to $3.3 million
from $120.2 million in fiscal year 2001. In fiscal year 2002, online revenue
increased by $1.3 million to $16.0 million from $14.7 million in fiscal year
2001. Online revenue for fiscal years 2002 and 2001 included approximately $2.0
million and $2.4 million, respectively, of barter revenue arising from web
advertising. Software revenues totaled $1.1 million for fiscal year 2002.
Sales for the fiscal years ended 2003, 2002, and 2001 were primarily to
customers located in the United States of America.
For the fiscal year ended July 31, 2003, one customer, Intel Corporation,
accounted for approximately 17% of net revenues. For the fiscal year ended July
27, 2002, one customer, Intel Corporation, accounted for approximately 20% of
net revenues. Going forward, we do not anticipate that any one customer will
represent more than 10% of net revenues.
Cost of Revenues
Cost of revenues increased to $12.8 million in fiscal year 2003 from $9.7
million in fiscal year 2002. Gross margin decreased as a percentage of revenue
to 47.3% in fiscal year 2003 from 52.6% in fiscal year 2002. The increase in
cost of revenues was primarily due to a net credit in fiscal year 2002 of $5.8
million related to the reversal of inventory reserves. This credit was primarily
the result of a better than expected sell through of old and excess material as
well as the ability to sell product at a price in excess of that originally
estimated in the three-month period ended July 28, 2001. Cost of revenues for
fiscal year 2003 included a credit of $0.4 million as a result of adjustments to
previous restructuring accruals. Net of these restructuring credits, cost of
revenues decreased to $13.2 million in fiscal year 2003 from $15.5 million in
fiscal year 2002. This decrease was primarily the result of exiting the systems
business which accounted for $2.8 million of the decrease, a reduction in cost
of sales in the SourceForge and online advertising businesses which accounted
for a decrease of $1.8 million, offset by an increase in e-commerce cost of
revenues of $2.4 million as a result of higher revenue levels. Headcount related
to cost of revenues was 37 at July 31, 2003, compared to 44 at July 27, 2002.
Gross margin, excluding the reversal of prior period inventory and restructuring
reserves, increased as a percentage of revenues to 45.5% in fiscal year 2003
from 24.1% in fiscal year 2002. The increase in gross margins excluding the
reversal of prior period inventory and restructuring reserves was the result of
improvements in the online advertising and software businesses as follows:
Online advertising gross margins increased to 63.0% for fiscal year 2003,
compared to 40.9% for fiscal year 2002; software gross margins increased to
31.5% for fiscal year 2003, compared to a negative 119.8% for fiscal year 2002.
E-commerce gross margins declined to 27.4% for fiscal year 2003 from 29.2% in
fiscal year 2002. The increase in online advertising gross margins was primarily
driven by the increase in revenues while reducing the costs associated with
editorial content and online delivery. The increase in our software gross
margins was primarily due to an increase in revenues as well as an effort to
align our software cost of revenues infrastructure to support our current
revenue levels. The decrease in ecommerce gross margins was the result of a
shift in product mix to lower gross margin products. We expect cost of revenues
to continue to increase as revenues increase, however, we expect overall gross
margins to improve as a result of leveraging the fixed cost portion of the cost
of revenues.
Cost of revenues decreased to $9.7 million in fiscal year 2002 from $154.1
million in fiscal year 2001. Gross margin increased as a percentage of revenue
to 52.6% in fiscal year 2002 from a negative 14.2% in fiscal year 2001. The
increase in gross margin as a percentage of net revenue was due primarily to the
exiting of the systems business and an inventory provision allowance of $28.0
million in fiscal year 2001 to establish a reserve for excess material. Cost of
revenues for fiscal year 2002 included restructuring
14
<PAGE>
charges of a net credit of $5.8 million which included a $6.9 million credit
adjustment to the fiscal year 2001 fourth quarter systems restructuring composed
of a $2.0 million reversal of reserves for inventory (due to a better sell
through of old and excess material during fiscal year 2002 than anticipated at
fiscal year-end 2001) and a $4.9 million reversal of an over estimate of
warranty expense. We recorded a $1.1 million restructuring charge for a
workforce reduction, which consisted mostly of severance and other related costs
attributable to 50 employees.
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.
Sales and marketing expenses decreased to $9.8 million in fiscal year 2003
from $12.5 million in fiscal year 2002. The decrease in absolute dollars was
primarily due to headcount reductions which accounted for $1.0 million of the
decrease, a reduction in marketing programs which represented $0.9 million of
the decrease, the reduction in our investment in VA Linux Japan which
represented $0.7 million of the decrease and the exiting of our Linux software
engineering and professional services businesses which represented $0.1 million
of the decrease. Headcount in sales and marketing decreased to 27 at July 31,
2003 from 29 at July 27, 2002. Sales and marketing expenses as a percentage of
net revenues decreased to 40.4% for fiscal year 2003 from 61.4% for fiscal year
2002. This decrease as a percentage of net revenues was primarily due to
decreased spending levels as described above as well as increased revenue
levels. We believe our sales and marketing expenses 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.
Sales and marketing expenses decreased to $12.5 million in fiscal year 2002
from $40.0 million in fiscal year 2001. The decrease in absolute dollars was
primarily due to the exiting of our systems and services business, which
accounted for a $30.6 million reduction and a decline in our sales and marketing
efforts related to our online business of $3.0 million, offset by a $6.3 million
increase in spending due to the shift in resources to our software business.
Headcount in sales and marketing decreased to 29 in fiscal year 2002 from 59 in
fiscal year 2001. Sales and marketing expenses as a percentage of net revenues
increased to 61.4% for fiscal year 2002 from 29.6% in fiscal year 2001. This
increase was primarily due to our significantly decreased revenues.
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.
Research and development expenses decreased to $7.8 million in fiscal year
2003 from $8.1 million in fiscal year 2002. The decrease in absolute dollars was
primarily due to the exiting of our Linux software engineering and professional
services businesses, which accounted for a $1.3 million reduction, the reduction
in our investment in VA Linux Japan, which accounted for a $0.5 million
reduction, offset by an increase in the use of outside contractors of $0.6
million and higher employee related expenses of $0.6 million. The fiscal year
2003 $0.6 million increase in employee related expenses was primarily due to a
$0.7 million increase in allocated operating costs partially offset by a $0.1
million reduction in salary expense. Headcount in research and development
decreased to 34 at July 31, 2003 from 44 at July 27, 2002. Research and
development expenses as a percentage of net revenues decreased to 32.3% for
fiscal year 2003 from 39.8% for fiscal 2002. The decrease as a percentage of net
revenues was primarily due to our slightly decreased spending levels as
described above as well as increased revenues levels. We expect research and
development expenses to increase slightly in absolute dollars and decrease as a
percentage of revenue in the future.
Research and development expenses decreased to $8.1 million in fiscal year
2002 from $18.0 million in fiscal year 2001. The decrease in absolute dollars
was primarily due to the exiting of the systems business, which accounted for a
$15.0 million reduction offset by an increase in our research and development
efforts related to our online business of $0.8 million and a $4.2 million
increase in spending as a result of our decision to focus on our software
business. Headcount in research and development decreased to 44 in fiscal year
2002 from 66 in fiscal year 2001. Research and development expenses as a
percentage of net revenues increased to 39.8% for fiscal year 2002 from 13.3%
for fiscal year 2001. This increase was primarily due to our significantly
decreased revenues.
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
15
<PAGE>
technological feasibility and, accordingly, all software development costs have
been charged to research and development expense in the accompanying 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 and professional fees for accounting
and legal services.
General and administrative expenses decreased to $6.5 million in fiscal year
2003 from $10.9 million for fiscal year 2002. General and administrative
expenses for fiscal year 2002 included the reversal of excess bad debt
provisions of $1.0 million and include $0.9 million of accrued legal expenses
associated with the IPO Securities Litigation. See Part I - Item 3 - Legal
Proceedings. Excluding these charges, the decrease in absolute dollars resulted
primarily from a decrease in administrative personnel. Our decision in the
fourth quarter of fiscal 2002 to reduce our administrative and overhead costs to
align with our business model represented $4.1 million of the decrease and the
reduction in our investment in VA Linux Japan represented $0.4 million of the
decrease. Headcount in general and administrative services decreased to 17 at
July 31, 2003 from 27 at July 27, 2002. General and administrative expenses as a
percentage of net revenues decreased to 26.6% for fiscal year 2003 from 53.2%
for fiscal year 2002. 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 general and administrative expenses to remain
relatively consistent in absolute dollars and decrease as a percentage of
revenue in the future.
General and administrative expenses decreased to $10.9 million in fiscal
year 2002 from $22.0 million for fiscal year 2001. General and administrative
expenses for fiscal year 2002 included the reversal of excess bad debt
provisions of $1.0 million and included $0.9 million of accrued legal expenses
associated with the IPO Securities Litigation. See Part I - Item 3 - Legal
Proceedings. General and administrative expenses for fiscal year 2001 included a
one-time provision for bad debts of $2.5 million related to the reorganization
of the business. Excluding these charges, the decrease in absolute dollars
resulted primarily from a decrease in administrative personnel due to our exit
from the systems and services businesses. Headcount in general and
administrative services decreased to 27 in fiscal year 2002 from 70 in fiscal
year 2001. General and administrative expenses as a percentage of net revenues
increased to 53.2% for fiscal year 2002 from 16.3% for fiscal year 2001. The
increase as a percentage of net revenues was primarily due to our significantly
decreased revenue.
Restructuring Costs and Other Special Charges
In fiscal 2001 and 2002, we adopted plans to exit the 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 software and online
businesses and reduce our operating losses to improve cash flow. We recorded
restructuring charges of $180.2 million related to exiting these activities,
$160.4 million of which was included in restructuring charges and other special
charges in operating expenses and $19.8 million of which was included in cost of
sales. Included in the restructuring were charges related to excess facilities
from non-cancelable leases (with payments continuing until fiscal 2010, unless
sublet completely). The accrual from non-cancelable lease payments includes
management's estimates of sublease income. These estimates are subject to change
based on actual events. We evaluate and update, if applicable, these estimates
quarterly. As of July 31, 2003, we had an accrual of approximately $14.5 million
outstanding related to these non-cancelable leases, all of which was originally
included in operating expenses.
We have recorded a net restructuring credit of $0.3 million for the fiscal
year ended July 31, 2003. This included $0.4 million of additional charges
related to existing excess facilities as a result of the termination of a
subtenant lease and $0.3 million of charges associated with our fiscal 2002 plan
to reduce our general and administrative overhead costs, net of $1.0 million in
credit adjustments to previously recorded restructuring reserves. As of July 31,
2003, we had an accrual of $0.4 million related to these charges.
In addition to the above, we recorded a $0.4 million net credit in cost of
revenues in the consolidated statement of operations for the fiscal year ended
July 31, 2003. The $0.4 million consisted of $23,000 associated with severance
and other related costs attributable to the fiscal 2002 plan to align our
infrastructure with operations, net of adjustments to previously recorded
restructuring reserves of $0.4 million related to the systems warranty reserve
and excess facility reserves originally established during fiscal 2001. As of
July 31, 2003, no outstanding accruals remained related to these restructuring
charges.
Below is a summary of the restructuring charges in operating expenses (in
thousands):
16
<PAGE>
<TABLE>
<CAPTION>
Total
Total Charged Total Charged Total Charged Cash Restructuring
To Operations To Operations To Operations Receipts\ Liabilities at
Fiscal 2001 Fiscal 2002 Fiscal 2003 (Payments) July 31, 2003
----------- ----------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Cash Provisions:
Other special charges relating to
restructuring activities...................... $ 2,159 $ (888) $ 78 $ (1,349) $ --
Facilities charges.............................. 6,584 9,401 191 (1,287) 14,889
Employee severance and other related
charges....................................... 3,498 1,997 37 (5,532) --
------- ------- ------- -------- --------
Total cash provisions..................... 12,241 10,510 306 $ (8,168) $ 14,889
------- ------- ------- ======== ========
Non-cash:
Write-off of goodwill and intangibles...... 59,723 30,632 --
Write-off of other special charges
relating to restructuring activities......... 4,434 5,442 (553)
Write-off of accelerated options from
terminated employees...................... 1,352 -- --
Acceleration of deferred stock
compensation................................ 35,728 352 (16)
------- ------- -------
Total non-cash provisions................ 101,237 36,426 (569)
------- ------- -------
Total provisions........................... $113,478 $ 46,936 $ (263)
======= ======= =======
</TABLE>
Amortization of Deferred Stock Compensation
In connection with the grant of certain stock options to employees during
fiscal 2000 and 1999, we recorded deferred stock compensation within
stockholders' equity of approximately $37.8 million, representing the difference
between the estimated fair value of the common stock for accounting purposes and
the option exercise price of these options at the date of grant. We amortize the
deferred stock compensation expense on an accelerated basis over the vesting
period of the individual award which is generally equal to four years. This
method of deferred stock expense amortization is in accordance with Financial
Accounting Standards Board Interpretation No. 28. The amortization expense
relates to options awarded to employees in all operating expense categories. The
amortization of deferred stock compensation has not been separately allocated to
these categories. The amount of deferred stock compensation from year to year
has decreased as options for which accrued but unvested compensation has been
recorded have been forfeited. We recorded amortization of deferred stock
compensation related to these options of $0.1 million, $1.2 million and $10.6
million for the fiscal years ended July 31, 2003, July 27, 2002 and July 28,
2001, respectively. In addition, in connection with acquisitions, we recorded
$0.5 million and $50.7 million of deferred stock compensation during the fiscal
years ended July 27, 2002 and July 28, 2001, respectively. No amortization of
deferred stock compensation related to acquisitions was recorded during the
fiscal year ended July 31, 2003. Further, in connection with the restructuring
discussed above, we recorded an expense of approximately $35.7 million related
to the acceleration of deferred stock compensation for the fiscal year ended
July 28, 2001. Finally, we made adjustments during fiscal years 2003 and 2002
related to deferred stock compensation for stock options of terminated employees
of a credit of $16,000 and $0.3 million, respectively. All adjustments have been
included in restructuring costs and other special charges in the statements of
operations. We expect amortization of deferred stock compensation, in absolute
dollars, to decrease through fiscal year 2004 as a result of the accelerated
basis of amortization.
Goodwill and Intangibles and Impairment of Long-Lived Assets
In connection with the acquisitions of TruSolutions, Inc. ("TruSolutions"),
Precision Insight, Inc. ("Precision Insight"), NetAttach, Inc. ("NetAttach"),
and OSDN (formerly known as "Andover.Net, Inc."), we recorded $381.3 million of
goodwill and intangibles during fiscal 2000. We amortized $97.9 million of
goodwill and intangibles in fiscal 2001. In connection with the restructuring
plans in fiscal year 2001, we wrote off goodwill and intangibles associated with
BNW, Life, Alabanza (companies previously acquired prior to fiscal year 2000)
and TruSolutions in the amount of $59.7 million as we exited these lines of
business and expected no future cash flows. In connection with our restructuring
plans in fiscal year 2002, we wrote off goodwill and intangibles associated with
NetAttach, and Precision Insight in the amount of $30.6 million due to the exit
of the professional services and Linux software engineering businesses.
We continually evaluate whether events and circumstances have occurred that
indicate the remaining estimated useful life of long-lived assets may warrant
revision or that the remaining balance of long-lived assets may not be
recoverable in accordance with SFAS
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No. 144, "Accounting for Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of." When factors indicate that long-lived assets should
be evaluated for possible impairment, we use an estimate of the related
undiscounted future cash flows over the remaining life of the long-lived assets
in measuring whether they are recoverable. If the estimated undiscounted future
cash flows exceed the carrying value of the asset, a loss is recorded as the
excess of the asset's carrying value over fair value. Long-lived assets and
certain identifiable intangible assets to be disposed of are reported at the
lower of carrying amount or fair value less costs to sell. See Note 4 in the
consolidated financial statements for details on impairment charges recognized
during fiscal years 2002 and 2001.
We performed an assessment of the carrying value of its long-lived assets to
be held and used including significant amounts of goodwill and other intangible
assets recorded in connection with the Company's OSDN acquisition at July 28,
2001. We performed the assessment pursuant to SFAS No. 144 due to the
significant slowdown in the economy affecting current operations and expected
future sales, as well as the general decline of technology valuations. The
conclusion of that assessment was that the decline in market conditions within
the industry was significant and other than temporary. As a result, we recorded
during the fourth quarter of fiscal year 2001 a charge of $160.0 million to
reduce goodwill and other intangible assets associated with the acquisition of
OSDN, based on the amount by which the carrying value of these assets exceeded
their fair value. The charge is included in the caption "Impairment of
long-lived assets" in the consolidated statements of operations. Fair value was
determined based on discounted future cash flows.
