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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 April 30, 2005
Or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to .
Commission File Number: 000-28369
VA Software Corporation
(Exact name of Registrant as specified in its charter)
Delaware 77-0399299
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
46939 Bayside Parkway, Fremont, California, 94538
(Address, including zip code, of principal executive offices)
(510) 687-7000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Title Of Class Outstanding At May 27, 2005
Common Stock, $0.001 par value 61,578,010
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Table of Contents
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)................................................................................ 3
Condensed Consolidated Balance Sheets at April 30, 2005 and July 31, 2004................................... 3
Condensed Consolidated Statements of Operations for the three and nine months ended April 30, 2005
and April 30, 2004.......................................................................................... 4
Condensed Consolidated Statements of Cash Flows for the nine months ended April 30, 2005 and
April 30, 2004.............................................................................................. 5
Notes to Condensed Consolidated Financial Statements........................................................ 6
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations........................... 16
Item 3 Quantitative and Qualitative Disclosures About Market Risk...................................................... 40
Item 4 Controls and Procedures......................................................................................... 40
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................................................... 42
Item 6. Exhibits........................................................................................................ 43
Signatures.................................................................................................................... 43
Certifications................................................................................................................ 45
2
PART I
VA SOFTWARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
April 30, July 31,
2005 2004
--------- ---------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents .......................................................... $ 3,099 $ 10,964
Short-term investments ............................................................. 33,301 17,145
Restricted cash, current ........................................................... 450 450
Accounts receivable, net of allowance of $128 and $127 ............................. 3,848 3,909
Inventories ........................................................................ 840 1,069
Prepaid expenses and other assets .................................................. 1,603 1,046
--------- ---------
Total current assets ....................................................... 43,141 34,583
Property and equipment, net .......................................................... 919 1,208
Long-term investments ................................................................ 2,803 15,933
Restricted cash, non current ......................................................... 1,000 1,000
Other assets ......................................................................... 727 955
--------- ---------
Total assets ............................................................... $ 48,590 $ 53,679
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................................... $ 1,246 $ 1,674
Accrued restructuring liabilities, current portion ................................. 1,982 3,440
Deferred revenue ................................................................... 2,422 1,750
Accrued liabilities and other ...................................................... 2,607 1,853
--------- ---------
Total current liabilities .................................................. 8,257 8,717
Accrued restructuring liabilities, net of current portion ............................ 6,505 7,843
Other long-term liabilities .......................................................... 1,297 1,349
--------- ---------
Total liabilities .......................................................... 16,059 17,909
--------- ---------
Commitments and contingencies (Notes 7 and 9)
Stockholders' equity:
Common stock ....................................................................... 62 62
Treasury stock ..................................................................... (4) (4)
Additional paid-in capital ......................................................... 783,788 783,246
Accumulated other comprehensive loss ............................................... (258) (171)
Accumulated deficit ................................................................ (751,057) (747,363)
--------- ---------
Total stockholders' equity ................................................. 32,531 35,770
--------- ---------
Total liabilities and stockholders' equity ................................. $ 48,590 $ 53,679
========= =========
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, unaudited)
Three Months Ended Nine Months Ended
--------------------- ---------------------
April 30, April 30, April 30, April 30,
2005 2004 2005 2004
-------- -------- -------- --------
Net revenues:
SourceForge revenues ............................................................ $ 1,918 $ 1,379 $ 5,380 $ 3,377
Online Media revenues ........................................................... 2,052 2,563 5,909 7,062
E-commerce revenues ............................................................. 3,021 2,798 11,535 10,040
Online Images revenues .......................................................... 620 548 1,712 1,416
Other revenues .................................................................. -- 3 -- 49
-------- -------- -------- --------
Net revenues ................................................................. 7,611 7,291 24,536 21,944
-------- -------- -------- --------
Cost of revenues:
SourceForge cost of revenues .................................................... 254 360 774 1,496
Online Media cost of revenues ................................................... 869 738 2,509 2,189
E-commerce cost of revenues ..................................................... 2,329 2,277 9,043 8,028
Online Images cost of revenues .................................................. 130 138 386 364
-------- -------- -------- --------
Cost of revenues ............................................................. 3,582 3,513 12,712 12,077
-------- -------- -------- --------
Gross margin ................................................................. 4,029 3,778 11,824 9,867
-------- -------- -------- --------
Operating expenses:
Sales and marketing ............................................................. 2,730 2,639 7,546 7,623
Research and development ........................................................ 1,585 1,667 4,641 5,210
General and administrative ...................................................... 1,328 1,490 4,133 3,722
Restructuring costs and other special charges ................................... -- 3,244 (101) 3,209
Amortization of deferred stock compensation ..................................... -- -- -- 20
Amortization of intangible assets ............................................... 3 3 11 9
-------- -------- -------- --------
Total operating expenses ................................................ 5,646 9,043 16,230 19,843
-------- -------- -------- --------
Loss from operations .............................................................. (1,617) (5,265) (4,406) (9,976)
Remeasurement of warrant liability ................................................ -- 925 -- 1,566
Interest income, net .............................................................. 229 223 611 708
Other income, net ................................................................. 12 (8) 101 923
-------- -------- -------- --------
Net loss .......................................................................... $ (1,376) $ (4,125) $ (3,694) $ (6,779)
======== ======== ======== ========
Other comprehensive income (loss):
Unrealized gain (loss) on marketable securities and investments .... .............. 22 (152) (20) (258)
Foreign currency translation (loss) gain .......................................... -- (3) (68) 4
-------- -------- -------- --------
Comprehensive loss ................................................................ $ (1,354) $ (4,280) $ (3,782) $ (7,033)
======== ======== ======== ========
Net loss .......................................................................... $ (1,376) $ (4,125) $ (3,694) $ (6,779)
======== ======== ======== ========
Basic and diluted net loss per share .............................................. $ (0.02) $ (0.07) $ (0.06) $ (0.11)
======== ======== ======== ========
