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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 26, 2002
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 whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes |_| No |X|
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Title Of Class Outstanding At November 30, 2002
Common Stock, $0.001 par value 54,460,932
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Table of Contents
PART I. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements............................................................................................ 3
Condensed Consolidated Balance Sheets at October 26, 2002 and July 27, 2002................................. 3
Condensed Consolidated Statements of Operations for the three months ended October 26, 2002 and
October 27, 2001............................................................................................ 4
Condensed Consolidated Statements of Cash Flows for the three months ended October 26, 2002 and
October 27, 2001............................................................................................ 5
Notes to Condensed Consolidated Financial Statements........................................................ 6
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations...........................13
Item 3 Quantitative and Qualitative Disclosures About Market Risk......................................................28
Item 4 Controls and Procedures.........................................................................................28
Page No.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...............................................................................................29
Item 2. Changes in Securities and Use of Proceeds.......................................................................29
Item 3. Defaults Upon Senior Securities.................................................................................29
Item 4. Submission of Matters to a Vote of Security Holders.............................................................29
Item 5. Other Information...............................................................................................29
Item 6. Exhibits and Reports on Form 8-K................................................................................30
Signatures...............................................................................................................30
Certifications...........................................................................................................31
2
PART I
VA SOFTWARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
October 26, July 27,
2002 2002
--------- ---------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents .................................................................. $ 15,318 $ 35,148
Short-term investments ..................................................................... 10,548 5,458
Restricted cash, current ................................................................... 450 450
Accounts receivable, net ................................................................... 892 764
Inventories ................................................................................ 336 300
Prepaid expenses and other assets .......................................................... 1,127 877
--------- ---------
Total current assets ............................................................... 28,671 42,997
Property and equipment, net .................................................................. 6,282 7,223
Goodwill and intangibles, net ................................................................ 1,525 2,169
Long-term investments ........................................................................ 21,520 12,440
Restricted cash, non current ................................................................. 900 900
Other assets ................................................................................. 1,241 1,239
--------- ---------
Total assets ....................................................................... $ 60,139 $ 66,968
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable ........................................................... $ -- $ 42
Accounts payable ........................................................................... 1,804 2,075
Accrued restructuring liabilities, current portion ......................................... 3,782 3,397
Accrued compensation ....................................................................... 1,066 1,517
Deferred revenue ........................................................................... 695 774
Accrued liabilities and other .............................................................. 3,032 4,200
--------- ---------
Total current liabilities .......................................................... 10,379 12,005
Accrued restructuring liabilities, net of current portion .................................... 13,360 14,597
Other long-term liabilities .................................................................. 1,014 978
--------- ---------
Total liabilities .................................................................. 24,753 27,580
Stockholders' equity:
Common stock ............................................................................... 55 54
Additional paid-in capital ................................................................. 765,524 765,418
Deferred stock compensation ................................................................ (149) (245)
Accumulated other comprehensive income ..................................................... 14 86
Accumulated deficit ........................................................................ (730,058) (725,925)
--------- ---------
Total stockholders' equity ......................................................... 35,386 39,388
--------- ---------
Total liabilities and stockholders' equity ......................................... $ 60,139 $ 66,968
========= =========
The accompanying notes are an integral part of these financial statements.
3
VA SOFTWARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Three Months Ended
October 26, October 27,
2002 2001
----------- -----------
(Unaudited) (Unaudited)
Net revenues:
Software revenues .................................................................. $ 711 $ 118
Online revenues .................................................................... 4,155 3,633
Other revenues ..................................................................... 209 1,827
-------- --------
Net revenues .................................................................... 5,075 5,578
Cost of revenues:
Software cost of revenues .......................................................... 593 596
Online cost of revenues ............................................................ 2,311 2,237
Other cost of revenues ............................................................. (157) (390)
-------- --------
Cost of revenues ................................................................ 2,747 2,443
-------- --------
Gross margin .................................................................... 2,328 3,135
-------- --------
Operating expenses:
Sales and marketing ................................................................ 2,321 4,293
Research and development ........................................................... 2,044 2,903
General and administrative ......................................................... 1,755 2,875
Restructuring costs and other special charges ...................................... (15) 44,956
Amortization of deferred stock compensation ........................................ 38 1,984
Amortization of goodwill and intangible assets ..................................... 644 2,087
-------- --------
Total operating expenses ................................................... 6,787 59,098
-------- --------
Loss from operations ................................................................. (4,459) (55,963)
Interest and other, net .............................................................. 326 1,082
-------- --------
Net loss ............................................................................. $ (4,133) $(54,881)
======== ========
Basic and diluted net loss per share ................................................. $ (0.08) $ (1.04)
======== ========
Shares used in computing basic and diluted net loss per share ........................ 53,717 52,678
======== ========
The accompanying notes are an integral part of these financial statements.
4
VA SOFTWARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended
October 26, October 27,
2002 2001
----------- -----------
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net loss ................................................................................. $ (4,133) $(54,881)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization of intangibles ........................................... 1,618 3,404
Provision for bad debts ................................................................ (2) (758)
Provision for excess and obsolete inventory ............................................ 6 (2,033)
Loss on disposal of assets ............................................................. 1 212
Amortization of deferred stock compensation ............................................ 38 1,984
Non-cash restructuring expense ......................................................... (85) 36,086
Changes in assets and liabilities:
Accounts receivable .................................................................. (126) 9,825
Inventories .......................................................................... (42) 1,665
Prepaid expenses and other assets .................................................... (166) 601
Accounts payable ..................................................................... (271) (10,019)
Accrued restructuring liabilities .................................................... (852) 6,575
Accrued liabilities and other ........................................................ (1,700) (3,960)
Other long-term liabilities .......................................................... 36 (22)
-------- --------
Net cash used in operating activities ............................................. (5,678) (11,321)
-------- --------
Cash flows from investing activities:
Change in restricted cash ................................................................ -- 609
Purchase of property and equipment ....................................................... (33) (952)
Purchase of marketable securities ........................................................ (17,671) (10,210)
Sale of marketable securities ............................................................ 3,501 13,603
Other, net ............................................................................... (69) (218)
-------- --------
Net cash provided by (used in) investing activities ............................... (14,272) 2,832
-------- --------
Cash flows from financing activities:
Payments on notes payable ................................................................ (42) (71)
Proceeds from issuance of common stock, net .............................................. 165 91
-------- --------
Net cash provided by financing activities ......................................... 123 20
-------- --------
Effect of exchange rate changes on cash and cash equivalents .............................. (3) 221
-------- --------
Net decrease in cash and cash equivalents ................................................. (19,830) (8,248)
-------- --------
Cash and cash equivalents, beginning of period ............................................ 35,148 57,488
-------- --------
Cash and cash equivalents, end of period .................................................. $ 15,318 $ 49,240
======== ========
The accompanying notes are an integral part of these financial statements.
5
VA SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The condensed consolidated financial statements included herein have been
prepared by VA Software Corp. ("VA," "VA Software" or the "Company"), without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"). Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management, the unaudited interim financial
statements reflect all adjustments (consisting only of normal, recurring
adjustments) necessary for a fair presentation of the financial position,
results of operations and other comprehensive loss and cash flows for the
interim periods presented. The financial statements and the accompanying notes,
however, should be read in conjunction with VA's audited consolidated financial
statements and the notes thereto included in VA's Annual Report on Form 10-K for
the fiscal year ended July 27, 2002, filed with the SEC on October 18, 2002. The
condensed consolidated balance sheet as of July 27, 2002 has been derived from
the audited financial statements as of that date, but does not include all
disclosures required by generally accepted accounting principles for complete
financial statements.
The results of operations for the three month periods ended October 26,
2002 and October 27, 2001 are not necessarily indicative of the results that may
be expected for any other interim period or for the full fiscal year ending July
26, 2003.
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.
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
was recorded as other income in the Company's consolidated statements of
operations during the second quarter of fiscal 2002. 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 over it, 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
the Company's former systems and services business.
Revenue Recognition
Software Revenues
Software revenues are derived from the Company's SourceForge application
software business and include software licenses, professional services,
maintenance, support and training. Software revenues represent $0.7 million, or
14.0%, of total revenues for the three month period ended October 26, 2002.
Revenue from software license agreements follow 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
6
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 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 value based on published professional service rates.