Effective July 29, 2001, we adopted SFAS No. 142, "Goodwill and Other
Intangible assets." Upon adoption of SFAS No. 142, we no longer amortized
goodwill. Pursuant to SFAS No. 142, we test goodwill for impairment. SFAS 142
requires that goodwill be tested for impairment at the "reporting unit level"
("Reporting Unit") at least annually and more frequently upon the occurrence of
certain events, as defined by SFAS No. 142. During the quarter ended July 27,
2002 goodwill was tested for impairment and we determined that we had only one
Reporting Unit, providing application software products and related OSDN
products and services. First, we determined whether its carrying amount exceeded
its "fair value", which would indicate that goodwill may be impaired. Based on
this test, we determined that goodwill could be impaired. Therefore, we compared
the "implied fair value" of goodwill, as defined by SFAS No. 142, to its
carrying amount to determine whether there was an impairment loss. As a result
of the impairment test, we determined that the carrying value was impaired and
it recorded an impairment loss of $3.6 million. The charge is included in the
caption "Impairment of long-lived assets" in the statements of operations. There
was no carrying value associated with goodwill at July 31, 2003 to be tested for
impairment.
Intangible assets are amortized on a straight-line basis over three to five
years. we continually evaluate whether events or circumstances have occurred
that indicate the remaining estimated useful lives of these intangible assets
may not be recoverable. When factors indicate that the intangible assets should
be evaluated for possible impairment, we use 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. An evaluation was
performed on the intangible assets during the quarter ended July 27, 2002. As a
result of this evaluation, we determined that the carrying value was impaired
and an impairment loss was recorded for $8.6 million. The charge is included in
the caption "Impairment of goodwill, intangible assets and other long-lived
assets" in the statements of operations. No events or circumstances occurred
during the fiscal year ended July 31, 2003 that would indicate a possible
impairment in the carrying value of intangible assets at July 31, 2003.
Interest and Other Income, Net
Interest and other income, net, includes income from our cash investments,
net of other expenses. Net interest and other income decreased to $0.8 million
for fiscal year 2003 from $2.2 million for fiscal year 2002. The decrease was
primarily due to our decreased investment in VA Linux Japan, which accounted for
$0.9 million of the decrease and a lower cash balance and decreased returns on
our cash as a result of declining interest rates from prior year, which
accounted for $0.6 million of the decrease. We expect interest and other income,
net to decline as our cash balance decreases to support our operations.
Net interest and other income decreased to $2.2 million for fiscal year 2002
from $6.5 million for fiscal year 2001. The decrease was primarily due to a
lower cash balance and decreased returns on our cash as a result of declining
interest rates from prior year.
Income Taxes
As of July 31, 2003, we had $233 million of federal and state net operating
loss carry-forwards for tax reporting purposes available to offset future
taxable income. We have not recognized any benefit from these net operating loss
carry-forwards because 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 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 2021 and fiscal year 2012, respectively, to
the extent that they are not utilized. The amount of net
18
<PAGE>
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.
Liquidity and Capital Resources
As of July 31, 2003, our available capital resources totaled $38.8 million,
comprised of marketable securities of $32.5 million and cash and cash
equivalents of $6.3 million. As of July 27, 2002, our available capital
resources totaled $53.0 million, comprised of $17.9 million in marketable
securities and $35.1 million in cash and cash equivalents. During fiscal 2003,
in an effort to maximize our rate of return, we invested a greater portion of
our capital resources in short- and long-term marketable securities. The
resulting $14.6 million increase in our marketable securities investments during
fiscal 2003, accounts for 50.7% of the $28.8 million decline in our cash and
cash equivalents to $6.3 million at July 31, 2003 from $35.1 million at July 27,
2002. The remaining decline of approximately $14.2 million was primarily due to
cash utilized in our operations of $15.8 million, offset by cash generated by
our financing activities of $1.4 million. The remaining variance was due to cash
generated through the release of restricted cash of $0.5 million, offset by
capital purchases of $0.3 million.
For the fiscal year ended July 31, 2003, we used $15.8 million in cash for
operating activities, compared to $35.1 million for the fiscal year ended July
27, 2002. This represents a decrease of 55.0% and is primarily due to our
reduction in expenses as a result of exiting the systems and services businesses
and changing our focus to our software and online businesses.
For the fiscal year ended July 31, 2003, our operating loss of $8.6 million,
net of non-cash charges, accounted for 54.4% of our operating cash utilization.
Non-cash charges include depreciation and amortization of $5.4 million,
provision for bad debts, provision for excess obsolete inventory, loss on
disposal of assets, amortization of deferred stock compensation of $0.1 million,
non-cash restructuring charges of a negative $0.6 million, and an impairment of
long-lived assets of $0.2 million. In total, these net non-cash items reduced
the net loss of $13.8 million by $5.2 million. Other significant operating
activities resulting in the utilization of cash were accounts receivable,
inventories, accounts payable, accrued restructuring liabilities, and accrued
liabilities and other. The growth in accounts receivable utilized $1.2 million
in cash. The decline in accounts payable utilized $1.2 million in cash. The
decrease in accounts payable was due to a decrease in expenses as well as more
rapid payment under terms. Finally, $5.2 million was utilized in accrued
liabilities primarily as a result of payments made on excess facilities of $2.6
million, $0.5 million in payments made to former employees related to severance
agreements and $2.1 million in payments made for other accrued liabilities
during the normal course of business. We expect that the above cash utilization
trends will continue as we grow our business and pay off our remaining lease
obligations related to excess facilities.
For the fiscal year ended July 27, 2002 the utilization of cash was due to
our operating loss of $38.7 million, net of non-cash charges, offset by cash
generated from other operating activities of $3.6 million. Non-cash charges
include depreciation and amortization of $16.2 million, provision for bad debts
of a negative $1.1 million, provision for excess and obsolete inventory of a
negative $4.4 million, loss on disposal of assets of $1.4 million, proportionate
share of Japan losses in VA Linux Japan investment of $2.0 million, minority
interest of VA Linux Japan loss of a negative $0.5 million, gain on sale of VA
Linux Japan investment of a negative $12.8 million, release of contingent shares
in relation to OSDN acquisition of $1.3 million, amortization of deferred stock
compensation of $1.6 million, non cash compensation expense of $0.1 million,
non-cash restructuring charges of $36.4 million and an impairment on long-lived
assets of $12.2 million. In total, these net non-cash items reduced the net loss
of $91.0 million by $52.3 million. Other significant operating activities
resulting in the utilization of cash were accounts payable, accrued liabilities
and other long-term liabilities. The decline in accounts payable utilized $12.2
million in cash. The decrease in accounts payable was due to a decrease in
expenses as a result of exiting the hardware business. The decline in accrued
liabilities and other long-term liabilities utilized $8.5 million in cash
primarily as a net result of payments made associated with accrued compensation
of $2.4 million, payments made associated with accrued restructuring of $3.1
million and $4.2 million in payments made for other accrued liabilities during
the normal course of business, offset by cash generated from deferred rent
associated with a sublease termination of $1.2 million. Other significant
operating activities resulting in the generation of cash were accounts
receivable, inventories, prepaid expenses and other assets and accrued
restructuring liabilities. The decrease in accounts receivable generated $10.4
million in cash, and reflects a lower level of revenues as the hardware business
declined and we exited certain portions of that business. The decrease in
inventory generated $2.0 million and was due to exiting the hardware business
and selling inventory that was originally reserved for in restructuring. The
decline in prepaid expenses and other assets generated $3.4 million of cash and
was the result of selling a portion of our VA Linux Japan investment which
represented $0.8 million of the decline. The remaining decline of $2.6 million
was the result of cash received from various miscellaneous receivables during
the fiscal year ended July 27, 2002. Finally, an increase in accrued
restructuring liabilities generated $8.5 million in cash as a result of
additional restructuring reserves established for $11.6 million, offset by
payments made on previously established accruals of $3.1 million.
19
<PAGE>
For fiscal year 2001, we used $81.6 million in cash for operating
activities. Working capital decreased to $62.4 million at July 28, 2001,
primarily due to using our cash and investments to support our operating
activities. Non-cash items consisted primarily of depreciation and amortization
of goodwill, bad debt and inventory provisions, loss on disposal of assets,
amortization of deferred compensation, non-cash restructuring and impairment of
long-lived assets of $453.7 for fiscal year 2001. Other operating activities
during fiscal year 2001 consisted of an increase in inventories, prepaid
expenses, accrued restructuring liabilities, other accrued liabilities and other
long-term liabilities offset by decreases in accounts receivable and accounts
payable.
For the fiscal year ended July 31, 2003, we used $14.4 million in cash for
investing activities, compared to generating $11.3 million and $17.3 million for
the fiscal years ended July 27, 2002 and July 28, 2001, respectively. This
change is primarily due to our strategic decision to increase our short- and
long-term investments and decrease our cash equivalent investments in an effort
to maximize our rate of return. During the fiscal year ended July 31, 2003, we
utilized a net $14.6 million of cash and cash equivalents to purchase short- and
long-term investments, compared to an increase of $4.9 million and $29.8 million
in cash and cash equivalents during the fiscal years ended July 27, 2002 and
July 28, 2001, respectively, which resulted from our liquidation of certain
investments. In addition, during the fiscal year ended July 27, 2002 we sold a
portion of our VA Linux Japan investment that generated $5.1 million. Further,
we generated $0.5 million as a result of the release of restricted cash during
the fiscal year ended July 31, 2003, compared to $1.5 million during the fiscal
year ended July 27, 2002 and the utilization of $0.6 million during the fiscal
year ended July 28, 2001. We expect that cash utilization for investing
activities will decline as we sell longer term investments to fund our
operations and our restricted cash is released under terms of our corporate
lease agreement.
For the fiscal year ended July 31, 2003, we generated $1.4 million in cash
from financing activities, compared to $0.1 million and $1.6 million for the
fiscal years ended July 27, 2002 and July 28, 2001, respectively. This increase
in cash generation during fiscal 2003 is primarily the result of cash generated
from the issuance of common stock to our employees and decreasing payments on
notes payable. During the fiscal year ended July 31, 2003, $1.4 million in cash
was generated from the issuance of common stock to our employees, compared to
$0.4 million and $4.4 million during the fiscal years ended July 27, 2002 and
July 28, 2001, respectively. During the fiscal year ended July 31, 2003, $42,000
in cash was utilized to make payments on our notes payable, compared to payments
of $0.3 million and $2.5 million during the fiscal year ended July 27, 2002. 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.
For the fiscal year ended July 31, 2003, exchange rate changes had an
immaterial effect on cash and cash equivalents. For the fiscal year ended July
27, 2002, exchange rate changes had a positive effect on cash and cash
equivalents of $1.4 million. For the fiscal year ended July 28, 2001, exchange
rate changes had a negative effect on cash and cash equivalents of $1.5 million.
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 July 31, 2003 and July 27, 2002, we had outstanding letters of credit
issued under a line of credit of approximately $0.9 million and $1.4 million,
respectively, 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 each fiscal year through 2005
under the terms of our existing lease agreement.
Future payments due under debt and lease obligations as of July 31, 2003 are
as follows (in thousands):
Gross Net
Operating Sublease Operating
Leases Income Leases
------ ------ ------
2004................................... $ 5,370 $ 615 $ 4,755
2005................................... 4,916 309 4,607
2006................................... 3,709 77 3,632
2007................................... 3,511 -- 3,511
2008................................... 3,616 -- 3,616
Thereafter............................. 6,905 -- 6,905
------ ------ ------
Total minimum lease payments... $28,027 $ 1,001 $27,026
====== ====== ======
20
<PAGE>
Our liquidity and capital requirements depend on numerous factors, including
market acceptance of our software and online products, the resources we devote
to developing, marketing, selling and supporting our software and online
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 2004 under our current business strategy.
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.
Critical Accounting Policies
Accounting policies, methods and estimates are an integral part of the
consolidated financial statements prepared by management and are based upon
management's current judgments. Those judgments are normally based on knowledge
and experience with regard to past and current events and assumptions about
future events. Certain accounting policies, methods and estimates are
particularly sensitive because of their significance to the financial statements
and of the possibility that future events affecting them may differ markedly
from management's current judgments. While there are a number of accounting
policies, methods and estimates affecting our financial statements, areas that
are particularly significant include revenue recognition policies, the
assessment of recoverability of goodwill and other intangible assets,
restructuring reserves for excess facilities for non-cancelable leases, income
taxes, and contingencies and litigation.
Revenue Recognition
As discussed in Note 2 of the notes to the consolidated financial
statements, we account for the licensing of software in accordance with American
Institute of Certified Public Accountants (AICPA) Statement of Position (SOP)
97-2, Software Revenue Recognition. The application of SOP 97-2 requires
judgment, including whether a software arrangement includes multiple elements,
and if so, whether vendor-specific objective evidence (VSOE) of fair value
exists for those elements. End users receive certain elements of our products
over a period of time. These elements include post-delivery telephone support
and the right to receive unspecified upgrades/enhancements on a
when-and-if-available basis, the fair value of which is recognized over the
product's estimated life cycle. Changes to the elements in a software
arrangement, the ability to identify VSOE for those elements, the fair value of
the respective elements, and changes to a product's estimated life cycle could
materially impact the amount of earned and unearned revenue. Judgment is also
required to assess whether future releases of certain software represent new
products or upgrades and enhancements to existing products.
Amortization of Goodwill and Intangibles
As discussed in Note 2 of the notes to the consolidated financial
statements, effective July 29, 2001, we adopted SFAS No. 142, "Goodwill and
Other Intangible assets." SFAS 142, Goodwill and Other Intangible Assets,
requires that goodwill be tested for impairment at the reporting unit level
(operating segment or one level below an operating segment) on an annual basis
and between annual tests in certain circumstances. Application of the goodwill
impairment test requires judgment, including the identification of reporting
units, assigning assets and liabilities to reporting units, assigning goodwill
to reporting units, and determining the fair value of each reporting unit.
Significant judgments required to estimate the fair value of reporting units
include estimating future cash flows, determining appropriate discount rates and
other assumptions. Changes in these estimates and assumptions could materially
affect the determination of fair value and/or goodwill impairment for each
reporting unit.
Restructuring Costs and Other Special Charges
21
<PAGE>
As discussed in Note 4 of the notes to the consolidated financial
statements, we have recorded significant restructuring charges in connection
with exiting our managed services, systems, and professional services and Linux
software engineering services businesses during fiscal years ended 2002 and
2001. A significant portion of these charges related to excess facilities
primarily from non-cancelable leases (payments which, unless we sublet
completely, will continue until fiscal 2010) or other costs for the abandonment
or disposal of property and equipment. Restructuring charges associated with
these non-cancelable leases include estimates related to sublease costs and
income which are based on assumptions regarding the period required to locate
and contract with suitable sub-lessees and sublease rates which can be achieved
using market trend information analyses provided by a commercial real estate
brokerage firm retained by us. We review these estimates each reporting period
and to the extent that these assumptions change due to changes in the market,
the ultimate restructuring expenses for these excess facilities could vary by
material amounts. Savings related to fiscal year 2003 as a result of idle space
charges taken in fiscal year 2002 and 2001 totaled $3.0 million. Should the
Company be unable to sublet the idle facilities under the current assumptions,
additional idle space charges may be recorded in future periods for a maximum of
up to $6.5 million.
Income Taxes
We are required to estimate our income taxes in each of the jurisdictions in
which we operate as part of the process in preparing our consolidated financial
statements. This process involves us estimating our actual current tax exposure
together with assessing temporary differences resulting from differing treatment
of items, such as deferred revenue, for tax and accounting purposes. These
differences result in deferred tax assets or liabilities. We must then assess
the likelihood that our net deferred tax assets will be recovered from future
taxable income and to the extent that we believe recovery is not likely, we must
establish a valuation allowance. While we have considered future taxable income
in assessing the need for the valuation allowance, in the event that we were to
determine that we would be able to realize our deferred tax assets in the future
in excess of its net recorded amount, an adjustment to the deferred tax asset
would be made, increasing income in the period in which such determination was
made.
Contingencies and Litigation
We are subject to proceedings, lawsuits and other claims. We assess the
likelihood of any adverse judgments or outcomes to these matters as well as
ranges of probable losses. A determination of the amount of loss contingency
required, if any, is assessed in accordance with SFAS No. 5 "Contingencies and
Commitments" and recorded if probable after careful analysis of each individual
matter. The required loss contingencies may change in the future as the facts
and circumstances of each matter change.
Recent Accounting Pronouncements
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which addresses accounting for restructuring
and similar costs. SFAS No. 146 supercedes previous accounting guidance,
principally EITF issue No. 94-3. We are required to adopt SFAS No. 146 for
restructuring activities initiated after December 31, 2002. SFAS No. 146
requires that the liability for costs associated with an exit or disposal
activity be recognized when the liability is incurred. Under EITF 94-3, a
liability for an exit cost was recognized at the date of the company's
commitment to an exit plan. SFAS No. 146 also established that the liability
should initially be measured and recorded at fair value. Accordingly, SFAS No.
146 may affect the timing of recognizing future restructuring plans. If we
continue to record significant restructuring charges in the future, the adoption
of SFAS No. 146 could have a significant impact on our results of operations.
All restructuring charges have been recorded in accordance with SFAS No. 146 for
all periods presented with restructuring activities initiated after December 31,
2002.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." FIN No. 45 requires that a liability be
recorded in the guarantor's balance sheet upon issuance of a guarantee or
indemnification. In addition, FIN No. 45 requires disclosures about the
guarantees that an entity has issued, including a reconciliation of changes in
the entity's product warranty liabilities. The initial recognition and initial
measurement provisions of FIN No. 45 are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002, irrespective of the
guarantor's fiscal year-end. The disclosure requirements of FIN No. 45 are
effective for financial statements of interim or annual periods ending after
December 15, 2002. The adoption of FIN No. 45 has not had a material effect on
these consolidated financial statements.