Shares used in computing basic and diluted net loss per share ..................... 61,523 60,882 61,409 59,186
======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
4
VA SOFTWARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
Nine Months Ended
----------------------------
April 30, April 30,
2005 2004
-------- --------
Cash flows from operating activities:
Net loss ..................................................................................... $ (3,694) $ (6,779)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization of intangibles ............................................... 713 1,209
Remeasurement of warrant liability ......................................................... -- (1,566)
Provision for bad debts .................................................................... 2 7
Provision for excess and obsolete inventory ................................................ 46 (5)
Gain on sale of assets ..................................................................... (1) --
Non-cash compensation expense .............................................................. 68 --
Non-cash restructuring expense reversal .................................................... (101) 2,496
Amortization of deferred stock compensation ................................................ -- 20
Changes in assets and liabilities:
Accounts receivable ...................................................................... 60 (1,162)
Inventories .............................................................................. 183 (284)
Prepaid expenses and other assets ........................................................ (340) (408)
Accounts payable ......................................................................... (429) 120
Accrued restructuring liabilities ........................................................ (2,695) (2,391)
Deferred revenue ......................................................................... 672 762
Accrued liabilities and other ............................................................ 733 (1,148)
Other long-term liabilities .............................................................. (52) 65
-------- --------
Net cash used in operating activities ................................................. (4,835) (9,064)
-------- --------
Cash flows from investing activities:
Purchase of property and equipment ........................................................... (373) (763)
Sale of property and equipment ............................................................... 1 --
Purchase of marketable securities ............................................................ (12,244) (39,806)
Sale of marketable securities ................................................................ 9,198 32,306
Other, net ................................................................................... -- (258)
-------- --------
Net cash used in investing activities ................................................ (3,418) (8,521)
-------- --------
Cash flows from financing activities:
Payments on notes payable .................................................................... (18) --
Proceeds from issuance of common stock subject to registration rights, net ................... -- 12,027
Proceeds from issuance of warrants, net ...................................................... -- 2,464
Proceeds from issuance of common stock, net .................................................. 474 3,393
-------- --------
Net cash provided by financing activities ............................................. 456 17,884
-------- --------
Effect of exchange rate changes on cash and cash equivalents .................................. (68) 4
-------- --------
Net increase in cash and cash equivalents ..................................................... (7,865) 303
-------- --------
Cash and cash equivalents, beginning of period ................................................ 10,964 6,303
-------- --------
Cash and cash equivalents, end of period ...................................................... $ 3,099 $ 6,606
======== ========
The accompanying notes are an integral part of these financial statements.
5
VA SOFTWARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
Overview
VA Software Corporation ("VA Software," "VA" or the "Company") was
incorporated in California in January 1995 and reincorporated in Delaware in
December 1999. From the date of its incorporation through October 2001, the
Company sold Linux-based hardware systems and services under the name VA Linux
Systems, Inc. On June 27, 2001, the Company announced its decision to exit its
Linux-based hardware business. Today, the Company does business under the name
VA Software Corporation and it develops, markets and supports a software
application known as SourceForge Enterprise Edition ("SourceForge") and owns and
operates OSTG, Inc. ("OSTG") and its wholly-owned subsidiaries, a network of
Internet Web sites offering advertising, retail and animation services and
products.
The interim financial information presented in this Form 10-Q is not audited
and is not necessarily indicative of the Company's future consolidated financial
position, results of operations or cash flows. The unaudited financial
statements contained in this Form 10-Q have been prepared on the same basis as
the annual financial statements and, in the opinion of management, reflect all
adjustments, which include only normal recurring adjustments, necessary to
present fairly the Company's financial position, results of operations and its
cash flows for the stated periods, in conformity with accounting principles
generally accepted in the United States of America.
2. Summary of Significant Accounting Policies
Use of Estimates in Preparation of Consolidated Financial Statements
The preparation of the Company's consolidated financial statements and
related notes requires the Company to make estimates, which include judgments
and assumptions that affect the reported amounts of assets, liabilities, revenue
and expenses, and related disclosure of contingent assets and liabilities. The
Company has based its estimates on historical experience and on various
assumptions that are believed to be reasonable under the circumstances and the
Company evaluates its estimates on a regular basis and makes changes
accordingly. Historically, the Company's estimates relative to its critical
accounting estimates have not differed materially from actual results, however
actual results may differ from these estimates under different conditions.
A critical accounting estimate is based on judgments and assumptions about
matters that are highly uncertain at the time the estimate is made. Different
estimates that reasonably could have been used, or changes in accounting
estimates could materially impact the financial statements.
There have been no significant changes to the Company's critical accounting
estimates during the three and nine months ended April 30, 2005 as compared to
what was previously disclosed in the Notes to Consolidated Financial Statements
included in the Company's Annual Report of Form 10-K for the year ended July 31,
2004.
Principles of Consolidation
These consolidated financial statements include the accounts of VA and its
wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. In September 2000, the
Company acquired 68% of the outstanding shares of common stock of VA Linux
Systems Japan, K.K. ("VA Linux Japan") for a cash purchase price of
approximately $6.9 million. Effective January 11, 2002, VA sold 13,500 shares of
VA Linux Japan stock to a third party for approximately $5.1 million, the effect
of which decreased the Company's investment in VA Linux Japan to approximately
11%. As of April 30, 2005, VA Software's investment in VA Linux Japan was
approximately 14%. As the Company holds less than 20% of the voting stock of VA
Linux Japan and does not otherwise exercise significant influence, VA Linux
Japan has been accounted for under the cost method as of January 11, 2002 and
thereafter. The operations of VA Linux Japan primarily relate to the Company's
former systems and services business; however VA Linux Japan also acts as a
reseller of the Company's SourceForge application to customers in Japan and,
pursuant to a license agreement with the Company, resyndicates certain OSTG Web
sites for the Japanese market. There are $0.1 million of related-party
receivables and $0.1 million of related-party deferred revenue associated with
6
VA Linux Japan as of April 30, 2005 that are included in trade receivables and
deferred revenue in the accompanying Condensed Consolidated Balance Sheets.
There are no related-party receivables and deferred revenue associated with VA
Linux Japan as of July 31, 2004 that are included in trade receivables and
deferred revenue in the accompanying Condensed Consolidated Balance Sheets.
There were $0.1 million and $0.4 million related-party revenues associated with
VA Linux Japan for the three and nine months ended April 30, 2005, respectively.
There were $29,000 and $0.1 million related-party revenues associated with VA
Linux Japan for the three and nine months ended April 30, 2004, respectively.