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 renewal rates, if stated, or separate sales of maintenance sold
to customers. The unrecognized portion of amounts paid in advance for licenses
and services are recorded as deferred revenue.
For term arrangements, the Company does not use the residual method to
recognize revenues since we are unable to establish fair value for the
individual contract components such as software license, maintenance and
support. As a result, the Company recognizes the entire contract value ratably
over the term of the contract, normally 12 months. In the event that the
contract includes essential professional services, the Company defers revenue
until the professional services have been fully delivered. At that time, the
Company then recognizes the revenue 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 the shorter of our normal payment
terms or 120 days, the Company considers the fee not to be fixed or
determinable.
Online Revenues
Online revenues include online advertising as well as e-commerce revenue.
Online advertising revenues represent $2.3 million, or 45.0%, of total revenues
for the three month period ended October 26, 2002. E-commerce revenues represent
$1.9 million, or 36.9%, of total revenues for the three month period ended
October 26, 2002.
Online advertising revenues are derived from the sale of advertising space
on our various websites. Online 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 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 websites. Revenues for each of the three months ended
October 26, 2002 and October 27, 2001 included approximately $0.5 million of
barter revenue.
E-commerce revenues 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 and
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.
Other Revenues
Other revenues are derived from the Company's former hardware, customer
support, and hardware-related professional services businesses. Other revenues
represent $0.2 million, or 4.1%, of total revenues for the three months ended
October 26, 2002.
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
7
servers, components, and desktop computers when persuasive evidence of an
arrangement existed, delivery occurred, the sales price was fixed and
determinable and collectibility was reasonably assured. In general, the Company
recognized 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. For the three months ended October 26, 2002 and
October 27, 2001, revenues from customer support services and professional
service contracts associated with our former hardware business were not
material.
Software Development Costs
In accordance with 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, 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.
Goodwill and Intangibles
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
amortizes 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. The Company
has determined that it has only one Reporting Unit, specifically the licensing,
implementation and support of its software applications. There was no carrying
value associated with goodwill at October 27, 2002 and July 27, 2002 to be
tested for impairment. As a result of the restructuring plan adopted by the
Company in September 2001, $26.7 million of goodwill was written off related to
the Company's previous acquisitions of NetAttach, Inc. ("NetAttach"), and
Precision Insight, Inc. ("Precision Insight"). The charge is included in the
caption "Restructuring costs and other special charges" in the statements of
operations. In addition, based on an impairment test performed at fiscal year
ended July 27, 2002, the Company determined that the goodwill carrying value was
impaired and it recorded an impairment loss of $3.6 million.
Intangible assets are amortized on a straight-line basis over three to
five years. The Company continually evaluates whether events or circumstances
have occurred that indicate the remaining estimated useful lives of these
intangible assets may not be recoverable. When events or circumstances indicate
that the intangible assets should be evaluated for possible impairment, the
Company uses an estimate of the related business segment's undiscounted net
income over the remaining useful life of the intangible assets in measuring
whether they are recoverable. No events or circumstances occurred during the
three months ended October 26, 2002 that would indicate a possible impairment in
the carrying value of intangible assets at October 26, 2002. As a result of the
restructuring plan adopted by the Company in September 2001, $3.9 million of
intangible assets were written off related to the Company's previous
acquisitions of NetAttach and Precision Insight. The charge is included in the
caption "Restructuring costs and other special charges" in the statements of
operations.
The changes in the carrying amount of the goodwill and intangible assets
are as follows (in thousands):
As of October 26, 2002 As of July 27, 2002
--------------------------------- ----------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
-------------- ------------ -------------- ------------
Domain and trade names $ 5,922 $ (4,890) $ 5,922 $ (4,457)
Purchased technology 2,534 (2,041) 2,534 (1,830)
-------- -------- -------- --------
Total intangible assets 8,456 (6,931) 8,456 (6,287)
Goodwill 60,362 (60,362) 60,362 (60,362)
-------- -------- -------- --------
$ 68,818 $(67,293) $ 68,818 $(66,649)
======== ======== ======== ========
8
The aggregate amortization expense of intangible assets, net of
restructuring charges was $0.6 million and $2.1 million for the three month
periods ending October 26, 2002 and October 27, 2001, respectively. The
estimated total amortization expense of acquired intangible assets is $2.2
million and $12,700 for the fiscal years ending 2003 and 2004, respectively.
The changes in the carrying amount of goodwill are as follows (in
thousands):
As of As of
October 26, July 27,
2002 2002
------------- -------
Balance at beginning of period $ -- $ 3,582
Amortization in the period -- --
Goodwill additions -- --
Write-off of goodwill -- (3,582)
------------- -------
Balance at end of period $ -- $ --
============= =======
The following table presents the effect on net loss and basic and diluted
net loss per share if the Company had followed the amortization provisions of
SFAS No. 142 for all periods presented (in thousands, except per share data):
Three Months Ended Twelve Months Ended
---------------------------------- -------------------------------
October 26, 2002 October 27, 2001 July 27, 2002 July 28, 2001
---------------- ---------------- ------------- -------------
Net loss (as reported) $(4,133) $(54,881) $(91,038) $(525,268)
========= ========= ========= =========
Add: goodwill amortization -- -- -- 82,249
--------- --------- --------- ---------
Adjusted net loss $(4,133) $(54,881) $(91,038) $(443,019)
========= ========= ========= =========
Basic and diluted net loss per share $(0.08) $(1.04) $(1.72) $(9.09)
========= ========= ========= =========
Weighted-average shares of common stock outstanding 53,734 53,241 53,290 51,410
Less: Weighted-average shares subject to repurchase (17) (563) (226) (2,669)
--------- --------- --------- ---------
Shares used in computing basic and diluted net loss
per share 53,717 52,678 53,064 48,741
========= ========= ========= =========
Accrued Liabilities and Other
Accrued liabilities and other mainly consists of accruals related to
compensation, legal reserves, deferred rent, and other unpaid expenses.
3. Restructuring Costs and Other Special Charges
In June 2001, the Company adopted a plan to exit the systems business,
which was accounted for in the fourth quarter ended July 28, 2001. The Company
decided to exit its systems business in reaction to the negative impact of the
slowdown in the economy on VA's customer base and VA's inability to effectively
penetrate the larger enterprise market. VA exited the systems business to pursue
its SourceForge application software business in order to reduce operating
losses and improve cash flow. The Company recorded a restructuring charge of
$70.1 million in the fourth quarter of fiscal 2001 related to exiting its
systems business. Of the $70.1 million, $53.5 million related to the impairment
of goodwill and purchased intangibles, resulting from its expectation that VA
would receive no significant future cash flows from the systems business. $6.6
million of the $70.1 million charge related to excess facilities primarily from
non-cancelable leases (with payments continuing until fiscal year 2010, unless
sublet completely), $3.2 million related to a workforce reduction consisting of
severance, acceleration of stock options, and other related costs attributable
to 84 employees primarily from the Company's systems business, and $6.8 million
related to other restructuring charges related to the exit from the systems
business. The accrual for non-cancelable lease payments includes management's
estimates of the time expected to sublet the facilities and estimates of
sublease income. These estimates are subject to change based on actual events.
VA evaluates and updates, if applicable, these estimates quarterly. As of
October 26, 2002, the Company had an accrual of approximately $6.3 million
outstanding related to non-cancelable leases.
In addition to the above, the Company recorded $10.5 million of charges in
connection with the exit of the systems business, which were classified as cost
of revenues in the statements of operations. Of the $10.5 million, $7.6 million
was related to excess inventory charges arising from the exit of the systems
business, $0.4 million was recorded for a workforce reduction consisting of
severance, and other related costs attributable to 64 former employees from the
Company's systems business, and the remaining $2.5 million related to other
restructuring costs. As of October 26, 2002, the Company had an accrual of
approximately $0.2 million outstanding related to non-cancelable leases related
to these restructuring charges.