As permitted under Delaware law, we have agreements whereby our officers and
directors are indemnified for certain events or occurrences while the officer or
director is, or was serving, at our request in such capacity. The term of the
indemnification period is for the officer's or director's term in such capacity.
The maximum potential amount of future payments we could be required to make
under these indemnification agreements is unlimited; however, we have director
and officer liability insurance designed to limit our
22
<PAGE>
exposure and to enable us to recover a portion of any future amounts paid. As a
result of our insurance policy coverage, we believe the estimated fair value of
these indemnification agreements is minimal. All of these indemnification
agreements were grandfathered under the provisions of FIN No. 45 as they were in
effect prior to December 31, 2002. Accordingly, we have no liabilities recorded
for these agreements as of July 31, 2003.
We enter into standard indemnification agreements in the ordinary course of
business. Pursuant to these agreements, we indemnify, hold harmless, and agree
to reimburse the indemnified party for losses suffered or incurred by the
indemnified party, generally, our business partners, subsidiaries and/or
customers, in connection with any U.S. patent or any copyright or other
intellectual property infringement claim by any third party with respect to our
products. The term of these indemnification agreements is generally perpetual
any time after execution of the agreement. The maximum potential amount of
future payments we could be required to make under these indemnification
agreements is unlimited. We have not incurred significant costs to defend
lawsuits or settle claims related to these indemnification agreements. As a
result, we believe the estimated fair value of these agreements is
insignificant. Accordingly, we have no liabilities recorded for these agreements
as of July 31, 2003.
We warrant that our software products will perform in all material respects
in accordance with our 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, we warrant that our
maintenance services will be performed consistent with generally accepted
industry standards through completion of the agreed upon services. If necessary,
we would provide for the estimated cost of product and service warranties based
on specific warranty claims and claim history, however, we have not incurred
significant expense under our product or services warranties. As a result, we
believe the estimated fair value of these agreements is minimal. Accordingly, we
have no liabilities recorded for these agreements as of July 31, 2003.
We warrant that our hardware products related to our previous hardware
business will perform in all material respects in accordance with the our
standard published specifications in effect at the time of delivery of the
products to the customer for the life of the product, typically 36 months. The
remaining estimated fair value of these agreements related to our previous
hardware business is minimal at July 31, 2003. Accordingly, we have a liability
of approximately $12,000 recorded for these agreements as of July 31, 2003.
In November 2002, the Emerging Issues Task Force ("EITF") reached a
consensus regarding EITF Issue 00-21, Accounting for Revenue Arrangements with
Multiple Deliverables. The consensus addresses not only when and how an
arrangement involving multiple deliverables should be divided into separate
units of accounting but also how the arrangement's consideration should be
allocated among separate units. The pronouncement is effective for VA Software
commencing with its fiscal year 2004 and is not expected to have a material
impact on VA Software's consolidated results of operations or financial
position.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure -- an amendment of FASB Statement No.
123." This Statement amends FASB SFAS No. 123, "Accounting for Stock-Based
Compensation,", to provide alternative methods of transition for an entity that
voluntarily changes to the fair value based method of accounting for stock-based
employee compensation. SFAS No. 148 also requires that disclosures of the pro
forma effect of using the fair value method of accounting for stock-based
employee compensation be displayed more prominently and in a tabular format.
Additionally, SFAS No. 148 requires disclosures of the pro forma effect in
interim financial statements. The transition and annual disclosure requirements
of SFAS No. 148 are effective for fiscal years ended after December 15, 2002.
The interim disclosure requirements are effective for interim periods beginning
after December 15, 2002. We have chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in APB Opinion No. 25
and related interpretations. Accordingly, compensation expense for stock options
is measured as the excess, if any, of the estimate of the market value of our
stock at the date of the grant over the amount an employee must pay to acquire
its stock. We adopted the interim disclosure provisions for our financial
reports during the quarter ended April 26, 2003 and have adopted the annual
disclosure provisions of SFAS No. 148 in our financial reports for the fiscal
year ended July 31, 2003. Refer to Note 2 of Notes to Condensed Consolidated
Financial Statements. As the adoption of this standard involves disclosures
only, it has not had a material impact on our consolidated financial statements.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51." Generally, a variable
interest entity ("VIE") is a corporation, partnership, trust or any other legal
structure used for business purposes that either does not have equity investors
with substantive voting rights or has equity investors that do not provide
sufficient financial resources for the entity to support its activities. A VIE
often holds financial assets and may be passive or it may engage in such
activities as research and development or other activities on behalf of another
company. FIN No. 46 requires that a VIE be consolidated by a company if that
company is subject to a majority of the VIE's risk of loss or entitled to
receive a majority of the VIE's residual returns or both. A company that
consolidates a VIE is referred to as the primary beneficiary of that entity. The
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consolidation requirements of FIN No. 46 apply immediately to VIEs created after
January 31, 2003. The consolidation requirements apply to entities existing
prior to January 31, 2003 in the first fiscal year or interim period beginning
after June 15, 2003. Certain of the disclosure requirements apply in all
financial statements issued after January 31, 2003 regardless of when the VIE
was established. We have adopted the disclosure provisions and will adopt the
consolidation requirements as of August 1, 2003. The adoption of the
consolidation requirements of FIN No. 46 did not have a significant impact on
our consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
addresses certain financial instruments that, under previous guidance, could be
accounted for as equity, but now must be classified as liabilities in statements
of financial position. These financial instruments include: 1) mandatory
redeemable financial instruments, 2) obligations to repurchase the issuer's
equity shares by transferring assets, and 3) obligations to issue a variable
number of shares. SFAS No. 150 is effective for all financial instruments
entered into or modified after May 31, 2003, and otherwise effective at the
beginning of the first interim period beginning after June 15, 2003. The
implementation of SFAS No. 150 is not expected to have a material effect on our
consolidated financial statements.
Risk Factors
INVESTORS 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 Software Business
BECAUSE THE MARKET FOR OUR SOURCEFORGE APPLICATION SOFTWARE IS NEW AND
RAPIDLY EVOLVING, 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 broadly implement our
software by licensing additional copies from us. 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 CONCENTRATING OUR SALES EFFORTS ON SOURCEFORGE, SO IF THIS SOFTWARE
DOES NOT ACHIEVE MARKET ACCEPTANCE WE ARE LIKELY TO EXPERIENCE CONTINUED
OPERATING LOSSES. We are directing the majority of our product research and
development efforts to SourceForge. The failure to achieve market acceptance of
SourceForge would adversely affect our business and operating results. The
success of SourceForge is difficult to predict because SourceForge represents a
relatively new area of business for us. There can be no assurance that we will
be successful in marketing, licensing, upgrading and supporting SourceForge. Our
failure to do so could 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 internal financial and personnel
resources. As a result, rather than license 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 DO NOT DEVELOP AND ENHANCE SOURCEFORGE TO KEEP PACE WITH
TECHNOLOGICAL, MARKET, AND INDUSTRY CHANGES, OUR SOFTWARE REVENUE WILL NOT GROW
AND MAY DECLINE. Rapid technological
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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. 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 software revenues
may not grow or may decline. We believe the success of our software business
will become increasingly dependent on our ability to:
o support multiple platforms, including Linux, commercial UNIX,
Microsoft Windows and Apple Mac OS X;
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 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 our software varies and can range from
three to more than twelve months. Additionally, our sales cycle is complex
because customers consider a number of factors before committing to license
SourceForge. Factors that may be considered by customers when evaluating
SourceForge include product benefits, cost and time of implementation, and the
ability to operate with existing and future computer systems and applications.
Customer evaluation, purchasing and budgeting processes vary significantly from
company to company. As a result, we spend significant time and resources
informing prospective customers about our software products, which may not
result in a completed transaction and may negatively impact our operating
margins. 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 software
products and future introductions of new software by our competitors
and us may affect customer-purchasing decisions.
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. 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 software 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.
IF WE DO NOT CONTINUE TO RECEIVE REPEAT BUSINESS FROM EXISTING CUSTOMERS,
OUR REVENUE WILL NOT GROW AND MAY DECLINE. We generate a significant amount of
our software license revenues from existing customers.
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Most of our current customers initially purchased a limited number of licenses
as they implemented and adopted 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.
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 has come from our direct sales efforts.
To offer products and services to a larger customer base, we entered into a
commercial relationship with IBM. If we are unable to maintain our existing
strategic relationship with IBM, 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.
OUR RESEARCH AND DEVELOPMENT EFFORTS MAY BE COSTLY AND MAY NOT PRODUCE
SUCCESSFUL NEW PRODUCTS AND PRODUCT UPGRADES. Our future success will depend
upon our ability to enhance our current products and develop and introduce new
products on a timely basis, particularly if new technology or new industry
standards render any existing products obsolete. We believe that we will need to
incur significant research and development expenditures to remain competitive,
particularly because many of our competitors have substantially greater
resources. The products that we are currently developing or may develop in the
future may not be technologically successful or may not be accepted in our
market. In addition, the length of our product development cycle may be greater
than we expect. If the resulting products are not introduced in a timely manner,
or do not compete effectively with products of our competitors, our business
will be harmed.
DELAYS IN INTRODUCING UPGRADES TO OUR PRODUCTS MAY CAUSE US TO LOSE
CUSTOMERS TO OUR COMPETITORS OR HARM OUR REPUTATION. We attempt to maintain a
consistent release schedule for upgrades of existing products. Due to
uncertainties inherent in software development, it is likely that delays will
materialize from time to time in the future. We could lose customers as a result
of substantial delays in the shipment of product upgrades.
IF WE ARE UNABLE TO PROVIDE HIGH-QUALITY CUSTOMER SUPPORT AND SERVICES, WE
WILL NOT MEET THE NEEDS OF OUR CUSTOMERS AND REVENUE WILL NOT GROW AND MAY
DECLINE. For our business to succeed, we must effectively market and provide
customer support for SourceForge. If we do not develop our customer support
organization to meet the needs or expectations of customers, we face an
increased risk that customers will purchase software from other providers or
forgo deployment of collaborative software development applications entirely,
which would materially and adversely affect our operating results.
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.
PROMOTIONAL PRODUCT VERSIONS MAY ADVERSELY IMPACT OUR ACTUAL PRODUCT SALES.
Our marketing strategy relies in part on making elements of our technology
available for no charge or at a very low price. This strategy is designed to
expose our products to a broader customer base than to our historical customer
base and to encourage potential customers to purchase an upgrade or other full
priced products from us.
We may not be able to introduce enhancements to our full-price products or
versions of our products with intermediate functionality at a rate necessary to
adequately differentiate them from the promotional versions, which could reduce
sales of our products.
Risks Related To Our Online Business
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OUR ONLINE CONTENT AND SERVICES MAY NOT ACHIEVE CONTINUED ACCEPTANCE, WHICH
COULD ADVERSELY AFFECT OUR FINANCIAL RESULTS. Our future success depends upon
our ability to deliver original and compelling content and services that attract
and retain users. 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.
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
and sellers of technology products, 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. 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 softness of demand and minimal growth of marketing and advertising
budgets and delays in spending of budgeted resources. Because we derive a large
part of our revenues from advertising fees, the decrease in or delay 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.
WE CANNOT PREDICT OUR E-COMMERCE CUSTOMERS' PREFERENCES WITH CERTAINTY AND
SUCH PREFERENCES MAY CHANGE RAPIDLY. Our e-commerce offerings on our
ThinkGeek.com Web site are designed to appeal to IT professionals, software
developers and others in technical fields. If we misjudge either the market for
our products or our customers' purchasing habits, our sales may decline, our
inventories may increase or we may be required to sell our products at lower
prices. This 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. In order to be successful, we must accurately predict these trends 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. Our ability to receive inbound inventory efficiently or ship completed
orders to customers may be negatively affected by a number of factors, including
our dependence on a single third party contract fulfillment and warehouse
facility in Baltimore, Maryland to handle the majority of our ThinkGeek
e-commerce distribution and fulfillment operations and reliance upon third party
carriers for all of our product shipments.
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 ONLINE 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 future results will be adversely
affected.
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
2004. Since becoming a public
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company, we have experienced negative cash flow from operations and expect to
experience negative cash flow from operations for fiscal year 2004. 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 2004. While we believe we will not require
additional capital to fund continued operations during fiscal year 2004, 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
continued slowdown in technology or advertising spending as compared to the
general economy, 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.
IT IS DIFFICULT TO EVALUATE OUR BUSINESS BECAUSE WE HAVE A LIMITED HISTORY
OPERATING AS A PROVIDER OF APPLICATION SOFTWARE. We have a brief operating
history as a provider of SourceForge, our proprietary software application. As a
result, our historical financial information is of limited value in projecting
future operating results. On June 27, 2001, we announced our plan to exit our
hardware business. In the first quarter of our fiscal year 2002, we made the
strategic decision to exit, and exited, the hardware-related software
engineering and professional services fields to focus on SourceForge. These
changes required us to adjust our business processes and make a number of
significant personnel changes, including changes and additions to our
engineering and management teams. Therefore, in evaluating our business you must
consider the risks and difficulties frequently encountered by early stage
companies in new and rapidly evolving markets.
BECAUSE WE HAVE A LIMITED OPERATING HISTORY SELLING SOURCEFORGE, WE MAY NOT
ACCURATELY FORECAST OUR SALES AND REVENUES, WHICH WILL CAUSE QUARTERLY
FLUCTUATIONS IN OUR NET REVENUES AND RESULTS OF OPERATIONS. Our ability to
accurately forecast our quarterly software sales and revenue is made difficult
by our limited operating history with our new business direction and the
continued slowdown in technology spending. In addition, most of our operating
costs are fixed and based on our revenue expectations. Therefore, if we have a
shortfall in revenues, we may be unable to reduce our expenses quickly enough to
avoid lower quarterly operating results.
OUR QUARTERLY NET REVENUES AND RESULTS OF OPERATIONS MAY VARY SIGNIFICANTLY
IN THE FUTURE DUE TO A NUMBER OF FACTORS, MANY OF WHICH ARE OUTSIDE OF OUR
CONTROL. The primary factors that may cause our quarterly net revenues and
results of operations to fluctuate include the following:
o macroeconomic factors such as the general condition of the U.S.
economy;
o specific economic conditions relating to IT spending;
o demand for and market acceptance of our software and services;
o reductions in the sales price of our software or software offered
by our competitors;
o our ability to develop, introduce and market new versions of our
software and product enhancements that meet customer requirements
in a timely manner;
o the discretionary nature of our customers' purchase and budget
cycles;
o difficulty predicting the size and timing of customer orders;
o long sales cycles;
o our ability to develop and retain a skilled software sales force;
o introduction or enhancement of our products or our competitors'
products;
o an increase in our operating costs;
o whether we are able to expand our sales and marketing programs
for our software products;
o changes in accounting pronouncements applicable to us;
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o the timing of announcements and releases of new or enhanced
versions of our products and product upgrades;
o the market's transition between new releases of third party
operating systems on which our software products run;
o the possibility that software development delays will result from
our outsourcing of certain SourceForge research and development
efforts to Cybernet Software Systems, Inc., an independent
contractor located primarily in India;
o weak economic conditions relating to online advertising and
sponsorship, and e-commerce;
o the pricing of advertising on our network of Internet sites and
our competitors' Internet sites;
o the amount of traffic on our network of Internet sites;
o our ability to achieve, demonstrate and maintain attractive
online user demographics;
o our ability to develop and retain a skilled advertising and
sponsorship sales force;
o the demand for advertising or sponsorships;
o the addition or loss of specific advertisers or sponsors, and the
size and timing of advertising or sponsorship purchases by
individual customers;
o our ability to manage effectively our development of new business
opportunities and markets;
o our ability to upgrade and develop our systems and
infrastructure;
o our ability to keep our Web sites operational at a reasonable
cost;
o technical difficulties, system downtime, Internet brownouts or
denial of service or other similar attacks;
o consumer confidence in the safety and security of transactions on
our e-commerce Web sites; and
o disruption to our operations, employees, affiliates, customers
and facilities caused by international or domestic terrorist
attacks or armed conflict.
Due to all of the foregoing factors, any significant shortfall in revenues
in relation to planned expenditures could materially and adversely affect our
operating results and financial condition. 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 would 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 HAVE A MATERIAL IMPACT ON OUR BUSINESS. In October 1997, the AICPA issued
SOP No. 97-2, "Software Revenue Recognition" which superceded SOP No. 91-1. SOP
No. 97-2, as amended by SOP No. 98-4 and SOP No. 98-9, provides guidance on
applying generally accepted accounting principles for software revenue
recognition transactions. In December 1999, the SEC issued SAB No. 101, "Revenue
Recognition in Financial Statements," which provides further revenue recognition
guidance. We adopted SAB No. 101, as amended, and SOP No. 97-2, as amended by
SOP No. 98-4 and SOP No. 98-9 in the fourth quarter of fiscal 2001 as required.
The adoption of SAB No. 101 did not have a material effect on our consolidated
financial position, results of operations or cash flows. The accounting
profession continues to review certain provisions of SOP No. 97-2 and SAB No.