Foreign Currency Translation
The functional currency of all the Company's foreign subsidiaries is the
respective country's local currency. Operations related to all of the Company's
foreign subsidiaries were discontinued in 2001 and were included in the fiscal
2001 restructuring plan. Although several of the legal entities still exist as
of April 30, 2005, no revenues were generated from these entities for the
periods presented and the expenses were administrative in nature and were
immaterial to the consolidated results of operations for the periods presented.
Minimal cash balances have been maintained in these entities for legal purposes.
Remaining balance sheet accounts are translated into U.S. dollars at exchange
rates prevailing at balance sheet dates. Expenses are translated into U.S.
dollars at average rates for the period. Gains and losses resulting from
translation are charged or credited in other comprehensive income as a component
of stockholders' equity. As of April 30, 2005 the Company did not hold any
foreign currency derivative instruments. The Company is in the process of
formally liquidating all of its foreign subsidiaries.
Segment and Geographic Information
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures
about Segments of an Enterprise and Related Information," establishes standards
for reporting information regarding operating segments in annual financial
statements and requires selected information for those segments to be presented
in interim financial reports issued to stockholders. SFAS No. 131 also
establishes standards for related disclosures about products and services and
geographic areas. Operating segments are identified as components of an
enterprise about which separate discrete financial information is available for
evaluation by the chief operating decision-maker, or decision-making group, in
making decisions about how to allocate resources and assess performance. The
Company's chief decision-making group, as defined under SFAS No. 131, are the
Chief Executive Officer and the executive team. The Company currently operates
as four reportable business segments: SourceForge, Online Media, E-commerce and
Online Images.
The Company markets its products in the United States through its direct
sales force and online Web sites. Revenues for each of the three and nine months
ended April 30, 2005 and April 30, 2004 were generated primarily from sales to
end users in the United States.
Revenue Recognition
SourceForge Revenues
Software revenues are derived from fees for licenses of the Company's
SourceForge software products, maintenance, consulting and training. The Company
recognizes all software revenue using the residual method in accordance with
Statement of Position ("SOP") 97-2, "Software Revenue Recognition," as amended
by SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition with
Respect to Certain Transactions." Under the residual method, the fair value of
the undelivered elements is deferred and the remaining portion of the
arrangement fee is recognized as revenue. If evidence of the vendor specific
fair value of one or more undelivered elements does not exist, revenues are
deferred and recognized when delivery of those elements occurs or when fair
value can be established. Company-specific objective evidence of fair value of
maintenance and other services is based on the Company's customary pricing for
such maintenance and/or services when sold separately. At the outset of the
arrangement with the customer, the Company defers revenue for the fair value of
its undelivered elements (e.g., maintenance, consulting and training) and
recognizes revenue for the remainder of the arrangement fee attributable to the
elements initially delivered in the arrangement (i.e., software product) when
the basic criteria in SOP 97-2 have been met. If such evidence of fair value for
each undelivered element of the arrangement does not exist, the Company defers
all revenue from the arrangement until such time that evidence of fair value
does exist or until all elements of the arrangement are delivered.
Under SOP 97-2, revenue attributable to an element in a customer
arrangement is recognized when (i) persuasive evidence of an arrangement exists,
(ii) delivery has occurred, (iii) the fee is fixed or determinable, (iv)
collectibility is probable and (v) the arrangement does not require services
that are essential to the functionality of the software.
7
Persuasive evidence of an arrangement exists. The Company determines that
persuasive evidence of an arrangement exists with respect to a customer when the
Company has a written contract, which is signed by both the Company and the
customer, or a purchase order from the customer when the customer has previously
executed a standard license arrangement with the Company. The Company does not
offer product return rights.
Delivery has occurred. The Company's software may be either physically or
electronically delivered to the customer. The Company determines that delivery
has occurred upon shipment of the software pursuant to the billing terms of the
agreement or when the software is made available to the customer through
electronic delivery.
The fee is fixed or determinable. If at the outset of the customer
engagement the Company determines that the fee is not fixed or determinable, the
Company recognizes revenue when the fee becomes due and payable. Fees due under
a contract are generally deemed not to be fixed or determinable if a significant
portion of the fee is beyond the Company's normal payment terms, which are
generally no greater than 120 days from the date of invoice.
Collectibility is probable. The Company determines whether collectibility
is probable on a case-by-case basis. When assessing probability of collection,
the Company considers the number of years in business, history of collection,
and product acceptance for each customer. The Company typically sells to
customers, for whom there is a history of successful collection. New customers
are subject to a credit review process, which evaluates the customer's financial
position and ultimately such customer's ability to pay. If the Company
determines from the outset that collectibility is not probable based upon its
review process, revenue is recognized as payments are received.
The Company allocates revenue on software arrangements involving multiple
elements to each element based on the relative fair value of each element. The
Company's determination of fair value of each element in multiple-element
arrangements is based on vendor-specific objective evidence ("VSOE"). The
Company aligns its assessment of VSOE for each element to the price charged when
the same element is sold separately. The Company has analyzed all of the
elements included in its multiple-element arrangements and determined that it
has sufficient VSOE to allocate revenue to the maintenance, support and
professional services components of its perpetual license arrangements. The
Company sells its professional services separately, and has established VSOE for
professional services on that basis. VSOE for maintenance and support is
determined based upon the customer's annual renewal rates for these elements.
Accordingly, assuming all other revenue recognition criteria are met, the
Company recognizes revenue from perpetual licenses upon delivery using the
residual method in accordance with SOP 98-9.
Services revenues consist of professional services and maintenance fees.
In general, the Company's professional services, which are comprised of software
installation and integration, business process consulting and training, are not
essential to the functionality of the software. The Company's software products
are fully functional upon delivery and implementation and do not require any
significant modification or alteration of products for customer use. Customers
purchase these professional services to facilitate the adoption of the Company's
technology and dedicate personnel to participate in the services being
performed, but they may also decide to use their own resources or appoint other
professional service organizations to provide these services. Software products
are billed separately from professional services, which are generally billed on
a time-and-materials basis. The Company recognizes revenue from professional
services as services are performed.
Maintenance agreements are typically priced based on a percentage of the
product license fee and have a one-year term, renewable annually. Services
provided to customers under maintenance agreements include technical product
support and unspecified product upgrades. Deferred revenues from advanced
payments for maintenance agreements are recognized ratably over the term of the
agreement, which is typically one year.