9
In September 2001, the Company adopted a plan to exit the hardware-related
professional services and Linux software engineering services businesses in
order to focus solely on its SourceForge software application business. The
Company recorded a restructuring charge of $45.0 million in the first quarter of
fiscal year 2002 related to this exit. Of the $45.0 million, $30.6 million
related to the impairment of goodwill and purchased intangibles from its prior
year acquisitions of NetAttach and Precision Insight resulting from its
expectation that the Company would receive no significant future cash flows from
the hardware-related professional services and Linux software engineering
services businesses. $12.9 million of the $45.0 million charge related to excess
facilities primarily from non-cancelable leases (with payments continuing until
fiscal year 2010, unless sublet completely) and other costs for the abandonment
or disposal of property and equipment. Of the remaining $1.5 million
restructuring charge, $1.3 million was related to a workforce reduction
consisting of severance and other labor related costs attributable to 50 former
employees primarily from its Linux software engineering service business, and
$0.2 million related to other restructuring charges related to the exit of the
hardware-related services business. The accrual for non-cancelable lease
payments includes management's estimates of the time expected to sublet the
facilities and estimates of sublease income. These estimates are subject to
change based on actual events. VA evaluates and updates, if applicable, these
estimates quarterly. As of October 26, 2002, the Company had an accrual of
approximately $7.3 million outstanding related to non-cancelable leases related
to these restructuring charges.
During the third quarter of fiscal 2002, the Company recorded additional
restructuring charges associated with the exiting of a sublease agreement that
netted to $0.7 million, offset by reversals of excess restructuring accruals
related to prior periods of $0.6 million. As of October 26, 2002, the Company
had an accrual of approximately $2.4 million outstanding related to the
non-cancelable lease as a result of this sublease termination related to these
restructuring charges.
In July 2002, the Company adopted a plan to reduce its general and
administrative overhead costs. As a result of this plan, a $1.9 million
restructuring charge was recorded in the fourth quarter of fiscal year 2002. Of
the $1.9 million, $1.2 million related to excess facilities from non-cancelable
leases (with payments continuing until fiscal year 2004, unless sublet
completely) and the abandonment of property, and $0.7 million related to a
workforce reduction consisting of severance and other related costs attributable
to 35 employees. As of October 26, 2002, the Company had an accrual of
approximately $1.0 million outstanding related to non-cancelable leases and $0.1
million related to severances and related benefits related to these
restructuring charges.
In addition to the above, the Company recorded a $2.4 million net credit
included in cost of revenues in the consolidated statement of operations for the
quarter ended July 27, 2002. The $2.4 million net credit included a $2.7 million
credit adjustment relating to the overestimate of the fiscal 2001 fourth quarter
systems warranty restructuring accrual. A $0.3 million restructuring charge was
recorded for a workforce reduction, which mostly consisted of severance and
other related costs attributable to 14 former employees primarily in an effort
to align the Company's infrastructure with its operations. As of October 26,
2002, the Company had an accrual of approximately $0.1 million related to
severances and related benefits related to these restructuring charges.
The Company has recorded a net restructuring credit of $15,000 for the
three months ended October 26, 2002. This related to $116,000 of charges
associated with the Company's July 2002 plan to reduce its general and
administrative overhead costs, net of adjustments to previously recorded
restructuring reserves of $133,000. As of October 26, 2002, no outstanding
accruals remained related to these restructuring charges.
In addition to the above, the Company recorded a $182,000 net credit
included in cost of revenues in the consolidated statement of operations for the
three months ended October 26, 2002. The $182,000 consisted of $23,000
associated with severance and other related costs attributable to the July 2002
plan to align the Company's infrastructure with its operations, net of
adjustments to previously recorded restructuring reserves of $205,000 related to
the systems warranty reserve originally established in the fourth quarter of
fiscal 2001. As of October 26, 2002, no outstanding accruals remained related to
these restructuring charges.
10
Below is a summary of the restructuring charges in operating expenses (in
thousands):
Total Charged Total
Total Charged Total Charged To Operations Cash Restructuring
To Operations To Operations Quarter Ended Receipts/ Liabilities at
Fiscal 2001 Fiscal 2002 October 26, 2002 (Payments) October 26, 2002
-------- -------- -------- ------- --------
Cash Provisions:
Other special charges relating to
restructuring activities $2,159 $(888) $53 $(1,299) $25
Facilities charges 6,584 9,401 60 990 17,035
Employee severance and other related
charges 3,498 1,997 (43) (5,370) 82
-------- -------- -------- ------- --------
Total cash provisions 12,241 10,510 70 $(5,679) $17,142
-------- -------- -------- ======= ========
Non-cash Provisions:
Write-off of goodwill and intangibles 59,723 30,632 --
Write-off of other special charges relating
to restructuring activities 4,434 5,442 (85)
Write-off of accelerated options from
terminated employees 1,352 -- --
Acceleration of deferred stock
compensation 35,728 352 --
-------- -------- --------
Total non-cash provisions 101,237 36,426 (85)
-------- -------- --------
Total operating expense restructuring
provisions $113,478 $46,936 $(15)
======== ======== ========
4. Computation of Per Share Amounts
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 all periods presented, the Company has
excluded all outstanding 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):
Three Months Ended
--------------------------
October 26, October 27,
2002 2001
-------- --------
Net loss ...................................................... $ (4,133) $(54,881)
======== ========
Basic and diluted:
Weighted average shares of common stock outstanding ......... 53,734 53,241
Less: Weighted average shares subject to repurchase ......... (17) (563)
-------- --------
Shares used in computing basic and diluted net loss per share 53,717 52,678
======== ========
Basic and diluted net loss per share ........................ $ (0.08) $ (1.04)
======== ========
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):
As of As of
October 26, October 27,
2002 2001
------ ------
Anti-dilutive securities:
Options to purchase common stock ............ 11,511 14,707
Common stock subject to repurchase .......... 5 202
------ ------
11,516 14,909
====== ======
5. Comprehensive Loss
Comprehensive loss is comprised of net loss and other non-owner changes in
stockholders' equity, including foreign currency translation gains or loss and
unrealized gains or losses on available-for sale marketable securities. The
Company follows Statement SFAS No. 130, "Reporting Comprehensive Income." SFAS
130 requires unrealized gains or losses on the Company's available-for-sale
securities and foreign translation adjustments, which have been included in
stockholders' equity and excluded from net income, to be included in
comprehensive income. For the three month period ended October 26, 2002, total
comprehensive loss was approximately $4.2 million compared to comprehensive
income of approximately $54.6 million for the three month period ended October
27, 2001.
11
6. Segment and Geographic Information
The Company operates as one business segment, providing application
software products and related OSDN products and services. For the three month
periods ended October 26, 2002 and October 27, 2001, revenues from the Company's
single business segment and other revenues from the Company's former hardware
business were $5.1 million and $5.6 million, respectively.
The Company markets its products in the United States through its direct
sales force. Revenues for the three month periods ended October 26, 2002 and
October 27, 2001 were primarily generated from sales to end users in the United
States of America.
7. Customer Concentration
For the three month period ended October 26, 2002 and October 27, 2001,
Intel, which represented 19.7% and 18.3% of the Company's net revenues,
respectively, was the only customer that accounted for more than 10% of VA's net
revenues.
8. Litigation
The Company, two of its former officers (the "Former Officers"), and the
lead underwriter in its 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. Plaintiffs in the coordinated proceeding bring 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,
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. Defendants have filed motions to dismiss. In October 2002, the
court, pursuant to a stipulation, dismissed all claims against the Company's
Former Officers without prejudice. The Company believes it has meritorious
defenses to all of the claims against it and will defend them vigorously.
The Company is subject to various claims and legal actions arising in the
ordinary course of business. In the opinion of management, after consultation
with legal counsel, the ultimate disposition of these matters is not expected to
have a material effect on the Company's business, financial condition or results
of operations. 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. Although management currently believes that the outcome of
other outstanding legal proceedings, claims and litigation involving the Company
will not have a material adverse effect on its business, results of operations
or financial condition, litigation is inherently uncertain, and there can be no
assurance that existing or future litigation will not have a material adverse
effect on the Company's business, results of operations or financial condition.
9. Reclassifications
Certain reclassifications have been made to the prior year's financial
statements to conform to the current year's presentation. These classifications
had no effect on the prior year's stockholders' equity or results of operations.
10. Recent Accounting Policies
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses significant
issues relating to the implementation of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and
develops a single accounting method under which long-lived assets that are to be
disposed of by sale are measured at the lower of book value or fair value less
cost to sell. Additionally, SFAS No. 144 expands the scope of discontinued
operations to include all components of an entity with operations that (1) can
be distinguished from the rest of the entity and (2) will be eliminated from the
ongoing operations of the entity in a disposal transaction. SFAS No. 144 is
effective for financial statements issued for fiscal years beginning after
December 15, 2001 and its provisions are to be applied prospectively. The
adoption of SFAS No. 144 did not have a significant impact on the Company's
financial statements.