101 with the objective of providing additional guidance on implementing its
provisions. Depending upon the outcome of these reviews and the issuance of
implementation guidelines and interpretations, we may be required to change our
revenue recognition policies and business practices and such changes could have
a material adverse effect on our business, results of operations or financial
position.
WE HAVE A HISTORY OF LOSSES AND EXPECT TO CONTINUE TO INCUR NET LOSSES FOR
THE FORESEEABLE FUTURE. We incurred a loss of $2.4 million for our fiscal fourth
quarter ended July 31, 2003, and we had an accumulated deficit of $739.7 million
as of July 31, 2003. We expect to continue to incur significant product
development, sales and marketing and administrative expenses. We expect to
continue to incur net losses for at least the foreseeable future. If we do
achieve profitability,
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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.
DESPITE REDUCTIONS IN THE SIZE OF OUR WORKFORCE, OUR BUSINESS MAY FAIL TO
GROW RAPIDLY ENOUGH TO OFFSET OUR ONGOING OPERATING EXPENSES. During fiscal year
2001, we substantially reduced our workforce such that as of July 28, 2001 we
had 286 employees, down from 551 employees in January 2001. During fiscal years
2002 and 2003, we further reduced our workforce such that as of July 31, 2003 we
had 115 employees. Nevertheless, 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 AND OPERATING MARGINS WILL NOT GROW AND MAY DECLINE. 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 entrenched companies 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. 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
30
<PAGE>
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.
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 Business
WE MAY BE SUBJECT TO CLAIMS AS A RESULT OF INFORMATION PUBLISHED ON, POSTED
ON OR ACCESSIBLE FROM OUR INTERNET SITES. 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.
31
<PAGE>
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. 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 SOFTWARE
BUSINESS. Our ability to successfully offer our services and grow our software
business requires an effective planning and management process. Over the past
year, we have implemented or updated our operations and financial systems,
procedures and controls as we focused on our application software and online
businesses. 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 software and online 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. The trading price of our common stock has been and may continue to be
subject to wide fluctuations. During the fourth quarter of fiscal year 2003, the
closing sale prices of our common stock on the Nasdaq ranged from $0.88 to $2.49
per share and the closing sale price on September 30, 2003 was $4.12 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
32
<PAGE>
condition could be materially and adversely affected in the event of a major
earthquake, fire or other catastrophic event, such as the recent terrorist
attacks upon the United States. 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.
Item 7A. 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 and short-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 and
short-term investments (in thousands) that are subject to market risk and
weighted-average interest rates, categorized by expected maturity dates, as of
July 31, 2003. This table does not include money market funds because those
funds are not subject to market risk.
<TABLE>
<CAPTION>
Maturing Maturing within Maturing
Within three months three months to one year Greater than one year
(in thousands) ------------------- ------------------------ ---------------------
As of July 31, 2003
<S> <C> <C> <C>
Cash equivalents $3,401
Weighted-average interest rate 1.09%
Short-term investments $27,864
Weighted-average interest rate 2.40%
Long-term investments $4,680
Weighted-average interest rate 2.14%
</TABLE>
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.
33
<PAGE>
Item 8. Consolidated Financial Statements and Supplementary Data
TABLE OF CONTENTS
Page
----
Reports of Independent Public Accountants............................... 35
Consolidated Balance Sheets............................................. 37
Consolidated Statements of Operations and Other Comprehensive Loss...... 38
Consolidated Statements of Stockholders' Equity......................... 39
Consolidated Statements of Cash Flows................................... 40
Notes to Consolidated Financial Statements.............................. 41
All other schedules are omitted because they are not applicable, not
required, or because the required information is included in the consolidated
financial statements or notes thereto.
34
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
VA Software Corporation:
In our opinion, the accompanying consolidated financial statements listed in
the index appearing under Item 14(a)(1) on page 61 present fairly, in all
material respects, the financial position of VA Software Corporation and its
subsidiaries at July 31, 2003 and July 27, 2002, and the results of their
operations and their cash flows for each of the years ended July 31, 2003 and
July 27, 2002 in conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the financial statement
schedule for each of the years ending July 31, 2003 and July 27, 2002, listed in
the index appearing under Item 14(a)(2) on page 61 presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and financial statement schedule are the responsibility of the Company's
Management; our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audit. We conducted our
audit of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
The financial statements of VA Software Corporation as of and for the period
ended July 28, 2001 were audited by other independent accountants who have
ceased operations. These independent accountants expressed an unqualified
opinion on those financial statements in their report dated August 22, 2001.
As discussed in Note 1 to the consolidated financial statements, effective
July 29, 2001, the company changed its method of accounting for goodwill in
accordance with Statement of Financial Accounting Standards No.142, Goodwill and
Other Intangible Assets.
PricewaterhouseCoopers LLP
San Jose, California
August 20, 2003
35
<PAGE>
This is a copy of the audit report previously issued by Arthur Andersen LLP in
connection with VA Software Corporation's (Formerly VA Linux Systems, Inc.)
filing on Form 10-K for the year ended July 28, 2001. This audit report has not
been reissued by Arthur Andersen LLP in connection with this filing on Form
10-K. See Exhibit 23.2 for further discussion. The consolidated balance sheet as
of July 28, 2001 and July 28, 2000, the consolidated statements of operations,
stockholders' equity and cash flows for the years ended July 28, 2000 and July
31, 1999 and the information in the schedule for 2000 and 1999 referred to in
this report have not been included in the accompanying financial statements or
schedule.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Board of Directors and Stockholders of
VA Linux Systems, Inc.:
We have audited the accompanying consolidated balance sheets of VA Software
Corporation, formerly known as VA Linux Systems, Inc. (a Delaware corporation)
as of July 28, 2001 and 2000, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended July 28, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of VA Software Corp. as of July
28, 2001 and 2000, and the results of its operations and its cash flows for each
of the three years in the period ended July 28, 2001, in conformity with
accounting principles generally accepted in the United States.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in Item 14(a)2 is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
San Jose, California
August 22, 2001
36
<PAGE>
VA SOFTWARE CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share information)
<TABLE>
<CAPTION>
July 31, July 27,
2003 2002
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................................... $ 6,303 $ 35,148
Short-term investments....................................................................... 27,864 7,952
Restricted cash, current..................................................................... 450 450
Accounts receivable, net of allowances of $144 and $1,166, respectively...................... 1,928 764
Inventories.................................................................................. 388 300
Prepaid expenses and other assets............................................................ 1,232 877
------------ ------------
Total current assets................................................................. 38,165 45,491
Property and equipment, net.................................................................... 4,267 7,223
Goodwill and intangibles, net.................................................................. 21 2,169
Long-term investments.......................................................................... 4,680 9,946
Restricted cash, non current................................................................... 450 900
Other assets................................................................................... 912 1,239
------------ ------------
Total assets......................................................................... $ 48,495 $ 66,968
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable............................................................. $ -- $ 42
Accounts payable............................................................................. 863 2,075
Accrued restructuring liabilities, current portion........................................... 4,117 3,397
Accrued compensation......................................................................... 1,346 1,517
Deferred revenue............................................................................. 751 774
Accrued liabilities and other................................................................ 2,263 4,200
------------ ------------
Total current liabilities............................................................ 9,340 12,005
Accrued restructuring liabilities, net of current portion...................................... 10,772 14,597
Other long-term liabilities.................................................................... 1,181 978
------------ ------------
Total liabilities.................................................................... 21,293 27,580
Commitments and contingencies (Notes 5,6 and 7)
Stockholders' equity:
Common stock, $0.001 par value; authorized-- 250,000,000; issued and
outstanding-- 55,470,064 shares in 2003 and 54,165,411 shares in 2002..................... 56 54
Treasury stock............................................................................... (4) (4)
Additional paid-in capital................................................................... 766,765 765,422
Deferred stock compensation.................................................................. (20) (245)
Accumulated other comprehensive gain......................................................... 128 86
Accumulated deficit.......................................................................... (739,723) (725,925)
------------- -------------
Total stockholders' equity........................................................... 27,202 39,388
------------ ------------
Total liabilities and stockholders' equity........................................... $ 48,495 $ 66,968
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
37
<PAGE>
VA SOFTWARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME/(LOSS)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended
July 31, July 27, July 28,
Net revenues: 2003 2002 2001
------------ ------------ ----------
<S> <C> <C> <C>
Software revenues........................................................... $ 2,917 $ 1,086 $ --
Online revenues............................................................. 20,551 15,967 14,678
Other revenues.............................................................. 760 3,332 120,212
------------ ------------ ----------
Net revenues............................................................. 24,228 20,385 134,890
Cost of revenues:
Software cost of revenues................................................... 1,997 2,387 --
Online cost of revenues..................................................... 11,166 10,393 10,497
Other cost of revenues...................................................... (383) (3,119) 143,606
------------- ------------ ----------
Cost of revenues............................................................. 12,780 9,661 154,103
------------ ------------ ----------
Gross margin............................................................. 11,448 10,724 (19,213)
------------ ------------ ----------
Operating expenses:
Sales and marketing......................................................... 9,791 12,513 39,981
Research and development.................................................... 7,815 8,122 17,959
General and administrative.................................................. 6,455 10,850 22,012
Restructuring costs and other special charges............................... (263) 46,936 113,478
Amortization of deferred stock compensation................................. 144 1,671 61,268
Amortization of goodwill and intangible assets.............................. 1,910 11,730 97,887
Impairment of goodwill, intangible assets and other long-lived assets....... 239 12,150 160,000
Total operating expenses............................................ 26,091 103,972 512,585
------------ ------------ ----------
Loss from operations.......................................................... (14,643) (93,248) (531,798)
Interest income............................................................... 1,132 1,714 6,803
Interest expense.............................................................. (8) (32) (165)
Other income (expense), net................................................... (279) 528 (108)
------------ ------------ ----------
Net loss...................................................................... $ (13,798) $ (91,038) $ (525,268)
Other comprehensive loss:
Unrealized gain on marketable securities and investments................ 30 209 13
Foreign currency translation gain (loss)....................... 12 1,367 (1,456)
------------ ------------ ==========
Comprehensive loss............................................................ $ (13,756) $ (89,462) $ (526,711)
============ ============ ==========
Net loss...................................................................... $ (13,798) $ (91,038) $ (525,268)
============ ============ ==========
Basic and diluted net loss per share.......................................... $ (0.25) $ (1.72) $ (10.78)
============ ============ ==========
Shares used in computing basic and diluted net loss per share................. 54,110 53,064 48,741
============ ============ ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
38
<PAGE>
<TABLE>
<CAPTION>
Accumulated
Additional Deferred Other
Common Stock Treasury Paid-in Stock Comprehensive
Shares Amount Stock Capital Compensation Loss
------ ------ ----- ------- ------------ ----
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JULY 28, 2000 ........................... 51,904 $ 52 $ -- $ 763,175 $ (109,686) $ (47)
Issuance of common stock for cash related to options 2,522 3 -- 4,437 -- --
Repurchase of common stock for cash related to
options ............................................ (1,028) (1) (4) (268) -- --
Issuance of common stock to acquire businesses
Or assets .......................................... 721 -- -- 14,397 (6,757) --
Amortization of deferred stock compensation ........ -- -- -- -- 61,268 --
Acceleration and forfeiture of deferred stock
compensation related to terminations ............... -- -- -- (12,944) 49,067 --
Foreign currency translation adjustment and
unrealized gain or loss on marketable securities ... -- -- -- -- -- (1,443)
Net loss ........................................... -- -- -- -- -- --
------ ------ ------ ------- ------ ------
BALANCE AT JULY 28, 2001 ........................... 54,119 54 (4) 768,797 (6,108) (1,490)
Issuance of common stock for cash related to options 581 1 -- 402 -- --
Repurchase of common stock for cash related to
options ............................................ (535) (1) -- (16) -- --
Issuance of common stock to acquire businesses
Or assets .......................................... -- -- -- 1,313 (1,308) --
Acceleration of stock options....................... -- -- -- 74 -- --
Amortization of deferred stock compensation ........ -- -- -- (1,926) 3,597 --
Acceleration and forfeiture of stock options and
deferred stock compensation related to
terminations, restructuring ........................ -- -- -- (3,222) 3,574 --
Foreign currency translation adjustment and
unrealized gain or loss on marketable securities ... -- -- -- -- -- 1,576
Net loss ........................................... -- -- -- -- -- --
------ ------ ------ ------- ------ ------
BALANCE AT JULY 28, 2002 ........................... 54,165 54 (4) 765,422 (245) 86
Issuance of common stock for cash related to options 1,578 2 -- 1,442 -- --
Repurchase of common stock for cash related to
options ............................................ (273) -- -- (2) -- --
Amortization of deferred stock compensation ........ -- -- -- (76) 220 --
Acceleration and forfeiture of stock options and
deferred stock compensation related to
terminations, restructuring ........................ -- -- -- (21) 5 --
Foreign currency translation adjustment and
unrealized gain or loss on marketable securities ... -- -- -- -- -- 42
Net loss ........................................... -- -- -- -- -- --
BALANCE AT JULY 31, 2003 ........................... 55,470 $ 56 $ (4) $ 766,765 $ (20) $ 128
====== ====== ====== ======== ======= ======
</TABLE>
Total
Accumulated Stockholders
Deficit Equity
------- ------
BALANCE AT JULY 28, 2000 ........................... $ (109,619) $ 543,875
Issuance of common stock for cash related to options -- 4,440
Repurchase of common stock for cash related to
options ............................................ -- (273)
Issuance of common stock to acquire businesses
Or assets .......................................... -- 7,640
Amortization of deferred stock compensation ........ -- 61,268
Acceleration and forfeiture of deferred stock
compensation related to terminations ............... -- 36,123
Foreign currency translation adjustment and
unrealized gain or loss on marketable securities ... -- (1,443)
Net loss ........................................... (525,268) (525,268)
------- -------
BALANCE AT JULY 28, 2001 ........................... (634,887) 126,362
Issuance of common stock for cash related to options -- 403
Repurchase of common stock for cash related to
options ............................................ -- (17)
Issuance of common stock to acquire businesses
Or assets .......................................... -- 5
Acceleration of stock options....................... -- 74
Amortization of deferred stock compensation ........ -- 1,671
Acceleration and forfeiture of stock options and
deferred stock compensation related to
terminations, restructuring ........................ -- 352
Foreign currency translation adjustment and
unrealized gain or loss on marketable securities ... -- 1,576
Net loss ........................................... (91,038) (91,038)
------- -------
BALANCE AT JULY 28, 2002 ........................... (725,925) 39,388
Issuance of common stock for cash related to options -- 1,444
Repurchase of common stock for cash related to
options ............................................ -- (2)
Amortization of deferred stock compensation ........ -- 144
Acceleration and forfeiture of stock options and
deferred stock compensation related to
terminations, restructuring ........................ -- (16)
Foreign currency translation adjustment and
unrealized gain or loss on marketable securities ... -- 42
Net loss ........................................... (13,798) (13,798)
------- -------
BALANCE AT JULY 31, 2003 ........................... $ (739,723) $ 27,202
39
<PAGE>
VA SOFTWARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended
July 31, July 27, July 28,
2003 2002 2001
--------- ------------ --------
Cash flows from operating activities:
<S> <C> <C> <C>
Net loss....................................................................... $ (13,798) $ (91,038) $ (525,268)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization................................................ 5,351 16,153 102,786
Provision for bad debts...................................................... (19) (1,096) 3,968
Provision for excess and obsolete inventory.................................. (6) (4,378) 24,441
Loss on disposal of assets................................................... 35 1,422 9
Proportionate share of net losses in Japan investment........................ -- 2,012 --
Minority interest in Japan loss.............................................. -- (496) --
Gain on sale of Japan investment............................................. -- (12,872) --
Release of contingent shares in relation to OSDN acquisition ................ -- 1,313 --
Amortization of deferred stock compensation.................................. 144 1,671 61,268
Non-cash compensation expense................................................ -- 75 --
Non-cash restructuring expense............................................... (569) 36,426 101,237
Impairment of long-lived assets.............................................. 239 12,150 160,000
Changes in assets and liabilities:
Accounts receivable........................................................ (1,178) 10,439 17,635
Inventories................................................................ (82) 2,046 (23,783)
Prepaid expenses and other assets.......................................... 286 3,391 (3,195)
Accounts payable........................................................... (1,212) (12,244) (12,446)
Accrued restructuring liabilities.......................................... (3,105) 8,481 9,513
Accrued liabilities and other.............................................. (2,098) (8,159) 1,388
Other long-term liabilities................................................ 203 (388) 814
------------ ------------- -----------
Net cash used in operating activities................................... (15,809) (35,092) (81,633)
------------- ------------- -----------
Cash flows from investing activities:
Change in restricted cash...................................................... 450 1,509 (609)
Purchase of property and equipment............................................. (289) (417) (14,750)
Sale of property and equipment................................................. 8 -- --
Purchase of marketable securities.............................................. (34,335) (32,917) (80,329)
Sale of marketable securities.................................................. 19,688 37,829 110,167
Businesses acquired, net of cash acquired...................................... -- -- 4,627
Cash proceeds on sale of Japan investment...................................... -- 5,059 --
Purchase of other long-lived assets............................................ -- -- (1,929)
Other, net..................................................................... 30 209 161
------------ ------------ -----------
Net cash provided by (used in) investing activities..................... (14,448) 11,272 17,338
------------- ------------ -----------
Cash flows from financing activities:
Payments on notes payable...................................................... (42) (273) (2,527)
Proceeds from issuance of common stock......................................... 1,444 403 4,440
Repurchase of common stock..................................................... (2) (17) (273)
------------- ------------- -----------
Net cash provided by financing activities............................... 1,400 113 1,640
------------ ------------ -----------
Effect of exchange rate changes on cash and cash equivalents.................... 12 1,367 (1,456)
------------ ------------ -----------
Net decrease in cash and cash equivalents....................................... (28,845) (22,340) (64,111)
------------- ------------- -----------
Cash and cash equivalents, beginning of year.................................... 35,148 57,488 121,599
------------ ------------ -----------
Cash and cash equivalents, end of year.......................................... $ 6,303 $ 35,148 $ 57,488
============ ============ ===========
Supplemental cash flow information:
Cash paid for state taxes....................................................... $ 16 $ 18 $ 335
Cash paid for interest.......................................................... $ 8 $ 32 $ 165
Supplemental non-cash flow information:
Issuance of common stock to acquire businesses................................... $ -- $ -- $ 14,397
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
40
<PAGE>
VA SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Operations of the Company:
Overview
We were incorporated in California in January 1995 and reincorporated in
Delaware in December 1999. We develop, market and support a software application
known as SourceForge Enterprise Edition ("SourceForge") and also own and operate
the Open Source Development Network, Inc. ("OSDN"), a network of Internet Web
sites.