Online Media Revenues
Online media revenues are primarily derived from cash sales of advertising
space on the Company's various Web sites, as well as sponsorship and royalty
related arrangements associated with advertising on these Web sites. The Company
recognizes Online Media revenues over the period in which the advertisements are
displayed, provided that persuasive evidence of an arrangement exists, no
significant obligations remain, the fee is fixed or determinable, and collection
of the receivable is reasonably assured. The Company's obligations typically
include guarantees of a minimum number of "impressions" (times that an
advertisement is viewed by users of the Company's online services). To the
extent that minimum guaranteed impressions are not met in the specified time
8
frame, the Company does not recognize the corresponding revenues until the
guaranteed impressions are achieved. Prior to the first quarter of fiscal year
2005, Online Media revenues also included barter transactions. The Company
recorded barter revenue transactions at their estimated fair value based on 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 broadcasted banner advertising in
exchange for similar banner advertising on third-party Web sites. The Company's
barter arrangements were documented with its standard customer insertion order
(and accompanying terms and conditions) or, in certain limited instances, via an
alternative written contract negotiated between the parties. The standard terms
and conditions included, but were not limited to, the Web sites for each company
that would display the impressions, the time frame that the impressions would be
displayed, and the number, type and size of impressions to be delivered. There
were no barter revenue transactions for the three and nine months ended April
30, 2005. Barter revenue transactions totaled $0.3 million and $1.2 million for
the three and nine months ended April 30, 2004.
E-commerce Revenues
E-commerce revenues are derived from the online sale of consumer goods. The
Company recognizes E-commerce revenues from the sale of consumer goods in
accordance with SEC Staff Accounting Bulletin ("SAB") No. 104, "Revenue
Recognition." Under SAB No. 104, product revenues are recognized when persuasive
evidence of an arrangement exists, delivery has occurred, the sale price is
fixed or determinable, and collectibility is reasonably assured. In general, the
Company recognizes E-commerce revenue upon the shipment of goods. The Company
does grant customers a right to return E-commerce products. Such returns are
recorded as incurred and have been immaterial for the periods presented.
The Company's E-commerce business is highly seasonal, reflecting the general
pattern associated with the retail industry of peak sales and earnings during
the holiday shopping season. In the past several years, a substantial portion of
the Company's E-commerce revenues occurred in its second fiscal quarter, which
in fiscal 2005, began on November 1, 2004, and ended on January 31, 2005. As is
typical in the retail industry, the Company generally experiences lower
E-commerce revenues during the other quarters. Therefore, the Company's
E-commerce revenues in a particular quarter are not necessarily indicative of
future E-commerce revenues for a subsequent quarter or its full fiscal year.
Online Images Revenues
Online Images revenues are derived from the online sale of
three-dimensional art, animations and presentations that consist of fees for
software licenses and memberships for these animation software products.
Software revenues related to digital animations are recognized using the
residual method in accordance with SOP 97-2, as amended by SOP 98-9, as
described in detail above. Revenues recognized related to animation memberships
are recognized over the life of the membership, typically three months or 12
months.
Software Development Costs
In accordance with SFAS No. 86, "Accounting for the Cost of Computer
Software to be Sold, Leased, or Otherwise Marketed," development costs incurred
in the research and development of new software products are expensed as
incurred until technological feasibility in the form of a working model has been
established at which time such costs are capitalized, subject to a net
realizable value evaluation. Technological feasibility is established upon the
completion of an integrated working model. To date, the Company's software
development has been completed concurrent with the establishment of
technological feasibility and, accordingly, all software development costs have
been charged to research and development expense in the accompanying Condensed
Consolidated Statements of Operations.
In accordance with SOP 98-1, "Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use," costs incurred related to internal use
software are capitalized and amortized over their useful lives.
Stock Based Compensation
The Company has elected to account for its employee stock-based
compensation plans in accordance with Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and Financial
Accounting Standards Board ("FASB") Interpretation No. ("FIN") 44, "Accounting
for Certain Transactions Involving Stock Compensation--an Interpretation of APB
Opinion No. 25," and complies with the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, no compensation cost is
currently recognized for any of the Company's fixed stock options granted to
employees when the exercise price of the option equals or exceeds the fair value
of the underlying common stock as of the grant date for each stock option. The
9
Company accounts for equity instruments issued to non-employees in accordance
with the provisions of SFAS No. 123 and EITF No. 96-18, "Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services." Deferred stock-based compensation
is included as a component of stockholders' equity and is being amortized by
charges to operations over the vesting period of the options and restricted
stock consistent with the method described in FIN 28, "Accounting for Stock
Appreciation Rights and Other Variable Stock Option or Award Plans."