In November 2001, the EITF reached a consensus on EITF Issue No. 01-09,
"Accounting for Consideration Given by a Vendor to a Customer or a Reseller of
the Vendor's Products," which is a codification of EITF Issue No. 00-14, 00-22
and 00-25. This issue
12
presumes that consideration from a vendor to a customer or reseller of the
vendor's products to be a reduction of the selling prices of the vendor's
products and, therefore, should be characterized as a reduction of revenues when
recognized in the vendor's income statement and could lead to negative revenues
under certain circumstances. Revenue reduction is required unless consideration
relates to a separate identifiable benefit and the benefit's fair value can be
established. EITF No. 01-09 is effective for fiscal years beginning after
December 15, 2001 and interim periods within those fiscal years. The adoption of
EITF No. 01-9 has not had a material effect on the Company's consolidated
financial statements.
In November 2001, the FASB discussed Topic D-103, recharacterized as EITF
Issue No. 01-14, "Income Statement Characterization of Reimbursements Received
for `Out-of-Pocket' Expenses Incurred." This issue deals with classification in
the income statement of incidental expenses, which in practice are commonly
referred to as "out-of-pocket" expenses, incurred by entities that provide
services as part of their central ongoing operations. The Task Force reached a
consensus that reimbursements received for out-of-pocket expenses incurred
should be characterized as revenue in the income statement. This issue is
effective for fiscal years beginning after December 15, 2001. The Company has
recorded all "out-of-pocket" expenses for all periods presented as revenue.
Out-of-pocket expenses for all periods presented were immaterial.
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 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. There were no significant restructuring charges recorded during the
three month period ended October 26, 2002.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Special Note Regarding Forward-Looking Statements
This Form 10-Q contains forward-looking statements that involve risks and
uncertainties. Words such as "intend," "expect," "believe," "in our view," and
variations of such words and similar expressions, are intended to identify such
forward-looking statements, which include, but are not limited to, statements
regarding our expectations and beliefs regarding future revenue growth; gross
margins; financial performance and results of operations; technological trends
in, and emergence of Development Intelligence software; the future
functionality, business potential, demand for, efficiencies created by and
adoption of SourceForge; management's strategy, plans and objectives for future
operations; the growth of license revenue; 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 intentions and strategies regarding
customers and customer relationships; our intent to continue to invest
significant resources in software 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; sufficiency of our
cash resources, cash generated from operations and investments to meet our
operating and working capital requirements; and our ability to attract and
retain highly qualified personnel. 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-Q entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations." We undertake no obligation to update the
forward-looking statements to reflect events or circumstances occurring after
the date of this Form 10-Q.
Overview
We were incorporated in California in January 1995 and reincorporated in
Delaware in December 1999. We develop, market and support SourceForge Enterprise
Edition ("SourceForge"), which is proprietary software designed for corporate
and public-sector information technology ("IT") and software engineering
organizations. SourceForge provides Development Intelligence (DI) to our
customers by combining software development tools with the ability to track,
measure and report on software project activity in real-time. Development
Intelligence allows organizations to access, analyze and share information on
software development activity as it takes place. By aligning software
development activity with business goals, Development Intelligence helps
organizations improve operational efficiency and build better quality software.
SourceForge is a relatively new product and additional development and
enhancements are expected in the future.
13
A component of our SourceForge sales strategy is the Open Source
Development Network, Inc. ("OSDN"). OSDN is our network of web sites that serve
the IT and software development communities. OSDN web sites include
SourceForge.net, which is the largest reference site for potential SourceForge
customers. As of November 30, 2002, SourceForge.net is the development home for
more than 50,000 software projects and more than 500,000 registered users. In
addition to the credibility SourceForge derives from the substantial and growing
usage of OSDN's SourceForge.net, we market SourceForge through product
advertising on the OSDN web sites.
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
believe that our accounting policies are prudent and provide a clear view of our
financial performance. 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 five quarters of operations as an application software
company, and accordingly have a very short operating history in our current
business. While we believe that we are making good progress in our new business,
a substantial majority of our revenues continues to be derived from OSDN and we
face numerous risks and uncertainties that commonly confront new and emerging
businesses in emerging markets, which we have identified in the "Risk Factors"
section below.
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 condensed consolidated financial statements and
the accompanying notes thereto included in this quarterly report on Form 10-Q.
Three Months Ended
October 26, October 27,
2002 2001
----------- -----------
Consolidated Statements of Operations Data:
Software revenues ................................. 14.0% 2.1%
Online revenues ................................... 81.9 65.1
Other revenues .................................... 4.1 32.8
------ ------
Net revenues ................................... 100.0% 100.0%
Software cost of revenues ......................... 11.7 10.7
Online cost of revenues ........................... 45.5 40.1
Other cost of revenues ............................ (3.1) (7.0)
------ ------
Cost of revenues ............................... 54.1 43.8
------ ------
Gross margin ...................................... 45.9 56.2
------ ------
Operating expenses:
Sales and marketing ............................ 45.7 77.0
Research and development ....................... 40.3 52.0
General and administrative ..................... 34.6 51.5
Restructuring costs and other special charges .. (0.3) 806.0
Amortization of deferred stock compensation .... 0.7 35.6
Amortization of goodwill and intangible assets . 12.7 37.4
------ ------
Total operating expenses ..................... 133.7 1059.5
------ ------
Loss from operations .............................. (87.8) (1003.3)
Interest and other income, net .................... 6.4 19.4
------ ------
Net loss .......................................... (81.4)% (983.9)%
====== ======
Net loss applicable to common stockholders ........ (81.4)% (983.9)%
====== ======
14
Net Revenues
Software Revenues
Software revenues are derived from our SourceForge application software
business and include software licenses, professional services, maintenance,
support and training. Software revenues represent $0.7 million, or 14.0%, of
total revenues for the three month period ended October 26, 2002, as compared to
$0.1 million, or 2.1%, of total revenues for the three month period ended
October 27, 2001.
Revenues from software license agreements follow 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, 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 value based on published professional service rates.
When an agreement includes professional services that are significant or
essential to the functionality of the software, 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
and services are recorded as deferred revenue.
For term arrangements, we do not use the residual method to recognize
revenues since we are unable to establish fair value for the individual contract
components such as software license, maintenance and support. As a result, we
recognize the entire contract value ratably over the term of the contract,
normally 12 months. 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 consider the fee not to be fixed or determinable.
Online Revenues
Online revenues include online advertising as well as e-commerce revenue.
Online advertising revenues represent $2.3 million, or 45.0%, of total revenues
for the three month period ended October 26, 2002, and includes $0.5 million of
barter revenue. This compares to online advertising revenues of $2.2 million, or
39.2%, of total revenues for the three month period ended October 27, 2001,
which included $0.5 million of barter revenue. E-commerce revenues represent
$1.9 million, or 36.9%, of total revenues for the three month period ended
October 26, 2002. This compares to e-commerce revenues of $1.4 million, or
25.9%, of total revenues for the three month period ended October 27, 2001.
Online Advertising revenues are derived from the sale of advertising space
on our various websites. We recognize online advertising revenues over the
period in which the advertisements are displayed, provided that no significant
obligations remain and collection of the receivable is probable. 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 websites.
E-commerce revenues are derived from the online sale of consumer goods and
digital animations. We recognize e-commerce revenues 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 and 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.
15
Other Revenues
Other revenues are derived from our former hardware, customer support, and
professional services businesses. Other revenues represent $0.2 million, or
4.1%, of total revenues for the three month period ended October 26, 2002. This
compares to other revenues of $1.8 million, or 32.8%, of total revenues for the
three month period ended October 27, 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 and
determinable and collectibility was reasonably assured. In general, we
recognized product revenue upon shipment of the goods. We did not grant our
customers any rights to return products.
We recognize 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 recognize revenues from professional service
contracts upon completion of the project, or used the percentage of completion
method of the project where project costs could be reasonably estimated. We
record any payments received prior to revenue recognition as deferred revenue.