SourceForge is proprietary software designed for corporate and
public-sector information technology ("IT") professionals and software
engineering organizations. SourceForge is a Web-based application that enables
IT and software engineering organizations to manage application development more
effectively. SourceForge combines software development and collaboration tools
with the ability to track, measure, and report on software project activity in
real-time. With SourceForge, developers and project managers gain access to the
information they need to reduce risk and become more productive. SourceForge is
a relatively new product and additional development and enhancements are
expected in the future.
OSDN is a network of media and e-commerce Internet sites serving the Open
Source, developer and IT communities, and media sites serving Web designers and
consumers. OSDN sites, including SourceForge.net, Slashdot.org, Linux.com,
NewsForge.com, DevChannel.org, and Freshmeat.com collectively receive more than
180 million page views, and more than 10 million unique visitors, every month
2. Summary of Significant Accounting Policies:
Use of Estimates in Preparation of Consolidated Financial Statements
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted by the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of such financial statements, as well as the reported
amounts of revenue and expenses during the periods indicated. Actual results
could differ from those estimates.
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.
Principles of Consolidation
These consolidated financial statements include the accounts of VA and its
wholly-owned and majority-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 a result of this sale, the Company recorded a $0.4 million gain, which
is included in other income in the Company's consolidated statements of
operations. On March 29, 2002, VA Linux Japan repurchased 10,000 shares of its
outstanding stock from a third party other than the Company, thereby decreasing
the number of shares outstanding and increasing the Company's investment to
approximately 19%. 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. The
minority interest included in the results of operations for VA Linux Japan has
not been material for any period presented and has been recorded in other income
in the accompanying statements of operations. The operations of VA Linux Japan
primarily relate to our former systems and services business.
Foreign Currency Translation
41
<PAGE>
The functional currency of all the Company's foreign subsidiaries is the
country's local currency. Balance sheet accounts are translated into U.S.
dollars at exchange rates prevailing at balance sheet dates. Revenue and
expenses are translated into U.S. dollars at average rates for the period. Gains
and losses resulting from translation are charged or credited in comprehensive
income as a component of stockholders' equity. As of July 31, 2003 the Company
did not hold any foreign currency derivative instruments.
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. During fiscal 2001, the Company had
two reportable business segments for revenue: systems and services and OSDN. The
Company allocated its resources and evaluated performance of its separate
segments based on revenue. As a result of the Company's decision to exit the
systems business in the fourth quarter of fiscal 2001 and focus on its software
application business, during fiscal 2002 the Company operated as one business
segment, providing application software products and related OSDN products and
services. During the fourth quarter of fiscal 2003, two separate businesses
emerged and as of July 31, 2003, we operate as two reportable business segments:
software and online. Due to the significant amount of shared operating resources
that are utilized by both of the business segments, the Company only reports
segment information for revenues and cost of sales.
The Company marketed its products in the United States through its direct
sales force. Revenues for each of the years ended July 31, 2003, July 27, 2002
and July 28, 2001 were primarily generated from sales to end users in the United
States.
Cash, Cash Equivalents, Short-Term Investments and Long-Term Investments
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. Cash and cash
equivalents consist principally of cash deposited in money market and checking
accounts.
The Company accounts for its investments under the provisions of SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities."
Investments in highly liquid financial instruments with remaining maturities
greater than three months and maturities of less than one year are classified as
short-term investments. Financial instruments with remaining maturities greater
than one year are classified as long-term investments. All investments are
classified as available-for-sale and are reported at fair value with net
unrealized gains (losses) reported, net of tax, using the specific
identification method as other comprehensive gain/(loss) in stockholders'
equity. The cost of the investments was not significantly different than the
fair value for the fiscal years presented. The fair value of the Company's
available-for-sale securities are based on quoted market prices at the balance
sheet dates.
Cash equivalents and investments consist of the following (in thousands) at
market value:
July 31, July 27,
2003 2002
---- ----
Government obligations........................... $ 10,001 $ 22,319
Corporate obligations............................ 21,148 6,431
Commercial paper................................. 4,796 598
-------- --------
Total.................................. $ 35,945 $ 29,348
======== ========
Included in cash, cash equivalents.............. $ 3,401 $ 11,450
Included in short-term investments.............. 27,864 7,952
Included in Long-term investments............... 4,680 9,946
-------- --------
Total................................. $ 35,945 $ 29,348
======== ========
Restricted Cash
42
<PAGE>
During fiscal year 2000, the Company established letters of credit of
approximately $2.3 million that are used to collateralize payments related to
the Fremont building lease. As of July 31, 2003 and July 27, 2002, the Company
had approximately $0.9 million and $1.4 million, respectively, of restricted
cash related to this building lease.
Inventories
Inventories related to our online operations consist of finished goods are
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.
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):
<TABLE>
<CAPTION>
July 31, July 27,
2003 2002
---- ----
<S> <C> <C>
Computer and office equipment (useful lives of 2 to 3 years)................... $ 6,238 $ 6,295
Furniture and fixtures (useful lives of 2 to 4 years).......................... 2,209 2,464
Leasehold improvements (useful lives of lesser of estimated life or lease term) 3,762 3,748
Software (useful lives of 2 to 5 years) ...................................... 2,090 2,016
--------- ---------
Total property and equipment......................................... 14,299 14,523
Less: Accumulated depreciation and amortization................................ (10,032) (7,300)
---------- ---------
Property and equipment, net.......................................... $ 4,267 $ 7,223
========= =========
</TABLE>
Depreciation expense for the years ended July 31, 2003, July 27, 2002, and
July 28, 2001 was $3.2 million, $4.4 million, and $4.9 million, respectively.
Goodwill and Intangibles and Impairment of Long-Lived Assets
In connection with the acquisitions of TruSolutions, Inc. ("TruSolutions"),
Precision Insight, Inc. ("Precision Insight"), NetAttach, Inc. ("NetAttach"),
and OSDN (formerly known as "Andover.Net, Inc."), the Company recorded $381.3
million of goodwill and intangibles during fiscal 2000. The Company amortized
$97.9 million of goodwill and intangibles in fiscal 2001. In connection with the
restructuring plans in fiscal year 2001, the Company wrote off goodwill and
intangibles associated with BNW, Life, Alabanza (companies previously acquired
prior to fiscal year 2000) and TruSolutions in the amount of $59.7 million as
the Company had exited these lines of business and expected no future cash
flows. In connection with the Company's restructuring plans in fiscal year 2002,
the Company wrote off goodwill and intangibles associated with NetAttach, and
Precision Insight in the amount of $30.6 million due to the exit of the
professional services and Linux software engineering businesses.
The Company continually evaluates whether events and circumstances have
occurred that indicate the remaining estimated useful life of long-lived assets
may warrant revision or that the remaining balance of long-lived assets may not
be recoverable in accordance with SFAS No. 144, "Accounting for Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of." When factors
indicate that long-lived assets should be evaluated for possible impairment, the
Company uses an estimate of the related undiscounted future cash flows over the
remaining life of the long-lived assets in measuring whether they are
recoverable. If the estimated undiscounted future cash flows exceed the carrying
value of the asset, a loss is recorded as the excess of the asset's carrying
value over fair value. Long-lived assets and certain identifiable intangible
assets to be disposed of are reported at the lower of carrying amount or fair
value less costs to sell. See Note 4 for details on impairment charges
recognized during fiscal years 2002 and 2001.
The Company performed an assessment of the carrying value of its long-lived
assets to be held and used including significant amounts of goodwill and other
intangible assets recorded in connection with the Company's OSDN acquisition at
July 28, 2001. The Company performed the assessment pursuant to SFAS No. 144 due
to the significant slowdown in the economy affecting current operations and
expected future sales, as well as the general decline of technology valuations.
The conclusion of that assessment was that the decline in market conditions
within the industry was significant and other than temporary. As a result, the
Company recorded during the fourth quarter of fiscal year 2001 a charge of
$160.0 million to reduce goodwill and other intangible assets associated with
the acquisition of OSDN, based on the amount by which the carrying value of
these assets exceeded their fair value. The charge is
43
<PAGE>
included in the caption "Impairment of long-lived assets" in the consolidated
statements of operations. Fair value was determined based on discounted future
cash flows.
Effective July 29, 2001, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible assets." Upon adoption of SFAS No. 142, the Company no longer
amortized goodwill. Pursuant to SFAS No. 142, the Company tests goodwill for
impairment. SFAS 142 requires that goodwill be tested for impairment at the
"reporting unit level" ("Reporting Unit") at least annually and more frequently
upon the occurrence of certain events, as defined by SFAS No. 142. During the
quarter ended July 27, 2002 goodwill was tested for impairment and the Company
determined that it had only one Reporting Unit, providing application software
products and related OSDN products and services. First, the Company determined
whether its carrying amount exceeded its "fair value", which would indicate that
goodwill may be impaired. Based on this test, the Company determined that
goodwill could be impaired. Therefore, the Company compared the "implied fair
value" of goodwill, as defined by SFAS No. 142, to its carrying amount to
determine whether there was an impairment loss. As a result of the impairment
test, the Company determined that the carrying value was impaired and it
recorded an impairment loss of $3.6 million. The charge is included in the
caption "Impairment of long-lived assets" in the statements of operations. There
was no carrying value associated with goodwill at July 31, 2003 to be tested for
impairment.
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 factors 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. An
evaluation was performed on the intangible assets during the quarter ended July
27, 2002. As a result of this evaluation, the Company determined that the
carrying value was impaired and an impairment loss was recorded for $8.6
million. The charge is included in the caption "Impairment of goodwill,
intangible assets and other long-lived assets" in the statements of operations.
No events or circumstances occurred during the fiscal year ended July 31, 2003
that would indicate a possible impairment in the carrying value of intangible
assets at July 31, 2003.
The changes in the carrying amount of the goodwill and intangible assets are
as follows (in thousands):
<TABLE>
<CAPTION>
As of July 31, 2003 As of July 27, 2002
------------------------------ -----------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Domain and trade ................................... $ 5,922 $ (5,901) $ 5,922 $ (4,457)
names...............................................
Purchased technology................................ 2,534 (2,534) 2,534 (1,830)
------------ ------------ ------------ -----------
Total intangible assets....................... 8,456 (8,435) 8,456 (6,287)
Goodwill............................................ 60,362 (60,362) 60,362 (60,362)
------------ ------------ ------------ -----------
Total changes in Goodwill and intangible assets......... $ 68,818 $ (68,797) $ 68,818 $ (66,649)
============ ============ ============ ===========
</TABLE>
The aggregate amortization expense of intangible assets, net of
restructuring charges was $2.1 million and $11.7 million for the fiscal years
ending July 31, 2003 and July 27, 2002, respectively. The estimated total
amortization expense of acquired intangible assets is $12,700 and $8,500 for the
fiscal years ending 2004 and 2005, respectively, at which point intangible
assets will be fully amortized.
The changes in the net carrying amount of goodwill for the years ended July
31, 2003, and July 27, 2002 are as follows (in thousands):
July 31, July 27,
2003 2002
---------- -----------
Balance as of July................. $ -- $ 49,114
Amortization in the period......... -- --
Goodwill additions................. -- 45
Write-off of goodwill.............. -- (49,159)
---------- -----------
Balance as of July................. $ -- $ --
========== ===========
44
<PAGE>
Revenue Recognition
Software Revenues
Revenues from software license agreements follows American Institute of
Certified Public Accountants ("AICPA") Statement of Position ("SOP") 97-2, are
recognized when objective, persuasive evidence of an agreement exists, delivery
of the product has occurred, provided the arrangement does not require
significant customization of the software, the fee is fixed or determinable and
collectibility is probable.
For perpetual licenses, the Company uses the residual method to recognize
revenues. 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 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. A typical perpetual license
agreement may include professional services, maintenance and training. Revenue
from non-essential professional services is recognized as the work is performed
based on fair value. When an agreement includes professional services that are
significant or essential to the functionality of the software, the Company uses
the percentage of completion contract accounting method for the entire
arrangement, including license fees. Maintenance revenues are recognized ratably
over the term of the maintenance period (generally one year). Software
maintenance agreements provide technical support and the right to unspecified
updates/upgrades on an if-and-when-available basis. Fair value for the ongoing
maintenance obligations are based upon separate sales or maintenance sold to
customers or upon renewal rates quoted in the contract, when these exist. The
unrecognized portion of amounts paid in advance for licenses and services are
recorded as deferred revenue.
For term arrangements, which include licenses and bundled post-contract
support ("PCS"), the Company uses ratable revenue recognition. Under ratable
revenue recognition, the only undelivered element is PCS and objective evidence
of fair value of PCS does not exist. If the term license agreement includes
multiple elements (such as training and non-essential professional services),
then the Company defers revenue until all elements except PCS are delivered, at
which time revenue is recognized ratably over the remaining contract term.
If the fee due from the customer is not fixed or determinable, the Company
recognizes revenues at the earlier of the due date or when cash is received from
the customer, assuming all other revenue recognition criteria have been met. If
a significant portion of the fee is due after 120 days, the Company considers
the fee not to be fixed or determinable.
Online Revenues
Advertising revenues are derived from the sale of advertising space on our
various Web sites. Advertising revenues are recognized over the period in which
the advertisements are displayed, provided that no significant obligations
remain and collection of the receivable is reasonable assured. Our obligations
typically include guarantees of a minimum number of "impressions" (times that an
advertisement is viewed by users of our online services over a specified period
of time). To the extent that minimum guaranteed impressions are not met, the
Company does not recognize the corresponding revenues until the guaranteed
impressions are achieved. Barter revenue transactions which totaled $2,000,000,
2,000,000 and 2,400,000 for the fiscal years ended July 31, 2003, July 27, 2002
and July 28,2001, respectively, are recorded at their estimated fair value based
on the Company's 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 broadcasts banner advertising
in exchange for similar banner advertising on third party Web sites.
E-commerce revenues are derived from the online sale of consumer goods and
digital animations. E-commerce revenues from the sale of consumer goods are
recognized in accordance with SEC Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition in Financial Statements." Under SAB 101, 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 majority of the revenues derived from
digital animation sales are related to membership arrangements. As a result, we
recognize the value ratably over the term of the contract, normally 3 or 12
months
Other Revenues
The Company's revenue recognition policy related to its former hardware
systems business follows SEC SAB No. 101, "Revenue Recognition in Financial
Statements." Under SAB No. 101, the Company recognized product revenues from the
sale of Linux-based
45
<PAGE>
servers, components, and desktop computers when persuasive evidence of an
arrangement existed, delivery occurred, the sales price is fixed or determinable
and collectibility is reasonably assured. In general, the Company recognizes
product revenue upon shipment of the goods. The Company does not grant customers
any rights to return these products.
The Company recognizes revenues from customer support services, including
on-site maintenance and technical support on a pro-rata basis over the term of
the related service agreement. The Company recognizes revenues from professional
service contracts upon completion of the project, or using the percentage of
completion method of the project where project costs could be reasonably
estimated. The Company records any payments received prior to revenue
recognition as deferred revenue.
Advertising Expenses
The Company expenses advertising costs as incurred. Total advertising
expenses were $2.5 million, $2.7 million and $8.3 million for fiscal years
ending July 31, 2003, July 27, 2002 and July 28, 2001, respectively.