Had compensation cost been recognized based on the fair value at the date
of grant for options granted and Employee Stock Purchase Plan issuances during
the three and nine months ended April 30, 2005 and April 30, 2004, the Company's
pro forma net loss and net loss per share would have been as follows (in
thousands, except per share amounts):
Three Months Ended Nine Months Ended
-------------------- ---------------------
April 30, April 30, April 30, April 30,
2005 2004 2005 2004
-------- -------- -------- --------
Net loss as reported .............................................................. $ (1,376) $ (4,125) $ (3,694) $ (6,779)
Add back employee stock-based compensation expense related to
stock options included in reported net loss, net of related tax effects ....... 68 -- 68 20
Less employee stock-based compensation expense determined under
fair value based method for all employee stock option awards,
net of related tax effects .................................................... (1,176) (1,773) (3,911) (4,780)
-------- -------- -------- --------
Pro forma net loss ............................................................. $ (2,484) $ (5,898) $ (7,537) $(11,539)
-------- -------- -------- --------
Shares used in computing basic and diluted net loss per share ..................... 61,523 60,882 61,409 59,186
-------- -------- -------- --------
Reported basic and diluted net loss per share ..................................... $ (0.02) $ (0.07) $ (0.06) $ (0.11)
-------- -------- -------- --------
Pro forma basic and diluted net loss per share .................................... $ (0.04) $ (0.10) $ (0.12) $ (0.19)
-------- -------- -------- --------
The Company calculated the fair value of each option grant on the date of
the grant and stock purchase right using the Black-Scholes option-pricing model
using the following assumptions:
Stock Option Plans ESPP Plans
For The Three Months Ended For The Three Months Ended
---------------------------------- -------------------------------------
April 30, April 30, April 30, April 30,
2005 2004 2005 2004
---------------- ------------- ----------------- ---------------
Expected life (years)........... 4.78 4.70 0.49 0.50
Risk-free interest rate......... 4.1% 2.9% 2.4% 1.1%
Volatility...................... 95.2% 105.7% 59.5% 119.1%
Dividend yield.................. None None None None
Stock Option Plans ESPP Plans
For The Nine Months Ended For The Nine Months Ended
---------------------------------- -------------------------------------
April 30, April 30, April 30, April 30,
2005 2004 2005 2004
---------------- ------------- ----------------- ---------------
Expected life (years)........... 4.79 5.00 0.50 0.50
Risk-free interest rate......... 3.5% 3.3% 2.1% 1.1%
Volatility...................... 98.4% 109.7% 63.9% 102.3%
Dividend yield.................. None None None None
Property and Equipment
Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are amortized over the lesser of the estimated useful lives or the
corresponding lease term. Property and equipment consist of the following (in
thousands):
10
April 30, July 31,
2005 2004
-------- --------
Computer and office equipment (useful lives of 2 to 3 years) ................................... $ 7,189 $ 6,820
Furniture and fixtures (useful lives of 2 to 4 years) .......................................... 1,199 1,199
Leasehold improvements (useful lives of lesser of estimated life or lease term ................. 293 271
Software (useful lives of 2 to 5 years) ....................................................... 2,108 2,092
-------- --------
Total property and equipment ......................................................... 10,789 10,382
Less: Accumulated depreciation and amortization ................................................ (9,870) (9,174)
-------- --------
Property and equipment, net .......................................................... $ 919 $ 1,208
======== ========
Goodwill and Intangibles
Intangible assets are amortized on a straight-line basis over three to five
years. The Company continually evaluates whether events or circumstances have
occurred that indicate the remaining estimated useful lives of these intangible
assets may not be recoverable. When events or circumstances indicate that the
intangible assets should be evaluated for possible impairment, the Company uses
an estimate of the related business segment's undiscounted net income over the
remaining useful life of the intangible assets in measuring whether they are
recoverable. No events or circumstances occurred during the three and nine
months ended April 30, 2005 that would indicate a possible impairment in the
carrying value of intangible assets at April 30, 2005.
The changes in the carrying amount of the intangible assets are as follows
(in thousands):
As of April 30, 2005 As of July 31, 2004
--------------------------------- --------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
------ ------------ ------ ------------
Domain and trade names ........................... $ 5,927 $(5,924) $ 5,927 $(5,913)
Purchased technology ............................. 2,534 (2,534) 2,534 (2,534)
------- ------- ------- -------
Total intangible assets .......................... $ 8,461 $(8,458) $ 8,461 $(8,447)
======= ======= ======= =======
The aggregate amortization expense of intangible assets was $3,000 for each
of the three-month periods ending April 30, 2005 and 2004, respectively. The
aggregate amortization expense of intangible assets was $11,000 and $9,000 for
the nine-month periods ending April 30, 2005 and 2004, respectively. The
estimated total amortization expense of intangible assets is less than $1,000
for the fourth quarter of fiscal year ending July 31, 2005. The estimated total
amortization expense of intangible assets is $1,700 for the fiscal year ending
July 31, 2006. The estimated total amortization expense of intangible assets is
negligible for the fiscal year ending July 31, 2007.
Inventories
Inventories related to the Company's E-commerce and Online Images segments
consist solely of finished goods that are valued at the lower of cost or market
using the average cost method. Provisions, when required, are made to reduce
excess and obsolete inventories to their estimated net realizable values.
Concentrations of Credit Risk and Significant Customers
The Company's investments are held with two reputable financial
institutions; both institutions are headquartered in the United States. The
Company's investment policy limits the amount of risk exposure. Financial
instruments that potentially subject the Company to concentrations of credit
risk consist primarily of cash trade receivables. The Company provides credit,
in the normal course of business, to a number of companies and performs ongoing
credit evaluations of its customers. The credit risk in the Company's trade
receivables is substantially mitigated by its credit evaluation process and
reasonably short collection terms. The Company maintains reserves for potential
credit losses and such losses have been within management's expectations. As of
April 30, 2005, no one customer accounted for a material concentration of our
gross account receivables.
For the three and nine months ended April 30, 2005 and 2004, no one customer
represented more than 10% of net revenues. The Company does not anticipate that
any one customer will represent more than 10% of net revenues in the near
future.
11
Reclassifications
Certain reclassifications have been made to the prior period consolidated
financial statements to conform to the current period presentation. These
reclassifications have no impact on previously reported net loss or cash flows.
3. Restructuring Costs and Other Special Charges
In fiscal 2001 and 2002, the Company adopted plans to exit its hardware
systems and hardware-related software engineering and professional services
businesses, as well as exit a sublease agreement and reduce its general and
administrative overhead costs. The Company exited these activities to pursue its
SourceForge, Online Media, E-commerce and Online Images businesses and reduce
its operating losses in order to improve cash flow. The Company recorded
restructuring charges of $168.5 million related to exiting these activities,
$160.4 million of which was included in restructuring charges and other special
charges in operating expenses and $8.1 million of which was included in cost of
sales. Included in the restructuring were charges related to excess facilities
from non-cancelable leases. During the third quarter of fiscal 2004, in
connection with its original 2002 restructuring plan which included an
assumption to sublet all idle facilities, the Company relocated its Fremont,
California headquarters to a smaller building in the same complex. As a result
of the change in circumstances, original accruals were reevaluated and
accordingly the Company recorded a restructuring adjustment of $2.9 million.
Included in the $2.9 million dollar restructuring adjustment was $2.5 million of
expense related to writing off leasehold improvements and fixed assets and an
additional $0.4 million expense related to excess facilities from non-cancelable
leases.