Our net revenues decreased to $5.1 million in the three month period ended
October 26, 2002, from $5.6 million for the three month period ended October 27,
2001. The $0.5 million net decrease in revenues was due primarily to the exiting
of the systems and services business segment, offset by an increase in the
current software, online advertising, and e-commerce businesses. SourceForge
revenue increased $0.6 million to $0.7 million in the three month period ended
October 26, 2002 from $0.1 million in the three month period ended October 27,
2001. Online advertising revenue increased $0.1 million to $2.3 million in the
three month period ended October 26, 2002 from $2.2 million in the three month
period ended October 27, 2001, which included approximately $0.5 million of
barter revenue arising from web advertising for both periods presented.
E-commerce revenue increased $0.5 million to $1.9 million in the three month
period ended October 26, 2002 from $1.4 million in the three month period ended
October 27, 2001. Other revenue decreased $1.6 million to $0.2 million in the
three month period ended October 26, 2002 from $1.8 million in the three month
period ended October 27, 2001.
Sales for the three month periods ended October 26, 2002 and October 27,
2001 were primarily to customers located in the United States of America.
For the three month periods ended October 26, 2002 and October 27, 2001,
Intel, which represented 19.7% and 18.3% of our net revenues, respectively, was
the only customer that accounted for more than 10% of VA's net revenues.
Cost of Revenues
Cost of revenues increased to $2.7 million in the three month period ended
October 26, 2002 from $2.4 million for the three month period ended October 27,
2001. Gross margin decreased as a percentage of revenue to 45.9% in the three
month period ended October 26, 2002 from 56.2% in the three month period ended
October 27, 2001. The decrease in gross margin as a percentage of net revenue
was due primarily to a credit of $3.1 million related to the reversal of
inventory reserves during the three month period ended October 27, 2001. This
credit was 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 the three month period ended October 26, 2002 included net
restructuring charges of a $0.2 million credit as a result of minor adjustments
to previous accruals. Net of restructuring charges, cost of revenues decreased
to $2.9 million from $5.5 million. This decrease was the result of exiting the
systems business. We expect cost of revenues to remain relatively constant or to
slightly increase in absolute dollars in the future.
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 $2.3 million in the three month
period ended October 26, 2002 from $4.3 million in the three month period ended
October 27, 2001. The decrease was related to various factors, primarily the
exiting of our Linux software engineering and professional services businesses
which represented $0.1 million of the decrease, the decline in our investment in
VA Linux Systems Japan KK ("VA Linux Japan") which represented $0.4 million of
the decrease, and the decrease in overall sales and
16
marketing related spending, including significant headcount reductions which
accounted for $1.4 million of the decrease. Headcount in sales and marketing
decreased to 31 in the three month period ended October 26, 2002 from 47 in the
three month period ended October 27, 2001. Sales and marketing expenses as a
percentage of net revenues decreased to 45.7% for the three month period ended
October 26, 2002 from 77.0% in the three month period ended October 27, 2001.
This decrease was primarily due to decreased spending levels as described above.
We believe our sales and marketing expenses to support our SourceForge business
will increase in absolute dollars as we intend to continue to grow our sales
force. However, in the future, we expect sales and marketing expenses to
decrease slightly as a percentage of revenue.
Research and Development Expenses
Research and development expenses consist primarily of salaries and
related expenses for software engineers. We expense all of our research and
development costs as they are incurred.
Research and development expenses decreased to $2.0 million in the three
month period ended October 26, 2002 from $2.9 million in the three month period
ended October 27, 2001. 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 decline in our
investment in VA Linux Japan, which accounted for a $0.3 million reduction,
offset by an increase in our research and development efforts related to our
current business of $0.7 million. Headcount in research and development
decreased slightly to 44 in the three month period ended October 26, 2002 from
46 in the three month period ended October 27, 2001. Research and development
expenses as a percentage of net revenues decreased to 40.3% for the three month
period ended October 26, 2002 from 52.0% for the three month period ended
October 27, 2001. This decrease was primarily due to our exiting the Linux
software engineering and professional services businesses and decreasing our
investment in VA Japan KK. We expect research and development expenses to remain
relatively consistent in absolute dollars and decrease as a percentage of
revenue in the future.
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 $1.8 million in the three
month period ended October 27, 2002 from $2.9 million for the three month period
ended October 27, 2001. General and administrative expenses for the three month
period ended October 27, 2001 included the reversal of $0.8 million for the over
estimate for bad debt provisions booked during the reorganization of the
business. Excluding these charges, the decrease in absolute dollars resulted
primarily from a decrease in administrative personnel. The decline in our
investment in VA Linux Japan represented $0.2 million of the decrease, and our
decision in the fourth quarter of fiscal 2002 to reduce our administrative and
overhead costs to align with our business model represented $1.7 million of the
decrease. Headcount in general and administrative services decreased to 22 in
the three month period ended October 26, 2002 from 62 in the three month period
ended October 27, 2001. General and administrative expenses as a percentage of
net revenues decreased to 34.6% for the three month period ended October 26,
2002 from 51.5% for the three month period ended October 27, 2001. The decrease
as a percentage of net revenues was primarily due to our decreased spending
levels as described above. We expect general and administrative expenses to
remain relatively consistent in absolute dollars and decrease as a percentage of
revenue in the future.
Restructuring Costs and Other Special Charges
In June 2001, we adopted a plan to exit the systems business, which we
accounted for in the fourth quarter ended July 28, 2001. We decided to exit our
systems business and pursue our applications software business in order to
reduce operating losses and improve cash flow. We recorded a restructuring
charge of $70.1 million in the fourth quarter of fiscal year 2001 related to
exiting our systems business. Of the $70.1 million, $53.5 million related to the
impairment of goodwill and purchased intangibles resulting from our expectation
that we would receive no significant future cash flows from the systems
business. $6.6 million of the $70.1 million charge related to excess facilities
primarily from non-cancelable leases, net of $3.1 million in assumed sublease
income (with payments continuing until fiscal year 2010, unless sublet
completely), $3.2 million related to a workforce reduction consisting of
severance, acceleration of stock options, and other related costs attributable
to 84 employees primarily from our systems business, and $6.8 million related to
other restructuring charges related to the exit from the systems business. The
accrual for non-cancelable lease payments included management's estimates of the
time expected to sublet the facilities and 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 October 26, 2002, we had an
accrual of approximately $6.3 million outstanding related to non-cancelable
leases.
17
In addition to the above, we recorded $10.5 million of charges in
connection with the exit of the systems business, which was classified as cost
of revenues in the statements of operations. Of the $10.5 million, $7.6 million
was related to excess inventory charges arising from the exit from the systems
business, $0.4 million was recorded for a workforce reduction consisting of
severance, and other related costs attributable to 64 former employees from our
systems business, and the remaining $2.5 million related to other restructuring
costs. As of October 26, 2002, we had an accrual of approximately $0.2 million
outstanding related to non-cancelable leases.
In September 2001, we adopted a plan to exit the hardware-related
professional services and Linux software engineering services businesses in
order to focus on our SourceForge application software business. We recorded a
restructuring charge of $45.0 million in the first quarter of fiscal 2002
related to this exit. Of the $45.0 million, $30.6 million related to the
impairment of goodwill and purchased intangibles from our prior year
acquisitions of NetAttach and Precision Insight resulting from our expectation
that we would receive no significant future cash flows from the hardware-related
professional services and Linux software engineering services businesses. $12.9
million of the $45.0 million charge related to excess facilities primarily from
non-cancelable leases, net of $2.4 million in assumed sublease income (with
payments continuing until fiscal year 2010, unless sublet completely) or other
costs for the abandonment or disposal of property and equipment. Of the
remaining $1.5 million restructuring charge, $1.3 million was related to a
workforce reduction consisting of severance and other labor related costs
attributable to 50 former employees primarily from our Linux software
engineering service business and $0.2 million related to other restructuring
charges related to the exit of the hardware-related services business. The
accrual for non-cancelable lease payments included management's estimates of the
time expected to sublet the facilities and 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 October 26, 2002, we had an
accrual of approximately $7.3 million outstanding related to non-cancelable
leases related to these restructuring charges.
During the third quarter of fiscal 2002, we recorded additional
restructuring charges associated with the termination of a sublease agreement of
$0.7 million offset by reversals of excess restructuring accruals related to
prior periods of $0.6 million. As of October 26, 2002, we had an accrual of
approximately $2.4 million outstanding related to the non-cancelable lease as a
result of this sublease termination related to these restructuring charges.