Stock-Based Compensation
The Company accounts 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 ("FIN") No. 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 No. 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 fiscal years ended July 31, 2003, July 27, 2003 and July 28, 2003 the
Company's pro forma net loss and net loss per share would have been as follows
(in thousands, except per share amounts):
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------
July 31, July 27, July 28,
2003 2002 2001
-------- --------- ---------
<S> <C> <C> <C>
Net loss as reported ............................................. ($13,798) ($ 91,038) ($525,268)
Add back employee stock-based compensation expense related to
stock options included in reported net loss .................. 144 1,671 61,268
Less employee stock-based compensation expense determined under ..
fair value based method for all employee stock option awards,
-------- --------- ---------
net of related tax effects ..................................... (8,774) (10,590) (20,332)
-------- --------- ---------
Pro forma net loss ............................................ ($22,428) ($ 99,957) ($484,332)
Basic and diluted net loss per share .......................... ($ 0.25) ($ 1.72) ($ 10.78)
-------- --------- ---------
Pro forma basic and diluted net loss per share ................... ($ 0.41) ($ 1.88) ($ 9.94)
-------- --------- ---------
</TABLE>
46
<PAGE>
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:
<TABLE>
<CAPTION>
Stock option Plans ESPP Plans
For the fiscal year ended For the fiscal year ended
--------------------------- ---------------------------------
July 31, July 27, July 28, July 31, July 27, July 28,
2003 2002 2001 2003 2002 2001
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Expected life (years) . 4.8 4 4 0.5 0.5 0.6
Risk-free interest rate 3% 3.7% 5.1% 1.1% 2.4% 5.2%
Volatility ............ 108% 100% 100% 95% 100% 100%
Dividend yield ........ None None None None None None
</TABLE>
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 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.
Computation of Per Share Amounts
In accordance with SFAS No. 128, 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 years
ended July 31, 2003, July 27, 2002 and July 28, 2001, 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.
The following table presents the calculation of basic and diluted net loss
per share (in thousands, except per share data):
<TABLE>
<CAPTION>
Year Ended
-----------------------------------------
July 31, July 27, July 28,
2003 2002 2001
--------- --------- ---------
<S> <C> <C> <C>
Net loss ...................................................... $ (13,798) $ (91,038) $(525,268)
========= ========= =========
Basic and diluted:
Weighted average shares of common stock outstanding ......... 54,117 53,290 51,410
Less: Weighted average shares subject to repurchase ......... (7) (226) (2,669)
--------- --------- ---------
Shares used in computing basic and diluted net loss per share 54,110 53,064 48,741
========= ========= =========
Basic and diluted net loss per share ........................ $ (0.25) $ (1.72) $ (10.78)
========= ========= =========
</TABLE>
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):
<TABLE>
<CAPTION>
Year Ended
-------------------------------------
July 31, July 27, July 28,
2003 2002 2001
------------ ------------ --------
<S> <C> <C> <C>
Anti-dilutive securities:
Options to purchase common stock................... 9,433 12,308 10,834
Common stock subject to repurchase................. -- 29 923
----------- ------------ --------
Total Anti-dilutive securities.......................... 9,433 12,337 11,757
=========== =========== =======
</TABLE>
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.
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Income Taxes
The Company accounts for income taxes using the liability method in
accordance with SFAS No. 109, "Accounting for Income Taxes". Due to the
Company's loss position in fiscal years 2003, 2002 and 2001, there was no
provision for income taxes for the years ended July 31, 2003, July 27, 2002 and
July 28, 2001. Deferred tax assets are recognized for anticipated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and their respective tax bases. A valuation
allowance has been recorded for the total deferred tax assets as management
believe it is more likely than not that these assets will not be realized as a
result of uncertainties regarding realization of the assets based on the lack of
profitability to date and the uncertainty of future profitability.
Recent Accounting Pronouncements
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which addresses accounting for
restructuring and similar costs. SFAS No. 146 supercedes previous accounting
guidance, principally EITF issue No. 94-3. The Company is required to adopt SFAS
No. 146 for restructuring activities initiated after December 31, 2002. SFAS No.
146 requires that the liability for costs associated with an exit or disposal
activity be recognized when the liability is incurred. Under EITF 94-3, a
liability for an exit cost was recognized at the date of the company's
commitment to an exit plan. SFAS No. 146 also established that the liability
should initially be measured and recorded at fair value. Accordingly, SFAS No.
146 may affect the timing of recognizing future restructuring plans. If the
Company continues to record significant restructuring charges in the future, the
adoption of SFAS No. 146 could have a significant impact on its results of
operations.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." FIN No. 45 requires that a liability be
recorded in the guarantor's balance sheet upon issuance of a guarantee or
indemnification. In addition, FIN No. 45 requires disclosures about the
guarantees that an entity has issued, including a reconciliation of changes in
the entity's product warranty liabilities. The initial recognition and initial
measurement provisions of FIN No. 45 are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002, irrespective of the
guarantor's fiscal year-end. The disclosure requirements of FIN No. 45 are
effective for financial statements of interim or annual periods ending after
December 15, 2002. The adoption of FIN No. 45 has not had a material effect on
these consolidated financial statements.
In November 2002, the Emerging Issues Task Force ("EITF") reached a
consensus regarding EITF Issue 00-21, Accounting for Revenue Arrangements with
Multiple Deliverables. The consensus addresses not only when and how an
arrangement involving multiple deliverables should be divided into separate
units of accounting but also how the arrangement's consideration should be
allocated among separate units. The pronouncement is effective for VA Software
commencing with its fiscal year 2004 and is not expected to have a material
impact on VA Software's consolidated results of operations or financial
position.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure -- an amendment of FASB Statement No.
123." This Statement amends FASB SFAS No. 123, "Accounting for Stock-Based
Compensation,", to provide alternative methods of transition for an entity that
voluntarily changes to the fair value based method of accounting for stock-based
employee compensation. SFAS No. 148 also requires that disclosures of the pro
forma effect of using the fair value method of accounting for stock-based
employee compensation be displayed more prominently and in a tabular format.
Additionally, SFAS No. 148 requires disclosures of the pro forma effect in
interim financial statements. The transition and annual disclosure requirements
of SFAS No. 148 are effective for fiscal years ended after December 15, 2002.
The interim disclosure requirements are effective for interim periods beginning
after December 15, 2002. The Company has chosen to continue to account for
stock-based compensation using the intrinsic value method prescribed in APB
Opinion No. 25 and related interpretations. Accordingly, compensation expense
for stock options is measured as the excess, if any, of the estimate of the
market value of the Company's stock at the date of the grant over the amount an
employee must pay to acquire its stock. The Company adopted the interim
disclosure provisions for our financial reports during the quarter ended April
26, 2003 and has adopted the annual disclosure provisions of SFAS No. 148 in our
financial reports for the fiscal year ended July 31, 2003. As the adoption of
this standard involves disclosures only, it has not had a material impact on our
consolidated financial statements.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51." Generally, a variable
interest entity ("VIE") is a corporation, partnership, trust or any other legal
structure used for business purposes that either does not have equity investors
with substantive voting rights or has equity investors that do not provide
sufficient financial
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resources for the entity to support its activities. A VIE often holds financial
assets and may be passive or it may engage in such activities as research and
development or other activities on behalf of another company. FIN No. 46
requires that a VIE be consolidated by a company if that company is subject to a
majority of the VIE's risk of loss or entitled to receive a majority of the
VIE's residual returns or both. A company that consolidates a VIE is referred to
as the primary beneficiary of that entity. The consolidation requirements of FIN
No. 46 apply immediately to VIEs created after January 31, 2003. The
consolidation requirements apply to entities existing prior to January 31, 2003
in the first fiscal year or interim period beginning after June 15, 2003.
Certain of the disclosure requirements apply in all financial statements issued
after January 31, 2003 regardless of when the VIE was established. The Company
has adopted the disclosure provisions and will adopt the consolidation
requirements as of August 1, 2003. The adoption of the consolidation
requirements of FIN No. 46 did not have a significant impact on our consolidated
financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 addresses certain financial instruments that, under previous guidance,
could be accounted for as equity, but now must be classified as liabilities in
statements of financial position. These financial instruments include: 1)
mandatory redeemable financial instruments, 2) obligations to repurchase the
issuer's equity shares by transferring assets, and 3) obligations to issue a
variable number of shares. SFAS No. 150 is effective for all financial
instruments entered into or modified after May 31, 2003, and otherwise effective
at the beginning of the first interim period beginning after June 15, 2003. The
implementation of SFAS No. 150 is not expected to have a material effect on the
Company's consolidated financial statements.
Supplier Concentration
Prior to exiting the hardware systems business in fiscal year 2001, the
Company was dependent on a single contract manufacturer for substantially all of
its manufacturing and supply chain management, including component procurement
and inventory management for its systems and services segment. Beginning July
29, 2001, under the software application business, no supplier concentration
exists.
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.
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. As of July 31, 2003, no gross
accounts receivables were concentrated with one customer. As of July 27, 2002
approximately 40% of gross accounts receivables were concentrated with one
customer, Lavaca Systems, Inc. A reserve representing 100% of the gross accounts
receivable related to this customer has been established.
For the fiscal year ended July 31, 2003, one customer, Intel Corporation,
accounted for approximately 17% of net revenues. For the fiscal year ended July
27, 2002, one customer, Intel Corporation, accounted for approximately 20% of
net revenues. For the fiscal year ended July 28, 2001, one customer, Akamai
Technologies, Inc., accounted for approximately 25% of net revenues. Going
forward, the company does not anticipate that anyone customer will represent
more than 10% of net revenues.
3. Acquisitions and Divestitures
There were no acquisitions or divestitures during the fiscal years ended
2003 and 2002. During the fiscal year ended July 28, 2001, the Company completed
a number of acquisitions accounted for using the purchase method and as such,
the purchase price was allocated to the assets acquired and the liabilities
assumed based on estimated fair values on the date of acquisition. The
consolidated financial statements include the operating results of each business
from the date of acquisition. Amounts allocated to goodwill and purchased
intangible assets have been amortized on a straight-line basis over three to
five years through July 28, 2001. As of July 29, 2001, in accordance with SFAS
No. 142, "Goodwill and Other Intangible assets," the Company no longer amortizes
goodwill. Other intangible assets continue to be amortized on a straight-line
basis over three to five years.
Brave New Worlds, Inc.
On September 26, 2000, in an acquisition accounted for under the purchase
method of accounting, the Company acquired all of the outstanding shares of
Brave New Worlds, Inc. ("BNW") for approximately $2.5 million. The consideration
included approximately 35,000 shares of the Company's common stock with a fair
market value of $1.7 million based on the average closing price for three days
prior to the acquisition closing date and cash of approximately $750,000. The
purchase agreement contained additional
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payments to be made in common stock that were solely contingent upon the
continued employment of certain key employees for a period of four years.
Maximum future payments contingent on employment of the key employees was to be
$4.8 million in stock (approximately 97,000 shares) and was payable after 12
months, 24 months, 36 months and 48 months. The contingent payments were
accounted for as compensation expense on a pro rata basis over the term of the
employment condition and not as purchase price. Upon consummation of the
acquisition, the Company established an escrow for these contingent payments.
The disclosures of the allocation of purchase price and pro forma data have been
omitted as the amounts are not material. In February 2001, in response to the
general slowdown in the economy, the Company adopted a plan to reduce operating
costs. The plan involved the divestiture of the managed services business,
including the recently acquired BNW. Charges were recorded to write down the net
book value of the BNW net assets acquired to the Company's estimate of proceeds
to be received on the sale of the business, which was estimated to be nominal.
In addition, compensation expense of $1.4 million was recorded for the
acceleration of a portion of the contingent consideration related to severance
arrangements made with terminated BNW employees. The sale of BNW was completed
on June 10, 2001 for minimal proceeds. The charges associated with this
divestiture have been recorded as restructuring costs and other special charges
in the statement of operations (see Note 4).
Life BVBA
On September 29, 2000, in an acquisition accounted for under the purchase
method of accounting, the Company acquired all of the outstanding shares of Life
BVBA ("Life") for approximately $860,000. The consideration included
approximately 14,000 shares of the Company's common stock with a fair market
value of $660,000 based on the average closing price for three days prior to the
acquisition closing date and cash of approximately $200,000. The purchase
agreement contained additional payments to be made in common stock that were
solely contingent upon the continued employment of certain key employees for a
period of four years. Maximum future payments contingent on employment of the
key employees were capped at $2.0 million in stock (approximately 43,000 shares)
and was originally payable after 12 months, 24 months, 36 months and 48 months.
Upon consummation of the acquisition, the Company established an escrow for
these contingent payments. The disclosures of the allocation of purchase price
and pro forma data have been omitted as the amounts are not material. In
February 2001, in response to the general slowdown in the economy, the Company
adopted a plan to reduce operating costs. The plan involved the divestiture of
the managed services business, including the recently acquired Life. The sale of
Life was completed on April 25, 2001 for minimal proceeds. In addition,
compensation expense of $1.3 million was recorded for the acceleration of the
contingent consideration related to severance arrangements made with terminated
Life employees. The charges associated with this divestiture have been recorded
as restructuring costs and other special charges in the statement of operations
(see Note 4).
Help Desk Facility
On November 27, 2000, the Company acquired certain assets of Alabanza
Corporation ("Alabanza") for approximately $3.6 million. The consideration
included 224,090 shares of the Company's common stock valued at $2.6 million and
cash of approximately $950,000. The agreement contained no additional contingent
payments, options or commitments. In February 2001, in response to the general
slowdown in the economy, the Company adopted a plan to reduce operating costs.
In connection with these actions, the plan involved the divestiture of its
managed services business, including the help desk facility recently acquired
from Alabanza. Charges were recorded to write down the net book value of
intangible assets to the Company's estimate of proceeds to be received on the
sale of the assets, which was estimated to be nominal. The divestiture of
Alabanza was completed on July 10, 2001 for approximately $0.5 million, which
has been fully reserved for during restructuring. The charges associated with
this divestiture were recorded as restructuring costs and other special charges
in the statements of operations (see Note 4).
Software Technology
On December 7, 2000, the Company acquired certain assets of Lavaca Systems,
Inc. ("Lavaca") for approximately $3.6 million. The consideration included
306,122 shares of the Company's common stock valued at $2.6 million and cash of
approximately $1.0 million. The agreement contained no additional contingent
payments, options or commitments. Purchased intangible assets included
intellectual property and technology related to specific software applications
of approximately $3.6 million. During the fourth quarter of fiscal 2001, charges
were recorded to write down the net book value of intangible assets to the
Company's estimate of proceeds to be received on the sale of the assets. The
divestiture of Lavaca was completed in the first quarter of fiscal 2002 for
minimal proceeds. The charges associated with this write-down have been recorded
as restructuring costs and other special charges in the statements of operations
(see Note 4).
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4. Restructuring Costs and Other Special Charges
In fiscal 2001 and 2002, the Company adopted plans to exit the 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 software and
online businesses and reduce its operating losses to improve cash flow. The
Company recorded restructuring charges of $180.2 million related to exiting
these activities, $160.4 million of which was included in restructuring charges
and other special charges in operating expenses and $19.8 million of which was
included in cost of sales. Included in the restructuring were charges related to
excess facilities from non-cancelable leases (with payments continuing until
fiscal 2010, unless sublet completely). The accrual from non-cancelable lease
payments includes management's estimates of sublease income. These estimates are
subject to change based on actual events. The Company evaluates and updates, if
applicable, these estimates quarterly. As of July 31, 2003, the Company had an
accrual of approximately $14.5 million outstanding related to these
non-cancelable leases, all of which was originally included in operating
expenses.
The Company recorded a net restructuring credit of $0.3 million for the
fiscal year ended July 31, 2003. This included $0.4 million of additional
charges related to existing excess facilities as a result of the termination of
a subtenant lease and $0.3 million of charges associated with the Company's
fiscal 2002 plan to reduce its general and administrative overhead costs, net of
$1.0 million credit adjustments to previously recorded restructuring reserves.
As of July 31, 2003, the Company had an accrual of $0.4 million related to these
charges.
In addition to the above, the Company recorded a $0.4 million net credit in
cost of revenues in the consolidated statement of operations for the fiscal year
ended July 31, 2003. The $0.4 million consisted of $23,000 associated with
severance and other related costs attributable to the fiscal 2002 plan to align
the Company's infrastructure with its operations, net of adjustments to
previously recorded restructuring reserves of $0.4 million related to the
systems warranty reserve and excess facility reserves originally established
during fiscal 2001. As of July 31, 2003, no outstanding accruals remained
related to these restructuring charges.