In addition, during the third quarter of fiscal 2004, the Company reached
agreements in principal to sublet unoccupied portions of properties that it
leases in Sunnyvale, California and Fremont, California. As a result of the
change in circumstances due to the agreements in principal, which were
thereafter formalized in executed agreements, original accruals were reevaluated
and, accordingly, the Company recorded a restructuring adjustment of $0.3
million in the third quarter of fiscal 2004. The total adjustment to
restructuring expenses in fiscal 2004 was therefore $3.2 million. In the second
quarter of fiscal 2005, a minor credit adjustment of $0.1 million was recorded
to accurately reflect the current common area maintenance fees associated with
the Fremont facilities. The remaining accrual from non-cancelable lease payments
is based on current circumstances. These accruals are subject to change should
actual circumstances change. The Company will continue to evaluate and update,
if applicable, these accruals quarterly. As of April 30, 2005, the Company had
an accrual of approximately $8.5 million outstanding related to these
non-cancelable leases, all of which was originally included in operating
expenses.
All charges as a result of restructuring activities have been recorded in
accordance with EITF 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs incurred in a Restructuring)." Restructuring charges recorded in fiscal
2004 were considered adjustments to the original restructuring plans, therefore,
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," was not applicable.
Below is a summary of the restructuring charges in operating expenses (in
thousands):
Total
Charged To Total Total Total
Operations Charged To Charged To Cash Restructuring
Fiscal Operations Operations Receipts/ Liabilities
2001-2003 Fiscal 2004 Fiscal 2005 (Payments) April 30, 2005
--------- ----------- ----------- ---------- --------------
Cash Provisions:
Other special charges relating to
restructuring activities.............................. $ 1,349 $ -- $ -- $ (1,349) $ --
Facilities charges...................................... 16,176 713 (101) (8,301) 8,487
Employee severance and other related charges............ 5,532 -- -- (5,532) --
-------- -------- -------- ---------- --------
Total cash provisions............................... 23,057 713 (101) $ (15,182) $ 8,487
-------- -------- -------- ---------- --------
Non-cash:
Write-off of goodwill and intangibles ................. 90,355 -- --
Write-off of other special charges relating to
restructuring activities ........................... 9,323 2,496 --
Write-off of accelerated options from
terminated employees.................................. 1,352 -- --
Acceleration of deferred stock compensation............ 36,064 -- --
-------- -------- ----------
Total non-cash provisions........................... 137,094 2,496 --
-------- -------- ----------
Total provisions.................................... $160,151 $ 3,209 $ (101)
======== ======== ==========
12
Below is a summary of the changes to the restructuring liability (in thousands):
Balance at Charged to Balance at
Changes in the total accrued restructuring liability Beginning Costs and End
- ----------------------------------------------------- of Period Expenses Deductions of Period
--------- -------- ---------- ---------
From July 29, 2000 through July 31, 2003 .......................... $ -- $ 23,057 $ (8,168) $ 14,889
For the year ended July 31, 2004 ................................... $ 14,889 $ 713 $ (4,319) $ 11,283
For the nine months ended April 30, 2004 ........................... $ 14,889 $ 713 $ (3,104) $ 12,498
For the nine months ended April 30, 2005 ........................... $ 11,283 $ (101) $ (2,695) $ 8,487
Components of the total accrued restructuring liability Short Long Total
- ------------------------------------------------------- Term Term Liability
---- ---- ---------
As of July 31, 2003 ................................................ $ 4,117 $ 10,772 $ 14,889
As of July 31, 2004 ................................................ $ 3,440 $ 7,843 $ 11,283
As of April 30, 2004 ............................................... $ 4,023 $ 8,475 $ 12,498
As of April 30, 2005 ............................................... $ 1,982 $ 6,505 $ 8,487
4. Computation of Per Share Amounts
In accordance with SFAS No. 128 "Earnings Per Share," basic net loss per
common share has been calculated using the weighted-average number of shares of
common stock outstanding during the period, less shares subject to repurchase.
For the three and nine months ended April 30, 2005 and April 30, 2004, the
Company has excluded all stock options and warrants 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 Nine Months Ended
------------------------ ------------------------
April 30, April 30, April 30, April 30,
2005 2004 2005 2004
-------- -------- -------- --------
Net loss ............................................................... $ (1,376) $ (4,125) $ (3,694) $ (6,779)
======== ======== ======== ========
Basic and diluted:
Weighted average shares of common stock outstanding .................. 61,523 60,882 61,409 59,186
-------- -------- -------- --------
Shares used in computing basic and diluted net loss per share ........ 61,523 60,882 61,409 59,186
======== ======== ======== ========
Basic and diluted net loss per share ................................. $ (0.02) $ (0.07) $ (0.06) $ (0.11)
======== ======== ======== ========
The following potential common shares have been excluded from the
calculation of diluted net loss per share for all periods presented because they
are anti-dilutive (in thousands):
Three Months Ended Nine Months Ended
------------------------- -------------------------
April 30, April 30, April 30, April 30,
2005 2004 2005 2004
------ ------ ------ ------
Anti-dilutive securities:
Options to purchase common stock .......................... 11,265 9,448 11,265 9,448
Warrants .................................................. 731 731 731 731
------ ------ ------ ------
Total ..................................................... 11,996 10,179 11,996 10,179
====== ====== ====== ======
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.
13
6. Segment and Geographic Information
The Company's operating segments are significant business units that offer
different products and services. The Company has four operating segments:
SourceForge, Online Media, E-commerce and Online Images.
The Company's SourceForge segment focuses on its SourceForge software
products. The Company's Online Media segment consists of a network of Internet
Web sites serving the IT professional and software development communities. The
Company's E-commerce segment provides online sales of a variety of retail
products of interest to the software development and IT communities. The
Company's Online Images segment provides online sales of three-dimensional art,
animations and presentations. Other includes revenues and costs associated with
the Company's former hardware business as well as all corporate expenses, such
as restructuring charges, legal judgments and settlements, amortization of
intangible assets and amortization of deferred stock, that are not allocated to
the individual operating segments and are not considered by the Company's chief
decision-making group in evaluating the performance of the operating segments.
The accounting policies of the segments are consistent with those described
in the summary of significant accounting policies. All intersegment sales have
been stated separately in the table below. The Company's chief decision-making
group, as defined under SFAS No. 131, consists of the Chief Executive Officer
and the executive team. The Company's chief decision-making group excludes all
intersegment sales when evaluating the performance of the segments. The
Company's assets and liabilities are not discretely allocated or reviewed by
operating segment. The depreciation of the Company's property, equipment and
leasehold improvements are allocated based on headcount, unless specifically
identified by operating segment.