In July 2002, we adopted a plan to reduce our general and administrative
overhead costs. As a result of this plan, we recorded a restructuring charge of
$1.9 million in the fourth quarter of fiscal 2002. Of the $1.9 million, $1.2
million related to excess facilities from non-cancelable leases (with payments
continuing until fiscal year 2004, unless sublet completely) and the abandonment
of property, and $0.7 million related to a workforce reduction consisting of
severance and other related costs attributable to 35 employees. The accrual for
non-cancelable lease payments included management's estimates of the time
expected to sublet the facilities and 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 October 26, 2002, we had an
accrual of approximately $1.0 million outstanding related to non-cancelable
leases and $0.1 million related to severances and related benefits related to
these restructuring charges.
In addition to the above, we recorded a $2.4 million net credit included
in cost of revenues in the consolidated statement of operations for the quarter
ended July 27, 2002. The $2.4 million net credit included a $2.7 million credit
adjustment relating to the overestimate of the fiscal 2001 fourth quarter
systems warranty restructuring accrual. A $0.3 million restructuring charge was
recorded for a workforce reduction, which mostly consisted of severance and
other related costs attributable to 14 former employees primarily in an effort
to align our infrastructure with our operations. As of October 26, 2002, we had
an accrual of approximately $0.1 million related to severances and related
benefits related to these restructuring charges.
We recorded a net restructuring credit of $15,000 for the three months
ended October 26, 2002. This related to $116,000 of charges associated with the
July 2002 plan to reduce its general and administrative overhead costs, net of
adjustments to previously recorded restructuring reserves of $133,000. As of
October 26, 2002, no outstanding accruals remained related to these
restructuring charges.
In addition to the above, we recorded a $182,000 net credit included in
cost of revenues in the consolidated statement of operations for the three
months ended October 26, 2002. The $182,000 consisted of $23,000 associated with
severance and other related costs attributable to the July 2002 plan, net of
adjustments to previously recorded restructuring reserves of $205,000 related to
the systems warranty reserve originally established in the fourth quarter of
fiscal 2001. As of October 26, 2002, no outstanding accruals remained related to
these restructuring charges.
18
Below is a summary of the restructuring charges in operating expenses (in
thousands):
Total Charged Total
Total Charged Total Charged To Operations Cash Restructuring
To Operations To Operations Quarter Ended Receipts/ Liabilities at
Fiscal 2001 Fiscal 2002 October 26, 2002 (Payments) October 26, 2002
-------- -------- -------- ------- --------
Cash Provisions:
Other special charges relating to
restructuring activities $2,159 $(888) $53 $(1,299) $25
Facilities charges 6,584 9,401 60 990 17,035
Employee severance and other related
charges 3,498 1,997 (43) (5,370) 82
-------- -------- -------- ------- --------
Total cash provisions 12,241 10,510 70 $(5,679) $17,142
-------- -------- -------- ======= ========
Non-cash Provisions:
Write-off of goodwill and intangibles 59,723 30,632 --
Write-off of other special charges relating
to restructuring activities 4,434 5,442 (85)
Write-off of accelerated options from
terminated employees 1,352 -- --
Acceleration of deferred stock
compensation 35,728 352 --
-------- -------- --------
Total non-cash provisions 101,237 36,426 (85)
-------- -------- --------
Total operating expense restructuring
provisions $113,478 $46,936 $(15)
======== ======== ========
Amortization of Deferred Stock Compensation
In connection with the grant of stock options to employees during fiscal
1999 and prior to our initial public offering in fiscal 2000, we expensed
deferred stock compensation of $38,000 during the three month period ended
October 26, 2002, compared to $1.5 million during the three month period ended
October 27, 2001. In addition, in connection with the restructuring, we made a
$2.1 million adjustment for deferred compensation that will never vest for stock
options for terminated employees during the three month period ended October 27,
2001, which has 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.
In connection with our prior fiscal year acquisitions, $0.5 million of
compensation expense was recorded during the three month period ended October
27, 2001. No compensation expense was recorded during the three month period
ended October 26, 2002. In addition, in connection with restructuring, we
recorded $2.7 million of compensation expense related to NetAttach and Precision
Insight in the three month period ended October 27, 2001, which has been
included in restructuring costs and other special charges in the statements of
operations. We do not expect any further compensation expense in connection with
our prior acquisitions.
Amortization of Goodwill and Intangibles
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." Under SFAS No. 142, goodwill and intangible assets with indefinite
lives are not amortized but are subject to at least an annual assessment for
impairment applying a fair-value based test. Upon adoption of SFAS No. 142 on
July 29, 2001, we no longer amortize goodwill. In connection with the
acquisition of OSDN, we amortized $0.6 million of intangibles during the three
month period ended October 26, 2002. In connection with the acquisitions of
NetAttach, Andover.Net, and Precision Insight, we amortized $2.1 million of
intangibles for the three month period ended October 27, 2001. In addition, in
connection with the restructuring plan approved in September 2001, we wrote-off
an additional $30.6 million of goodwill and intangibles related to our NetAttach
and Precision Insight acquisitions due to the exit of the professional services
and Linux software engineering businesses.
We periodically evaluate the carrying amount of our long-lived assets and
apply the provisions of SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of." SFAS No. 121
requires that long-lived assets and certain identifiable intangibles to be held
and used or disposed of by an entity be reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. No factors occurred during the three
19
month period ended October 26, 2002 that would indicate a possible impairment in
the carrying value of intangible assets at October 26, 2002.
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 $0.3 million
for the three month period ended October 26, 2002 from $1.1 million for the
three month period ended October 27, 2001. The decrease was primarily due to our
decreased investment from VA Linux Japan, which accounted for $0.3 million of
the decrease, as well as a lower cash balance and decreased returns on our cash
as a result of declining interest rates from prior year, which accounted for
$0.3 million of the decrease. We expect interest and other income, net to
decline as our cash balance decreases to support our operations.
Income Taxes
As of October 26, 2002, we had federal and state net operating loss
carry-forwards for tax reporting purposes available to offset future taxable
income. A valuation allowance has been recorded for the total deferred tax
assets as a result of uncertainties regarding realization of the assets based on
the lack of consistent profitability to date and the uncertainty of future
profitability. The federal and state net operating loss carry-forwards expire at
various dates through fiscal year 2021 and fiscal year 2012, respectively, to
the extent that they are not utilized. We have not recognized any benefit from
these net operating loss carry-forwards because of uncertainty surrounding their
realization. The amount of net operating losses that we can utilize is limited
under tax regulations because we have experienced a cumulative stock ownership
change of more than 50% over the last three years.
Liquidity and Capital Resources
As of October 26, 2002, our principal sources of liquidity included cash
and cash equivalents of $15.3 million, and marketable securities of $32.1
million. Cash and cash equivalents decreased to $15.3 million at October 26,
2002 from $35.1 million at July 27, 2002.
For the three month period ended October 26, 2002, we used $5.7 million in
cash for operating activities, compared to $11.3 million for the three month
period ended October 27, 2001. This represents a decrease of 50% and is
primarily due to a decrease in our net loss to $4.1 million for the three month
period ended October 26, 2002, compared to our net loss of $54.9 million for the
three month period ended October 27, 2001. This decrease in net loss was
primarily due to our reduction in expenses through our various restructurings,
including exiting the systems and services businesses and changing our focus to
application software. Non-cash items consisting primarily of depreciation and
amortization of goodwill, provision for bad debts, provision for excess and
obsolete inventory, loss on disposal of assets, non-cash restructuring, and
amortization of deferred compensation were $1.6 million and $38.9 million for
the three month periods ended October 26, 2002 and October 27, 2001,
respectively. Other operating activities during the three month period ended
October 26, 2002 consisted of decreases in accounts receivable, accounts
payable, inventories, prepaid expenses and other assets, accrued liabilities,
restructuring accruals, and a slight increase in other long-term liabilities.
The decrease in all accounts, with the exception of other long-term liabilities,
reflects our decreased spending levels.
For the three month period ended October 26, 2002, we used $14.3 million
in cash related to investing activities primarily from the sale/purchase of
marketable securities. For the three month period ended October 27, 2001, we
received $2.8 million in cash for investing activities primarily from the
sale/purchase of marketable securities.
For the three month periods ended October 26, 2002 and October 27, 2001,
we generated $0.1 million and $20,000 in cash from financing activities,
respectively. Cash provided by financing activities was due to proceeds from the
issuance of common stock to our employees, partially offset by payments on notes
payable.