Below is a summary of the restructuring charges in operating expenses (in
thousands):
<TABLE>
<CAPTION>
Total Total
Total Charged Charged To Total Charged Cash Restructuring
To Operations Operations To Operations Receipts\ Liabilities at
Fiscal 2001 Fiscal 2002 Fiscal 2003 (Payments) July 31, 2003
-------------- ----------- ----------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Cash Provisions:
Other special charges relating to
restructuring activities ................... $ 2,159 $ (888) $ 78 $ (1,349) $ --
Facilities charges ........................... 6,584 9,401 191 (1,287) 14,889
Employee severance and other related charges . 3,498 1,997 37 (5,532) --
-------- -------- -------- -------- --------
Total cash provisions .................... 12,241 10,510 306 $ (8,168) $ 14,889
-------- -------- -------- ======== ========
Non-cash:
Write-off of goodwill and intangibles ........ 59,723 30,632 --
Write-off of other special charges
relating to restructuring activities ........ 4,434 5,442 (553)
Write-off of accelerated options from
terminated employees ....................... 1,352 -- --
Acceleration of deferred stock compensation 35,728 352 (16)
-------- -------- --------
Total non-cash provisions ................ 101,237 36,426 (569)
-------- -------- --------
Total provisions ......................... $113,478 $ 46,936 $ (263)
======== ======== ========
</TABLE>
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Below is a summary of the changes to the restructuring liability (in thousands):
<TABLE>
<CAPTION>
Balance at Charged to Balance
Beginning Costs and at End
Changes in the total accrued restructuring liability of Period Expenses Deductions of Period
----------------------------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
For the year ended July 28, 2001......................... $ -- $ 12,241 $ (2,728) $ 9,513
For the year ended July 27, 2002......................... $ 9,513 $ 10,510 $ (2,029) $ 17,994
For the year ended July 31, 2003......................... $ 17,994 $ 306 $ (3,411) $ 14,889
Short Long Total
Components of the total accrued restructuring liability Term Term Liability
----------------------------------------------------- -------- ---------- ----------
For the year ended July 28, 2001......................... $ 3,135 $ 6,378 $ 9,513
For the year ended July 27, 2002......................... $ 3,397 $ 14,597 $ 17,994
For the year ended July 31, 2003......................... $ 4,117 $ 10,772 $ 14,889
</TABLE>
5. Commitments and Contingencies
The Company leases its facilities under operating leases that expire at
various dates through fiscal year 2010. Future minimum lease payments under
non-cancelable operating leases, net of sublease income, as of July 31, 2003 are
as follows (in thousands):
Gross Net
Operating Sublease Operating
Leases Income Leases
--------- --------- ---------
2004..................................... $5,370 $615 $4,755
2005..................................... 4,916 309 4,607
2006..................................... 3,709 77 3,632
2007.................................... 3,511 - 3,511
2008..................................... 3,616 - 3,616
Thereafter............................... 6,905 - 6,905
--------- --------- ---------
Total minimum lease payments... $28,027 $1,001 $27,026
========= ========= =========
Effective June 1, 2000, the Company entered into a ten-year lease agreement
for a new corporate facility.
Gross rent expense for the years ended July 31, 2003, July 28, 2002 and
July 28, 2001 was approximately $3,889,401, $18,866,000 and $13,601,000,
respectively. Rent expense was offset by sublease income of $2,436,655 and
$5,966,578 for the years ended July 31, 2003 and July 27, 2002, respectively.
$93,428 and $11,029,000 of the rent expense for the years ended July 31, 2003
and July 27, 2002, respectively, were attributable to an estimate of the loss
related to idle facilities, which has been recorded as restructuring costs and
other special charges in the statements of operations.
6. 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. In October 2002, the court, pursuant to a stipulation,
dismissed all claims against the Company's Former Officers without prejudice. On
February 19, 2003, the court denied in part and granted in part the motion to
dismiss filed on behalf of the defendants, including the Company. The court's
order did not dismiss any claims against the Company. As a result, discovery may
now proceed. A proposal has been made for the settlement and release of claims
against the issuer defendants, including VA Software. The settlement is subject
to a number of conditions, including approval of the proposed settling parties
and 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.
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On February 28, 2003, a related case, captioned Liu v. Credit Suisse First
Boston, et al., Case No. 03-20459, was filed in the United States District Court
for the Southern District of Florida. The Liu plaintiff was not alleged to have
bought or sold VA Software stock. The Company was not served with the Liu
complaint. The Complaint related generally to the ongoing IPO-related litigation
currently pending in the United States District Court for the Southern District
of New York, described above. On June 19, 2003, the Liu plaintiff filed an
amended complaint that dropped the VA Software defendants from the litigation.
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.
7. 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 term of the indemnification period is for the
officer's or director's term 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. All of these
indemnification agreements were grandfathered under the provisions of FIN No. 45
as they were in effect prior to December 31, 2002. Accordingly, the Company has
no liabilities recorded for these agreements as of July 31, 2003.
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 U.S. patent or any
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 July 31, 2003.
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
July 31, 2003.
The Company warrants that its hardware products related to its previous
hardware business will perform in all material respects in accordance with the
Company's standard published specifications in effect at the time of delivery of
the products to the customer for the life of the product, typically 36 months.
The remaining estimated fair value of these agreements related to the Company's
previous hardware business is minimal at July 31, 2003. Accordingly, the Company
has a liability of approximately $12,000 recorded for these agreements as of
July 31, 2003.
8. Retirement Savings Plan
The Company maintains an employee savings and retirement plan which is
intended to be qualified under Section 401(k) of the Internal Revenue Code and
is available to substantially all full-time employees of the Company. The plan
provides for tax deferred salary deductions and after-tax employee
contributions. Contributions include employee salary deferral contributions and
discretionary employer contributions. To date, there have been no employer
discretionary contributions.
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9. Common Stock
In October 1999, the Company's board of directors approved the
reincorporation into Delaware by way of a merger with a newly-formed Delaware
subsidiary in connection with the Company's IPO. In conjunction with the IPO,
the Company issued 4,400,000 shares of common stock with an initial public
offering price of $30.00 per share. Upon closing of the initial public offering,
all of the outstanding shares of convertible preferred stock were automatically
converted into 19,921,322 shares of common stock. In addition, the underwriters
exercised their option to purchase 660,000 additional shares to cover the
over-allotments of shares at the $30.00 per share offering price. The IPO raised
approximately $141,000,000 after underwriting fees and $139,000,000 after all
other direct costs. In fiscal year 2003, the Company cancelled 270,407 shares of
its common stock, which has been recorded as treasury stock in the balance sheet
and statement of stockholders' equity. In fiscal 2002, the Company cancelled
10,934 shares of its common stock which has been recorded as treasury stock in
the balance sheet and statement of stockholders' equity.
As of July 31, 2003 there were 55,470,064 shares of common stock issued and
outstanding. VA Software is authorized to issue 250,000,000 shares of common
stock, $0.001 par value. Each share of common stock has the right to one vote.
The holders of common stock are also entitled to receive dividends whenever
funds are available and when declared by the Board of Directors. No cash
dividends have been declared or paid through July 31, 2003.
As of July 31, 2003, the Company had reserved shares of its common stock for
future issuance as follows:
1998 Stock Option Plan and Assumed Plans................. 21,039,118
1999 Director Option Plan................................ 1,250,000
1999 Employee Stock Purchase Plan........................ 2,225,391
-----------
24,514,509
Stock Repurchase Agreements
In connection with the exercise of options pursuant to the Company's Stock
Option Plan, employees entered into restricted stock purchase agreements with
the Company. Under the terms of these agreements, the Company has a right to
repurchase any unvested shares at the original exercise price of the shares upon
termination of the employee. The repurchase right lapses ratably over the
vesting term of the original option grant. As of July 31, 2003, there were no
shares of the Company's common stock subject to repurchase by the Company.
Stock Option Plan
In fiscal year 1999, the Company adopted and the board of directors approved
the 1998 Plan. A total of 35,106,353 shares of common stock have been reserved
for issuance under the 1998 Plan, subject to an annual increase of the lesser of
4,000,000 shares or 4.9% of the then outstanding common stock or an amount to be
determined by the Board of Directors. Through July, 31, 2003, 38,404,566 options
have been granted under the 1998 Plan. Under the 1998 Plan, the board of
directors may grant to employees and consultants options and/or stock purchase
rights to purchase the Company's common stock at terms and prices determined by
the board of directors. The Plan will terminate in 2008. Nonqualified options
granted under the 1998 Plan must be issued at a price equal to at least 85% of
the fair market value of the Company's common stock at the date of grant. All
options may be exercised at any time within 10 years of the date of grant or
within three months of termination of employment, or such shorter time as may be
provided in the stock option agreement, and vest over a vesting schedule
determined by the board of directors.
The Company's 1999 Director's Option Plan (the "Directors' Plan") was
adopted by the Company's board of directors in October 1999. A total of
1,250,000 shares of common stock have been reserved for issuance under the
Directors' Plan, subject to an annual increase of the lesser of 250,000 shares,
0.5% of the then outstanding common stock or an amount determined by the board
of directors. Through July 31, 2003, 550,000 options have been granted under the
Directors' Plan. Under the Directors' Plan, options are granted when a
non-employee director joins the board of directors following the IPO and at each
annual meeting where the director continues to serve on the board of directors.
The Directors' Plan establishes an automatic grant of 80,000 shares of common
stock to each non-employee director who is elected after the completion of the
IPO. The Directors' Plan also provides that upon the date of each annual
stockholders' meeting, each non-employee director who has been a member of the
board of directors for at least six months prior to the date of the
stockholders' meeting will receive automatic annual grants of options to acquire
20,000 shares of common stock. Each automatic grant will have an exercise price
per share equal to the fair market value of the common stock at the date of
grant, will vest 25% immediately upon the grant date and monthly thereafter and
become fully vested three years after the date of grant. Each automatic grant
will have a term of ten years. In the event of a merger with another corporation
or the sale of substantially all of its assets, each non-employee director's
outstanding option will become fully vested and exercisable. Options granted
under the Directors' Plan must be exercised within 3 months of the end of the
non-employee director's tenure as a member of
54
<PAGE>
the board of directors, or within 12 months after a non-employee director's
termination by death or disability, provided that the option does not terminate
by its terms earlier. Unless terminated sooner, the Directors' Plan terminates
automatically in 2009.
The Company has assumed certain option plans and the underlying options of
companies which the Company has acquired (the "Assumed Plans"). Options under
the Assumed Plans have been converted into the Company's options and adjusted to
effect the appropriate conversion ratio as specified by the applicable
acquisition agreement, but are otherwise administered in accordance with the
terms of the Assumed Plans. Options under the Assumed Plans generally vest over
four years and expire ten years from the date of grant. No additional options
will be granted under the Assumed Plans.
The following is a summary of the option activity under all of the stock
option plans for the years ended July 31, 2003, July 27, 2002 and July 28, 2001.
Options Outstanding
-----------------------------
Options Weighted
Available Number of Average
for Grant Shares Exercise Price
------------- ------------- --------------
Balance at July 28, 2000....... 7,509,685 9,533,518 11.77
Authorized................... 3,293,288 -- --
Granted...................... (8,683,574) 8,683,574 9.10
Exercised.................... -- (2,395,276) 1.25
Cancelled.................... 4,272,107 (4,987,636) 16.62
Repurchases.................. 923,844 -- --
------------- -------------
Balance at July 28, 2001....... 7,315,350 10,834,180 9.72
============= =============
Authorized................... 2,901,816 -- --
Granted...................... (8,082,800) 8,082,800 1.15
Exercised.................... -- (511,674) 0.63
Cancelled.................... 5,970,320 (6,097,405) 8.79
Repurchases.................. 523,751 -- --
------------- -------------
Balance at July 27, 2002....... 8,628,437 12,307,901 4.94
============= =============
Authorized................... 2,904,105 -- --
Granted...................... (1,584,600) 1,584,600 1.25
Exercised.................... -- (1,499,274) 0.92
Cancelled.................... 2,906,164 (2,960,715) 9.24
Repurchases.................. 2,500 -- --
------------- -------------
Balance at July 31, 2003....... 12,856,606 9,432,512 3.61
============= =============
<TABLE>
<CAPTION>
Outstanding Options Options Exercisable
Weighted -------------------
Average Weighted Weighted
Remaining Average Average
Range of Number Life (in Exercise Exercise
Exercise Prices Outstanding years) Price Shares Price
--------------- ------------- ---------- --------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.02 - 0.96 770,610 6.01 $ 0.22 629,109 $ 0.06
$ 0.99 - 0.99 3,158,168 8.20 $ 0.99 1,024,589 $ 0.99
$ 1.00 - 2.32 2,248,877 8.92 $ 1.52 497,484 $ 1.75
$ 2.49 - 8.13 2,256,099 7.76 $ 4.18 1,535,526 $ 4.61
$ 8.50 - 112.06 998,758 7.17 $ 17.93 721,968 $ 19.26
--------- ---------
$ 0.02 - 112.06 9,432,512 7.98 $ 3.61 4,408,676 $ 5.20
========= =========
</TABLE>
During fiscal years 2003, 2002 and 2001, there were no options or stock
purchase rights granted outside of the 1998 Plan outstanding. Total options
exercisable at July 31, 2003 and July 27, 2002 were 4,408,676 and 4,116,898,
respectively.
Employee Stock Purchase Plan
In October 1999, the Company adopted an Employee Stock Purchase Plan ("ESPP").
Under the terms of the ESPP, the maximum aggregate number of shares of stock
that may be issued under the ESPP is 2,500,000, cumulatively increased annually
by an amount
55
<PAGE>
equal to the lesser of (a) one percent (1%) of the then issued and outstanding
shares of common stock, (b) an amount determined by the Board of Directors, or
(c) 500,000 shares of common stock. During each six-month offering period,
employees can choose to have up to 10% of their annual base earnings withheld to
purchase the Company's common stock. The purchase price of the common stock is
85% of the lesser of the fair value as of the beginning or ending of the
offering period. A total of 274,609 shares of common stock were issued under the
ESPP through July 31, 2003. At July 31, 2003, 2,225,391 shares were available
for issuance.
Employee Stock Option and Stock Purchase Plan
The Company elected to follow APB No. 25, Accounting for Stock Issued to
Employees, in accounting for our employee stock options because the alternative
fair value accounting provided for under SFAS No. 123, Accounting for
Stock-Based Compensation, requires the use of option valuation models that were
not developed for use in valuing employee stock options. Under APB No. 25,
because the exercise price of the Company's employee's stock options generally
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized in the Company's consolidated financial
statements.
Pro forma information regarding net loss and net loss per share is required
by SFAS No. 123. This information is required to be determined as if the Company
had accounted for its employee stock options, including shares issued under the
Employee Stock Purchase Plan, collectively called "options," under the fair
value method of that statement. The fair value of options granted during fiscal
2003, 2002 and 2001 reported below has been estimated at the date of grant using
the Black-Scholes option-pricing model assuming no expected dividends and the
following weighted average assumptions:
The weighted average fair value of options granted during fiscal years 2003,
2002 and 2001 was $ 0.97, $0.81 and $6.52, respectively. Pursuant to the
provisions of SFAS No. 123, the compensation cost associated with options
granted in fiscal years 2003, 2002 and 2001 were estimated on the grant date
using the Black-Scholes model and the following assumptions:
<TABLE>
<CAPTION>
Stock option Plans ESPP Plans
For the fiscal year ended For the fiscal year ended
------------------------- -------------------------
July 31, July 27, July 28, July 31, July 27, July 28,
2003 2002 2001 2003 2002 2001
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Expected life (years).......... 4.8 4 4 0.5 0.5 0.6
Risk-free interest rate........ 3% 3.7% 5.1% 1.1% 2.4% 5.2%
Volatility..................... 108% 100% 100% 95% 100% 100%
Dividend yield................. None None None None None None
</TABLE>
For purposes of pro forma disclosure, the estimated fair value of the
options was amortized to expense over the options' vesting period, for employee
stock options, and the six-month purchase period, for stock purchases under the
Employee Stock Purchase Plan and were included in the pro forma information in
the Summary of Significant Accounting Policies under Stock-Based Compensation.
Deferred Stock Compensation
In connection with the grant of certain stock options to employees during
fiscal 2000 and 1999, the Company recorded deferred stock compensation within
stockholders' equity of approximately $37.8 million, representing the difference
between the estimated fair value of the common stock for accounting purposes and
the option exercise price of these options at the date of grant. The Company
amortizes the deferred stock compensation expense on an accelerated basis over
the vesting period of the individual award which is generally equal to four
years. This method of deferred stock expense amortization is in accordance with
Financial Accounting Standards Board Interpretation No. 28. The amortization
expense relates to options awarded to employees in all operating expense
categories. The amortization of deferred stock compensation has not been
separately allocated to these categories. The amount of deferred stock
compensation from year to year has decreased as options for which accrued but
unvested compensation has been recorded have been forfeited. The Company
recorded amortization of deferred stock compensation related to these options of
$0.1 million, $1.2 million and $10.6 million for the fiscal years ended July 31,
2003, July 27, 2002 and July 28, 2001, respectively. In addition, in connection
with acquisitions, the Company recorded $0.5 million and $50.7 million of
amortization of deferred stock compensation during the fiscal years ended July
27, 2002 and July 28, 2001. No amortization of deferred stock compensation
related
56
<PAGE>
to acquisitions was recorded during the fiscal year ended July 31, 2003.
Further, in connection with the restructuring discussed above, the Company
recorded an expense of approximately $35.7 million related to the acceleration
of deferred stock compensation for the fiscal year ended July 28, 2001. Finally,
the Company made adjustments during fiscal years 2003 and 2002 related to
deferred stock compensation for stock options of terminated employees of a
credit of $16,000 and $0.3 million, respectively. All adjustments have been
included in restructuring costs and other special charges in the statements of
operations.
10. Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". Due to the Company's loss position in fiscal
years 2003, 2002 and 2001, there was no provision for income taxes for the years
ended July 31, 2003, July 27, 2002 and July 28, 2001. A valuation allowance has
been recorded for the total deferred tax assets as management believes there are
uncertainties regarding realization of the assets based on the lack of
consistent profitability to date and the uncertainty of future profitability.