Online Online Total
(in thousands) SourceForge Media E-commerce Images Other Eliminations Company
- -------------- ----------- ----- ---------- ------ ----- ------------ -------
Three Months Ended April 30, 2005
Revenue from external customers ........ $ 1,918 $ 2,052 $ 3,021 $ 620 $ -- $ -- $ 7,611
Revenue from intersegments ............. $ -- $ 50 $ -- $ 1 $ -- $ (51) $ --
Cost of revenues ....................... $ 254 $ 869 $ 2,329 $ 130 $ -- $ -- $ 3,582
Gross margin ........................... $ 1,664 $ 1,233 $ 692 $ 491 $ -- $ (51) $ 4,029
Operating income (loss) ................ $ (1,581) $ (385) $ 67 $ 292 $ (10) $ -- $ (1,617)
Depreciation expense ................... $ 130 $ 99 $ 7 $ 2 $ -- $ -- $ 238
Three Months Ended April 30, 2004
Revenue from external customers ........ $ 1,379 $ 2,563 $ 2,798 $ 548 $ 3 $ -- $ 7,291
Revenue from intersegments ............. $ -- $ 37 $ -- $ -- $ -- $ (37) $ --
Cost of revenues ....................... $ 360 $ 738 $ 2,277 $ 138 $ -- $ -- $ 3,513
Gross margin ........................... $ 1,019 $ 1,862 $ 521 $ 410 $ 3 $ (37) $ 3,778
Operating income (loss) ................ $ (2,149) $ (15) $ (41) $ 193 $ (3,253) $ -- $ (5,265)
Depreciation expense ................... $ 239 $ 42 $ 9 $ 8 $ -- $ -- $ 298
Nine Months Ended April 30, 2005
Revenue from external customers ........ $ 5,380 $ 5,909 $ 11,535 $ 1,712 $ -- -- $ 24,536
Revenue from intersegments ............. $ -- $ 226 $ -- $ 1 $ -- $ (227) $ --
Cost of revenues ....................... $ 774 $ 2,509 $ 9,043 $ 386 $ -- $ -- $ 12,712
Gross margin ........................... $ 4,606 $ 3,626 $ 2,492 $ 1,327 $ -- $ (227) $ 11,824
Operating income (loss) ................ $ (4,224) $ (1,222) $ 505 $ 709 $ (174) $ -- $ (4,406)
Depreciation expense ................... $ 425 $ 253 $ 21 $ 3 $ -- $ -- $ 702
Nine Months Ended April 30, 2004
Revenue from external customers ........ $ 3,377 $ 7,062 $ 10,040 $ 1,416 $ 49 -- $ 21,944
Revenue from intersegments ............. $ -- $ 166 $ -- $ -- $ -- $ (166) $ --
Cost of revenues ....................... $ 1,496 $ 2,189 $ 8,028 $ 364 $ -- $ -- $ 12,077
Gross margin ........................... $ 1,881 $ 5,039 $ 2,012 $ 1,052 $ 49 $ (166) $ 9,867
Operating income (loss) ................ $ (7,506) $ (648) $ 147 $ 415 $ (2,384) $ -- $ (9,976)
Depreciation expense ................... $ 958 $ 191 $ 20 $ 31 $ -- $ -- $ 1,200
During the time period covered by the table above, the Company marketed its
products in the United States through its direct sales force and its online Web
sites. Revenues for the three and nine months ended April 30, 2005 and April 30,
2004 were primarily generated from sales to end users in the United States.
14
7. Litigation
The Company, two of its former officers (the "Former Officers"), and the
lead underwriter in its initial public offering ("IPO") were named as defendants
in a consolidated shareholder lawsuit in the United States District Court for
the Southern District of New York, captioned In re VA Software Corp. Initial
Public Offering Securities Litigation, 01-CV-0242. This is one of a number of
actions coordinated for pretrial purposes as In re Initial Public Offering
Securities Litigation, 21 MC 92 with the first action filed on January 12, 2001.
Plaintiffs in the coordinated proceeding are bringing claims under the federal
securities laws against numerous underwriters, companies, and individuals,
alleging generally that defendant underwriters engaged in improper and
undisclosed activities concerning the allocation of shares in the IPOs of more
than 300 companies during late 1998 through 2000. Among other things, the
plaintiffs allege that the underwriters' customers had to pay excessive
brokerage commissions and purchase additional shares of stock in the aftermarket
in order to receive favorable allocations of shares in an IPO. The consolidated
amended complaint in the Company's case seeks unspecified damages on behalf of a
purported class of purchasers of its common stock between December 9, 1999 and
December 6, 2000. Pursuant to a tolling agreement, the individual defendants
were dismissed without prejudice. On February 19, 2003, the court denied the
Company's motion to dismiss the claims against it. The litigation is now in
discovery. In June 2004, a stipulation of settlement and release of claims
against the issuer defendants, including the Company, was submitted to the court
for approval. The terms of the settlement if approved, would dismiss and release
all claims against the participating defendants (including the Company). In
exchange for this dismissal, D&O insurance carriers would agree to guarantee a
recovery by the plaintiffs from the underwriter defendants of at least $1
billion, and the issuer defendants would agree to an assignment or surrender to
the plaintiffs of certain claims the issuer defendants may have against the
underwriters. The proposed settlement remains subject to a number of conditions,
including receipt of final approval of the court. If the settlement does not
occur, and litigation against the Company continues, the Company believes it has
meritorious defenses and intends to defend the case vigorously.