For the three month period ended October 26, 2002, exchange rate changes
had an immaterial effect on cash and cash equivalents. For the three month
period ended October 27, 2001, exchange rate changes had a positive effect on
cash and cash equivalents of $0.2 million.
As of October 26, 2002 and July 27, 2002, we had outstanding letters of
credit issued under the Line of Credit of approximately $1.4 million related to
the corporate facility lease. The amount related to this letter of credit is
recorded in the "Restricted cash" section of the condensed consolidated balance
sheet.
20
Our liquidity and capital requirements depend on numerous factors,
including market acceptance of our application software products, the resources
we devote to developing, marketing, selling and supporting our application
software 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-based 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 condensed 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
There have been no material changes to our critical accounting policies
and estimates from those disclosed in our report on Form 10-K for our fiscal
year ended July 27, 2002.
Recent Accounting Pronouncements
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses significant
issues relating to the implementation of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and
develops a single accounting method under which long-lived assets that are to be
disposed of by sale are measured at the lower of book value or fair value less
cost to sell. Additionally, SFAS No. 144 expands the scope of discontinued
operations to include all components of an entity with operations that (1) can
be distinguished from the rest of the entity and (2) will be eliminated from the
ongoing operations of the entity in a disposal transaction. SFAS No. 144 is
effective for financial statements issued for fiscal years beginning after
December 15, 2001 and its provisions are to be applied prospectively. The
adoption of SFAS No. 144 did not have a significant impact on our financial
statements.
In November 2001, the EITF reached a consensus on EITF Issue No. 01-09,
"Accounting for Consideration Given by a Vendor to a Customer or a Reseller of
the Vendor's Products," which is a codification of EITF Issue No. 00-14, 00-22
and 00-25. This issue presumes that consideration from a vendor to a customer or
reseller of the vendor's products to be a reduction of the selling prices of the
vendor's products and, therefore, should be characterized as a reduction of
revenues when recognized in the vendor's income statement and could lead to
negative revenues under certain circumstances. Revenue reduction is required
unless consideration relates to a separate identifiable benefit and the
benefit's fair value can be established. EITF No. 01-09 is effective for fiscal
years beginning after December 15, 2001 and interim periods within those fiscal
years. The adoption of EITF No. 01-9 has not had a material effect on our
consolidated financial statements.
In November 2001, the FASB discussed Topic D-103, recharacterized as EITF
Issue No. 01-14, "Income Statement Characterization of Reimbursements Received
for "Out-of-Pocket" Expenses Incurred." This issue deals with classification in
the income statement of incidental expenses, which in practice are commonly
referred to as "out-of-pocket" expenses, incurred by entities that provide
services as part of their central ongoing operations. The Task Force reached a
consensus that reimbursements received for out-of-pocket expenses incurred
should be characterized as revenue in the income statement. This issue is
effective for fiscal years beginning after December 15, 2001. We have recorded
all "out-of-pocket" expenses for all periods presented as revenue. Out-of-pocket
expenses for all periods presented were immaterial.
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
21
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 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. There were
no significant restructuring charges recorded during the three month period
ended October 26, 2002.
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 DEVELOPMENT INTELLIGENCE (DI) APPLICATION SOFTWARE IS
NEW, WE DO NOT KNOW WHETHER EXISTING AND POTENTIAL CUSTOMERS WILL LICENSE
SOURCEFORGE IN SUFFICIENT QUANTITY FOR US TO ACHIEVE PROFITABILITY. The market
for Development Intelligence (DI) software is new and rapidly evolving. Our
future growth and financial performance will depend on broad market acceptance
of SourceForge, our Development Intelligence application. 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 and market acceptance of SourceForge. In
particular, potential customers may be unwilling to make the significant capital
investment needed to license SourceForge and retrain their software developers
to develop software using our product. Many of our customers have licensed only
small quantities of SourceForge, and these or new customers may decide not to
broadly implement or license additional copies. 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 of SourceForge fails to emerge, this
would have a significant, adverse effect upon our 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 LARGER OPERATING
LOSSES. We are directing the majority of our product research and development
efforts to SourceForge. The failure to achieve widespread 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, upgrading and supporting SourceForge. Our failure to
do so could adversely affect our business and operating results.
IF WE DO NOT DEVELOP AND ENHANCE SOURCEFORGE TO KEEP PACE WITH TECHNOLOGICAL,
MARKET, AND INDUSTRY CHANGES, OUR REVENUES MAY NOT GROW. Rapid technological
advances, changes in customer requirements, and frequent new product
introductions and enhancements characterize the software industry generally. We
must respond rapidly to developments related to hardware platforms, operating
systems, and software development tools. These developments will require us to
make substantial product-development investments. 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 revenues may not
grow or may decline. We believe our continued success will become increasingly
dependent on our ability to:
o support multiple platforms, including Linux, commercial UNIX and
Microsoft Windows;
o use the latest technologies to continue to support web-based
Development Intelligence; and
o continually support the rapidly changing standards, tools and
technologies used in software development.
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 Development Intelligence applications internally, including ad hoc
development of Development Intelligence
22
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 operations.
Our product 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 long and complex as customers
consider a number of factors before committing to purchase SourceForge. Factors
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. 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 the 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:
o Because the licensing of our software products is often an
enterprise-wide decision by our customers that involves many
factors, our ability to license our product may be impacted by
changes in the strategic importance of software projects 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
selection of a vendor, could impact the timing and amount of
revenues recognized in a quarterly period.
o Changes in our sales incentive plans may have an unpredictable
impact on our sales cycle and contracting activities.
o The number, timing and significance of enhancements to our software
products and the introduction 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 THE TRANSACTION AND OUR ABILITY TO RECOGNIZE REVENUE AS
ANTICIPATED. Because we sell enterprise-wide solutions, the process of
contractual negotiation is becoming more protracted and critical. The additional
time needed to negotiate mutually acceptable terms that culminate in an
agreement to license our products could extend the sale cycle. Several factors
may also 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.
In addition, slowdowns or variances from internal expectations 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. Most of our current customers
initially purchase a limited number of licenses as they implement and adopt our
Development Intelligence application. Even if the customer successfully uses
SourceForge, customers may not purchase additional licenses to expand the use of
our product. Purchases of expanded 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, our direct sales force
depends on strategic relationships and marketing alliances to obtain customer
leads, referrals and distribution. If we are unable to maintain our existing
strategic relationship with IBM, our ability to increase our sales will 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.
23
IF WE ARE UNABLE TO PROVIDE HIGH-QUALITY CUSTOMER SUPPORT AND SERVICES, WE WILL
NOT MEET THE NEEDS OF OUR CUSTOMERS AND REVENUE 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 Development
Intelligence applications entirely, which would materially and adversely affect
our operations.
INCREASED UTILIZATION AND COSTS OF OUR TECHNICAL SUPPORT SERVICES MAY ADVERSELY
AFFECT OUR FINANCIAL RESULTS. Like many companies in the software industry,
technical support costs will likely comprise a significant portion of our
operating costs and expenses. Over the short term, we may be unable to respond
to fluctuations in customer demand for support services. We also may 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.
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 Development Intelligence software 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 Development Intelligence software
marketplace. Our potential competitors include entrenched companies in closely
related markets who may choose to enter and focus on the Development
Intelligence software marketplace. Although we do not believe that we presently
have an entrenched competitor, we expect competition to intensify in the future
if the market for Development Intelligence applications continues to expand.
Many of these potential competitors are much larger than we are and may have
significantly more resources and more experience. Our potential competitors
include providers of software and related services as well as providers of
hosted application services. Our potential competitors vary in size, scope of
services offered and platforms supported. Many of our competitors have 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
pressures 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.
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, for which we compete with various media including newspapers,
radio, magazines and various Internet sites. 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 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 company, we have experienced negative cash flow from
operations and expect to experience negative cash flow from operations for at
least the foreseeable future. Unless we monitor and minimize the level of use of
our existing cash, cash equivalents and marketable securities, we may require
additional capital to fund continued operations beyond our fiscal year 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 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.
24
IT IS DIFFICULT TO EVALUATE OUR BUSINESS BECAUSE WE HAVE A LIMITED HISTORY
OPERATING AS A PROVIDER OF SOURCEFORGE. We have a brief operating history as a
provider of our SourceForge commercial Development Intelligence 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 professional
services and Linux software engineering 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 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.