The components of the net deferred tax assets are as follows (in thousands):
July 31, July 27, July 28,
2003 2002 2001
-------- -------- --------
Net operating loss carryforwards $ 83,577 $ 80,446 $ 68,965
Other reserves and accruals .... 13,081 11,494 19,726
-------- -------- --------
96,658 91,940 88,691
Valuation allowance ............ (96,658) (91,940) (88,691)
-------- -------- --------
Net deferred income tax asset .. $ -- $ -- $ --
======== ======== ========
As of July 31, 2003, the Company has net operating loss carryforwards of
approximately $233 million to offset future federal taxable income, which
expires at various dates through fiscal year 2023. This amount includes
approximately $12.5 million of net operating loss carryforwards from the
acquisition of OSDN. The deferred tax assets related to the acquisition of OSDN
of approximately $5.6 million as of June 7, 2000, will be used to reduce the tax
provision if and when realized. The Company also has California net operating
loss carryforwards of approximately $73 million to offset future California
taxable income, which expire at various dates through fiscal year 2013. The net
operating loss carryforwards also include approximately $21.3 million resulting
from employee exercises of non-qualified stock options or disqualifying
dispositions, the tax benefits of which, when realized, will be recorded as an
addition to additional paid-in capital rather than a reduction of the provision
for income taxes. The operating loss carryforwards to be used in future years is
limited in accordance with the provisions of the Tax Reform Act of 1986 as the
Company has experienced a cumulative stock ownership change of more than 50%
over the last three years. The net operating loss carryforwards stated above are
reflective of various federal and state tax limitations
11. Segment and Geographic Information
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. During fiscal 2001, the Company had two reportable business
segments for revenue: systems and services and OSDN. The Company allocated its
resources and evaluated performance of its separate segments based on revenue.
As a result of the Company's decision to exit the systems business in the fourth
quarter of fiscal 2001 and focus on its software application business, during
fiscal 2002 the Company operated as one business segment, providing application
software products and related OSDN products and services. During the fourth
quarter of fiscal 2003, two separate businesses emerged and as of July 31, 2003,
we operate as two reportable business segments: software and online. Due to the
significant amount of shared operating resources that are utilized by both of
the business segments, the Company only reports segment information for revenues
and cost of sales.
The accounting policies of the segments are the same as those described in
the summary of significant accounting polices. There are no intersegment sales.
Our chief operating decision maker evaluates performance based on each segment's
revenue and gross margin rather than profit or similar measure. The Company's
assets and liabilities are not discretely allocated or reviewed by segment.
57
<PAGE>
<TABLE>
<CAPTION>
Total
(in thousands) Software Online Other Company
-------------------------------- -------- ------ ----- -------
<S> <C> <C> <C> <C>
Year Ended July 31, 2003
Revenue from external customers $ 2,917 $ 20,551 $ 760 $ 24,228
Cost of revenues .............. $ 1,997 $ 11,166 $ (383) $ 12,780
Gross margin .................. $ 920 $ 9,385 $ 1,143 $ 11,448
Year Ended July 27, 2002
Revenue from external customers $ 1,086 $ 15,967 $ 3,332 $ 20,385
Cost of revenues .............. $ 2,387 $ 10,393 $ (3,119) $ 9,661
Gross margin .................. $ (1,301) $ 5,574 $ 6,451 $ 10,724
Year Ended July 28, 2001
Revenue from external customers $ -- $ 14,678 $ 120,212 $ 134,890
Cost of revenues .............. $ -- $ 10,497 $ 143,606 $ 154,103
Gross margin .................. $ -- $ 4,181 $ (23,394) $ (19,213)
</TABLE>
The Company marketed its products in the United States through its direct
sales force. Revenues for each of the fiscal years ended July 31, 2003, July 27,
2002 and July 28, 2001 were primarily generated from sales to end users in the
United States of America.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
Item 9A. Controls and Procedures
a) Evaluation of disclosure controls and procedures. Our management
evaluated, with the participation of our Chief Executive Officer and
our Chief Financial Officer, the effectiveness of our disclosure
controls and procedures as of the end of the period covered by this
report. Based on this evaluation, our Chief Executive Officer and our
Chief Financial Officer have concluded that our disclosure controls and
procedures are effective to ensure that information we are required to
disclose in reports that we file or submit under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission
rules and forms.
b) Changes in internal controls over financial reporting. There was no
change in our internal control over financial reporting (as defined in
Rule 13a-15(f) of the Securities Exchange Act of 1934) that occurred
during the quarter ended July 31, 2003 that has materially affected, or
is reasonably likely to materially affect, our internal control over
financial reporting..
PART III
Item 10. Directors and Executive Officers of the Registrant
The information called for by this item is incorporated by reference to the
sections entitled "Certain Beneficial Owners" and "Security Ownership of
Directors and Executive Officers" in the Proxy Statement for the annual
stockholders' meeting to be held on December 3, 2003.
Code of Ethics
The Company has adopted a Code of Ethics for Principal Executive and Senior
Financial Officers. The Company has posted the text of this Code of Ethics on
our Internet Web site at http://www.vasoftware.com/company/investor_relations/
code_of_conduct/.
Item 11. Executive Compensation
The information called for by this item is incorporated by reference to the
section entitled "Compensation of Directors and Executive Officers" in the Proxy
Statement for the annual stockholders' meeting to be held on December 3, 2003. .
58
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information called for by this item is incorporated by reference to the
sections entitled "Certain Beneficial Owners" and "Security Ownership of
Directors and Executive Officers" in the Proxy Statement for the annual
stockholders' meeting to be held on December 3, 2003.
Item 13. Certain Relationships and Related Transactions
The information called for by this item is incorporated by reference to the
sections entitled "Certain Relationships and Related Transactions" in the Proxy
Statement for the annual stockholders' meeting to be held on December 3, 2003.
Item 14. Principal Accountant Fees and Services.
Not applicable.
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this report:
1. All Financial Statements:
See the Consolidated Financial Statements and notes thereto in Item 8
above.
2. Schedule II -- Valuation and Qualifying Accounts are filed as part
of this Form 10-K.
3. Exhibits:
See the Exhibit Index.
(b) Reports on Form 8-K.
On May 27, 2003, the Company furnished a Current Report on Form 8-K
under Items 9 (Regulation FD Disclosure) and 12 (Results of Operations and
Financial Condition) disclosing the issuance of a press release announcing its
financial results for the third quarter ended April 26, 2003 .
On August 27, 2003, the Company furnished a Current Report on Form 8-K
under Items 9 (Regulation FD Disclosure) and 12 (Results of Operations and
Financial Condition) disclosing the issuance of a press release announcing its
financial results for the fourth quarter and fiscal year ended July 31, 2003.
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
Chief Executive Officer, President
and Member of Board of Directors
Date: October 14, 2003
59
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Ali Jenab and Kathleen R. McElwee, and
each of them, his true and lawful attorneys-in-fact, each with full power of
substitution, for him and all capacities, to sign any amendments to this report
on Form 10-K and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission and does
hereby ratify and confirm all that each of said attorneys-in-fact or their
substitute or substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirement of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ ALI JENAB Chief Executive Officer, President October 14, 2003
- --------------------------------------- (principle executive officer) and Director
Ali Jenab
/s/ KATHLEEN R. MCELWEE Chief Financial Officer October 14, 2003
- --------------------------------------- (principle accounting officer)
Kathleen R. McElwee
/s/ LARRY M. AUGUSTIN Chairman of the Board of Directors October 14, 2003
- ---------------------------------------
Larry M. Augustin
/S/ ANDRE M. BOISVERT Director October 14, 2003
- ---------------------------------------
Andre M. Boisvert
/s/ RAM GUPTA Director October 14, 2003
- ---------------------------------------
Ram Gupta
/s/ DOUGLAS LEONE Director October 14, 2003
- ---------------------------------------
Douglas Leone
/s/ ROBERT M. NEUMEISTER, JR. Director October 14, 2003
- ---------------------------------------
Robert M. Neumeister, Jr.
/s/ CARL REDFIELD Director October 14, 2003
- ---------------------------------------
Carl Redfield
/s/ DAVID B. WRIGHT Director October 14, 2003
- ---------------------------------------
David B. Wright
</TABLE>
60
<PAGE>
VA SOFTWARE CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<TABLE>
<CAPTION>
Balance at Charged to Balance at
Beginning Costs and End
Description of Period Expenses Deductions of Period
----------- --------- -------- ---------- ---------
<S> <C> <C> <C> <C>
Year Ended July 28, 2001
Allowance for doubtful accounts...................... $ 1,475 $ 3,968 $ 1,196 $ 4,247
Allowance for excess and obsolete inventory.......... $ 1,171 $ 24,441 $ 7,265 $ 18,347
Year Ended July 27, 2002
Allowance for doubtful accounts...................... $ 4,247 $ (1,096) $ 1,985 $ 1,166
Allowance for excess and obsolete inventory.......... $ 18,347 $ (4,378) $ 13,939 $ 30
Year Ended July 31, 2003
Allowance for doubtful accounts...................... $ 1,166 $ (19) $ 1,003 $ 144
Allowance for excess and obsolete inventory.......... $ 30 $ (6) $ -- $ 24
</TABLE>
61
<PAGE>
EXHIBIT INDEX
Exhibit
Number
3.1** -- Amended and Restated Certificate of Incorporation of the
Registrant
3.2** -- Bylaws of the Registrant
4.1** -- Specimen Common Stock Certificate
10.1**++ -- Form of Indemnification Agreement between the Registrant and each
of its directors and officers
10.2**++ -- 1998 Stock Plan and forms of agreement thereunder
10.3**++ -- 1999 Employee Stock Purchase Plan
10.4**++ -- 1999 Director Option Plan
10.5# -- First Amended and Restated Registration Rights Agreement between
Registrant and certain holders of preferred stock
10.6## -- Loan and Security Agreement between Registrant and Comerica
Bank-- California
10.7+*** -- Master Lease Agreement between Boca Global, Inc. and Bordeaux
Partners LLC
10.8+### -- Master Lease Agreement between Registrant and Renco Investment
Company
10.9**** -- Consent of Linus Torvalds
23.1 -- Consent of PricewaterhouseCoopers LLP, Independent Public
Accountants
23.2 -- Notice regarding Consent of Arthur Andersen LLP
24.1 -- Power of Attorney (see signature page)
31.01 -- Certification Of Chief Executive Officer Pursuant To Section 302
Of The Sarbanes-Oxley Act Of 2002
31.02 -- Certification Of Chief Financial Officer Pursuant To Section 302
Of The Sarbanes-Oxley Act Of 2002
32.01 -- Certification Of Chief Executive Officer Pursuant To Section 906
Of The Sarbanes-Oxley Act Of 2002
32.02 -- Certification Of Chief Financial Officer Pursuant To Section 906
Of The Sarbanes-Oxley Act Of 2002
- ------------
+ Confidential treatment has been requested by the Registrant as to
certain portions of this exhibit. The omitted portions have been
separately filed with the Commission.
* Incorporated by reference to the corresponding exhibit of
Registrant's form S-4 and the amendment thereto (Commission
registration no. 333-35704).
** Incorporated by reference to the corresponding exhibit of
Registrant's form S-1 and the amendment thereto (Commission
registration no. 333-88687).
*** Incorporated by reference from Exhibit 10.16 of Registrant's form
S-1 and the amendments thereto (Commission registration no.
333-88687).
**** Incorporated by reference from Exhibit 10.18 of Registrant's
Quarterly Report on Form 10-Q for the period ended January 28, 2000
filed on March 13, 2000 (Commission file number 000-28369).
# Incorporated by reference from Exhibit 10.6 of Registrant's form S-1
and the amendments thereto (Commission registration no. 333-88687).
62
<PAGE>
## Incorporated by reference from Exhibit 10.9 of Registrant's form S-1
and the amendments thereto (Commission registration no. 333-88687).
### Incorporated by reference from Exhibit 10.14 of Registrant's Annual
Report on Form 10-K for the period ended June 28, 2000 filed on
October 26, 2000 (Commission file number 000-28369).
++ Denotes a management contract or compensatory plan or arrangement.
63
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23.1
<SEQUENCE>3
<FILENAME>p17754_ex23-1.txt
<DESCRIPTION>CONSENT OF PRICEWATERHOUSECOOPERS LLP
<TEXT>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (File Nos. 333-88687, 333-38766, 333-38768, 333-38874,
333-71944, 333-92391, 333-92409, 333-59096 and 333-101965) of VA Software
Corporation of our report dated August 20, 2003, relating to the financial
statements and financial statement schedule, which appears in this Annual Report
on Form 10-K.
/s/ PricewaterhouseCoopers LLP
San Jose, California
October 14, 2003
64
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23.2
<SEQUENCE>4
<FILENAME>p17754_ex23-2.txt
<DESCRIPTION>NOTICE REGARDING CONSENT OF ARTHUR ANDERSON LLP
<TEXT>
EXHIBIT 23.02
NOTICE REGARDING CONSENT OF ARTHUR ANDERSEN LLP
Section 11(a) of the Securities Act of 1933, as amended (the "Securities
Act"), provides that if any part of a registration statement at the time such
part becomes effective contains an untrue statement of a material fact or an
omission to state a material fact required to be stated therein or necessary to
make the statements therein not misleading, any person acquiring a security
pursuant to such registration statement (unless it is proved that at the time of
such acquisition such person knew of such untruth or omission) may sue, among
others, every accountant who has consented to be named as having prepared or
certified any part of the registration statement, or as having prepared or
certified any report or valuation which is used in connection with the
registration statement, with respect to the statement in such registration
statement, report or valuation which purports to have been prepared or certified
by the accountant.
This Form 10-K is incorporated by reference into VA Software Corporation's
filings on Form S-8 Nos. 333-88687, 333-38766, 333-38768, 333-38874, 333-71944,
333-92391, 333-92409 and 333-59096 (collectively, the "Registration Statements")
and, for purposes of determining any liability under the Securities Act, is
deemed to be a new registration statement for each Registration Statement into
which it is incorporated by reference.
On April 17, 2002, VA Software Corporation ("VA Software") dismissed Arthur
Andersen LLP ("Arthur Andersen") as its independent auditor and appointed
PricewaterhouseCoopers LLP to replace Arthur Andersen. Both the engagement
partner and the manager for VA Software's prior fiscal year audit are no longer
with Arthur Andersen. As a result, VA Software has been unable to obtain Arthur
Andersen's written consent to the incorporation by reference into the
Registration Statements of its audit report with respect to VA Software's
financial statements as of July 28, 2001 and July 28, 2000 and for the years
then ended. Under these circumstances, Rule 437a under the Securities Act and
Rule2-02 of Regulation S-X promulgated by the Securities Exchange Commission
permit VA Software to file this Form 10-K without a written consent from Arthur
Andersen. As a result, however, Arthur Andersen will not have any liability
under Section 11(a) of the Securities Act for any untrue statements of a
material fact contained in the financial statements audited by Arthur Andersen
or any omissions of a material fact required to be stated therein. Accordingly,
you would be unable to assert a claim against Arthur Andersen under Section
11(a) of the Securities Act for any purchases of securities under the
Registration Statements made on or after the date of this Form 10-K. To the
extent provided in Section 11(b)(3)(C) of the Securities Act, however, other
persons who are liable under Section 11(a) of the Securities Act, including VA
Software's officers and directors, may still rely on Arthur Andersen's original
audit reports as being made by an expert for purposes of establishing a due
diligence defense under Section 11(b) of the Securities Act.
65
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31.01
<SEQUENCE>5
<FILENAME>p17754_ex31-01.txt
<DESCRIPTION>CERTIFICATION OF JENAB
<TEXT>
EXHIBIT 31.01
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO
SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002
I, Ali Jenab, certify that:
1. I have reviewed this annual report on Form 10-K of VA Software
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: October 14, 2003 /s/ ALI JENAB
--------------------------------------
Ali Jenab
Chief Executive Officer
66
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31.02
<SEQUENCE>6
<FILENAME>p17754_ex31-02.txt
<DESCRIPTION>CERTIFICATION OF MCELWEE
<TEXT>
EXHIBIT 31.02
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO
SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002
I, Kathleen R. McElwee, certify that:
1. I have reviewed this annual report on Form 10-K of VA Software
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: October 14, 2003 /s/ KATHLEEN R. MCELWEE
------------------------------------------
Kathleen R. McElwee
Chief Financial Officer
67
<PAGE>
EXHIBIT 31.02
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Kathleen R. McElwee, certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual
Report of VA Software Corporation on Form 10-K for the fiscal year ended July
31, 2003 fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 and that information contained in such Annual
Report on Form 10-K fairly presents in all material respects the financial
condition and results of operations of VA Software Corporation.
..
By: /s/ KATHLEEN R. MCELWEE
----------------------------------------
Name: Kathleen R. McElwee
Title: Chief Financial Officer
68
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32.01
<SEQUENCE>7
<FILENAME>p17754_ex32-01.txt
<DESCRIPTION>CERTIFICATION OF JENAB
<TEXT>
EXHIBIT 32.01
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Ali Jenab, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report of VA
Software Corporation on Form 10-K for the fiscal year ended July 31, 2003 fully
complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 and that information contained in such Annual Report on
Form 10-K fairly presents in all material respects the financial condition and
results of operations of VA Software Corporation.
By: /s/ ALI JENAB
------------------------------------
Name: Ali Jenab
Title: Chief Executive Officer
69
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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