DESPITE REDUCTIONS IN THE SIZE OF OUR WORKFORCE, OUR BUSINESS MAY FAIL TO GROW
RAPIDLY ENOUGH TO OFFSET OUR ONGOING OPERATING EXPENSES. In February, June and
August 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 2002 and the first quarter of fiscal 2003, we further reduced our
workforce such that as of October 26, 2002 we had 135 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.
OUR QUARTERLY NET REVENUES AND RESULTS OF OPERATIONS MAY VARY SIGNIFICANTLY IN
THE FUTURE DUE TO A NUMBER OF ADDITIONAL 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 the acceptance of our products by the marketplace;
o the continued slowdown in technology spending and unfavorable
economic conditions in the technology industry;
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 introduction or enhancement of our products or our competitors'
products;
o changes in our pricing policies or the pricing policies of our
competitors;
o an increase in our operating costs;
o whether we are able to expand our sales and marketing programs for
our software products;
o the level of sales incentives for our direct sales force;
o changes in accounting pronouncements applicable to us;
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; and
o possibility that software development delays will result from our
outsourcing of certain SourceForge research and development efforts
to CSS, an independent contractor located primarily in India.
In addition to the foregoing factors, the risk of quarterly fluctuations is
increased by the fact that many enterprise customers negotiate site 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 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
25
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.
Factors that may decrease our online revenues include:
o decreased demand for advertising;
o the addition or loss of advertisers, and the size and timing of the
advertising purchases of individual advertisers;
o trends in Internet use and advertising;
o technical difficulties or system downtime; and
o economic conditions specific to advertising, the Internet and
Internet media.
Accordingly, you should not rely on the results of any past periods as an
indication of our future performance.
WE HAVE A HISTORY OF LOSSES AND EXPECT TO CONTINUE TO INCUR NET LOSSES FOR THE
FORESEEABLE FUTURE. We incurred a loss of $4.1 million for our fiscal first
quarter ended October 26, 2002, and we had an accumulated deficit of $730.1
million as of October 26, 2002. 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, 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.
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.
ECONOMIC CONDITIONS HAVE AFFECTED AND COULD CONTINUE TO NEGATIVELY IMPACT OUR
REVENUES AND PROFITS. Our revenue growth depends on the overall demand for IT
software spending. The recession in the United States has and may continue to
result in cutbacks by our current and potential customers in the purchase of our
software products and services, postponed or canceled orders, longer sales
cycles and lower average selling prices. To the extent that the current downturn
continues or increases in severity, we believe demand for our products and
services, and therefore future revenues, could be further impacted.
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 third-party patent rights. We cannot prevent current or future patent
holders or other owners of intellectual property from suing us and others
seeking monetary damages or an injunction against shipment of our software
offerings. A patent holder may deny us a license or force us to pay royalties.
In either event, our operating results could be seriously harmed. In addition,
employees hired from competitors might utilize proprietary and trade secret
information from their former employers without our knowledge, even though our
employment agreements and policies clearly prohibit such practices.
Any litigation regarding our intellectual property, with or without merit, could
be costly and time consuming to defend, divert the attention of our management
and key personnel from our business operations and cause product shipment
delays. Claims of intellectual property infringement may require us to enter
into royalty and licensing agreements that may not be available on terms
acceptable to us, or at all. In addition, parties making claims against us may
be able to obtain injunctive or other equitable relief that could effectively
block our ability to sell our products in the United States and abroad and could
result in an award of substantial
26
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, patent 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 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.
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 recent 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.
Other Risks Related To Our Business
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 business. Our
systems will continue to require additional modifications and improvements to
respond to current and future changes in our business. If we cannot grow our
software business, 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 business will suffer.
27
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The primary objective of our investment activities is to preserve
principal while at the same time maximizing the income we receive from our
investments without significantly increasing risk. Some of the securities that
we have invested in may be subject to market risk. This means that a change in
prevailing interest rates may cause the principal amount of the investment to
fluctuate. For example, if we hold a security that was issued with a fixed
interest rate at the then-prevailing rate and the prevailing interest rate later
rises, the principal amount of our investment will probably decline. To minimize
this risk, we maintain a portfolio of cash equivalents 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
October 26, 2002. This table does not include money market funds because those
funds are not subject to market risk.
Maturing Maturing within Maturing
(in thousands) within three months three months to one year Greater than one year
------------------- ------------------------ ---------------------
As of October 26, 2002
Cash equivalents $ 7,899
Weighted-average interest rate 1.93%
Short-term investments $10,548
Weighted-average interest rate 2.10%
Long-term investments $21,520
Weighted-average interest rate 2.71%
We have operated primarily in the United States, and virtually all sales
have been made in U.S. dollars. Accordingly, we have not had any material
exposure to foreign currency rate fluctuations.
The estimated fair value of our cash, cash equivalents and investments
approximate carrying value. We do not currently hold any derivative instruments
and do not engage in hedging activities.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures
Based on their evaluation of our disclosure controls and procedures (as
defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of
1934) as of a date within 90 days of the filing date of this Quarterly Report on
Form 10-Q, our principal executive officer and principal financial officer have
concluded that our disclosure controls and procedures are effective to ensure
that information that we are required to disclose in the 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 the rules and forms
of the Securities and Exchange Commission.
28
Changes in internal controls
There were no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of
the evaluation by our principal executive officer and principal financial
officer, including any corrective actions with regard to significant
deficiencies and material weaknesses.
PART II
Item 1. Legal Proceedings
The Company, two of its former officers (the "Former Officers"), and the
lead underwriter in its 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. Plaintiffs in the coordinated proceeding bring 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,
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. Defendants have filed motions to dismiss. In October 2002, the
court, pursuant to a stipulation, dismissed all claims against the Company's
Former Officers without prejudice. The Company believes it has meritorious
defenses to all of the claims against it and will defend them vigorously.
The Company is subject to various claims and legal actions arising in the
ordinary course of business. In the opinion of management, after consultation
with legal counsel, the ultimate disposition of these matters is not expected to
have a material effect on the Company's business, financial condition or results
of operations. 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. Although management currently believes that the outcome of
other outstanding legal proceedings, claims and litigation involving the Company
will not have a material adverse effect on its business, results of operations
or financial condition, Litigation is inherently uncertain, and there can be no
assurance that existing or future litigation will not have a material adverse
effect on the Company's business, results of operations or financial condition.
Item 2. Changes in Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Section 10A(i)(2) of the Securities Exchange Act of 1934, as added in
Section 202 of the Sarbanes-Oxley Act of 2002, requires us to disclose the
approval by our Audit Committee of any non-audit services to be performed by our
auditor. Non-audit services are defined as services other than those performed
in connection with an audit or a review of our financial statements. The Audit
Committee of our Board of Directors has previously approved the performance of
certain tax-related services by our auditor, PricewaterhouseCoopers LLP.
29
Item 6. Exhibits and Reports On Form 8-K
(a) Exhibits
----------------------------------------------------------------------------
Exhibit No. Description
----------------------------------------------------------------------------
99.1 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.
----------------------------------------------------------------------------
99.2 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.
----------------------------------------------------------------------------
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
VA SOFTWARE CORPORATION
By: /s/ ALI JENAB
------------------------------------------
Ali Jenab
President and Chief Executive Officer
By: /s/ KATHLEEN R. MCELWEE
------------------------------------------
Kathleen R. McElwee
Vice President and Chief Financial Officer
Date: December 10, 2002
30
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 quarterly report on Form 10-Q of VA Software
Corporation;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we
have:
a) designed such disclosure controls and procedures 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 quarterly report is
being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to record,
process, summarize and report financial data and have identified for the
Registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: December 10, 2002 /s/ ALI JENAB
-----------------------
Ali Jenab
Chief Executive Officer
31
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 quarterly report on Form 10-Q of VA Software
Corporation;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we
have:
a) designed such disclosure controls and procedures 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 quarterly report is
being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to record,
process, summarize and report financial data and have identified for the
Registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: December 10, 2002 /s/ KATHLEEN R. MCELWEE
-----------------------
Kathleen R. McElwee
Chief Financial Officer
32
EXHIBIT INDEX
Exhibit
Number
------
99.1 -- 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
99.2 -- 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
33