On Nov 9, 2001, a former employee of the Company, who had worked as a sales
person in the Company's former hardware business, filed a complaint captioned
Okerman v. VA Linux Systems, Inc. & Larry Augustin, Civil No. 01-01825 (Norfolk
Superior Court), in the Commonwealth of Massachusetts. As amended, the complaint
alleges that changes made to certain commission and bonus plans during the
plaintiff's tenure at the Company entitled him to recover damages for Breach of
Contract, Breach of the Implied Covenant of Good Faith and Fair Dealing,
violation of the Massachusetts Wage Act Statute, Promissory Estoppel, and
Quantum Meruit. On June 25, 2002, the Court dismissed the Massachusetts Wage Act
claim brought against the Company's former chief executive officer. On July 26,
2002, dismissal of the Wage Act claim in favor of the Company's former chief
executive officer was upheld on interlocutory appeal. On July 9, 2003, the Court
granted summary judgment in the Company's favor regarding claims for Breach of
Contract, Promissory Estoppel, and Quantum Meruit, and granted judgment on the
pleadings in favor of the Company regarding the Massachusetts Wage Act claim. On
September 24, 2004, following a jury trial on the sole remaining claim for
Breach of the Covenant of Good Faith and Fair Dealing, a jury awarded damages of
$136,876 to the plaintiff, which have been included in accrued liabilities and
other in the Company's Condensed Consolidated Balance Sheets as of April 30,
2005. The plaintiff has since filed a notice of appeal of his
previously-dismissed claims and the judgment for Breach of Contract and Breach
of the Covenant of Good Faith and Fair Dealing, and the Company has filed a
notice of appeal of the judgment for Breach of the Covenant of Good Faith and
Fair Dealing.
The Company is subject to various claims and legal actions arising in the
ordinary course of business. The Company has accrued for estimated losses in the
accompanying consolidated financial statements for those matters where it
believes that the likelihood that a loss will occur is probable and the amount
of loss is reasonably estimable.
8. Recent Accounting Pronouncements
In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an
amendment of ARB No. 43, Chapter 4. SFAS No. 151 clarifies the accounting for
abnormal amounts of idle facility expense, freight, handling costs and wasted
material. SFAS No. 151 is effective for inventory costs incurred during fiscal
years beginning in The Company's first quarter of fiscal 2006. The Company does
not believe adoption of SFAS No. 151 will have a material effect on its
consolidated financial position, results of operations or cash flows.
In December, 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 29. SFAS No. 153 addresses the
measurement of exchanges of nonmonetary assets and redefines the scope of
transactions that should be measured based on the fair value of the assets
exchanged. SFAS No. 153 is effective for nonmonetary asset exchanges beginning
in the Company's first quarter of fiscal 2006. The Company does not believe
adoption of SFAS No. 153 will have a material effect on its consolidated
financial position, results of operations or cash flows.
15
In December 2004, the FASB issued SFAS 123--revised 2004 ("SFAS 123R"),
"Share-Based Payment" which replaces SFAS No. 123, "Accounting for Stock-Based
Compensation" and supersedes APB 25, "Accounting for Stock Issued to Employees."
SFAS 123R requires the measurement of all employee share-based payments to
employees, including grants of employee stock options, using a fair-value-based
method and the recording of such expense in the company's consolidated
statements of income. The accounting provisions of SFAS 123R are effective for
annual reporting periods beginning after June 15, 2005.
The Company is required to adopt SFAS 123R in the first quarter of fiscal
2006. The pro forma disclosures previously permitted under SFAS 123 no longer
will be an alternative to financial statement recognition. See Note 2 in the
company's Notes to Consolidated Financial Statements for the pro forma net
income and net income per share amounts, for the three and nine months ended
April 30, 2005 and April 30, 2004 presented, as if the Company had used a
fair-value-based method similar to the methods required under SFAS 123R to
measure compensation expense for employee stock incentive awards. Although the
Company has not yet determined whether the adoption of SFAS 123R will result in
amounts that are similar to the current pro forma disclosures under SFAS 123,
the Company is evaluating the requirements under SFAS 123R and expects the
adoption to have a significant adverse impact on its consolidated statements of
operations and net loss per share.
9. Guarantees and Indemnifications
As permitted under Delaware law, the Company has agreements whereby the
Company's officers and directors are indemnified for certain events or
occurrences while the officer or director is, or was, serving at the Company's
request in such capacity. The maximum potential amount of future payments the
Company could be required to make under these indemnification agreements is
unlimited; however, the Company has director and officer liability insurance
designed to limit the Company's exposure and to enable the Company to recover a
portion of any future amounts paid. As a result of the Company's insurance
policy coverage, the Company believes the estimated fair value of these
indemnification agreements is minimal. Accordingly, the Company has no
liabilities recorded for these agreements as of April 30, 2005.
The Company enters into standard indemnification agreements in the ordinary
course of business. Pursuant to these agreements, the Company indemnifies, holds
harmless, and agrees to reimburse the indemnified party for losses suffered or
incurred by the indemnified party, generally, the Company's business partners,
subsidiaries and/or customers, in connection with any patent, copyright or other
intellectual property infringement claim by any third party with respect to the
Company's products. The term of these indemnification agreements is generally
perpetual any time after execution of the agreement. The maximum potential
amount of future payments the Company could be required to make under these
indemnification agreements is unlimited. The Company has not incurred
significant costs to defend lawsuits or settle claims related to these
indemnification agreements. As a result, the Company believes the estimated fair
value of these agreements is insignificant. Accordingly, the Company has no
liabilities recorded for these agreements as of April 30, 2005.
The Company warrants that its software products will perform in all
material respects in accordance with the Company's standard published
specifications in effect at the time of delivery of the licensed products to the
customer for a specified period, which generally does not exceed ninety days.
Additionally, the Company warrants that its maintenance services will be
performed consistent with generally accepted industry standards through the
completion of the agreed upon services. If necessary, the Company would provide
for the estimated cost of product and service warranties based on specific
warranty claims and claim history, however, the Company has not incurred
significant expense under its product or services warranties. As a result, the
Company believes the estimated fair value of these agreements is minimal.
Accordingly, the Company has no liabilities recorded for these agreements as of
April 30, 2005.
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; future customers representing more than 10% of our revenues; financial
performance and results of operations; technological trends in, and emergence of
the market for collaborative software development applications; the future
functionality, business potential, demand for, efficiencies created by and
adoption of SourceForge; demand for online advertising; management's strategy,
plans and objectives for future operations; the impact of our restructuring and
the amount of cash utilized by operations; our intent to continue to invest
16
significant resources in development; competition, competitors and our ability
to compete; liquidity and capital resources; the outcome of any litigation to
which we are a party; our accounting policies; and sufficiency of our cash
resources, cash generated from operations and investments to meet our operating
and working capital requirements. Actual results may differ materially from
those expressed or implied in such forward-looking statements due to various
factors, including those set forth in the Risk Factors contained in the section
of this Form 10-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.
Critical Accounting Estimates
There have been no significant changes in our critical accounting estimates
during the three and nine months ended April 30, 2005 as compared to what was
previously disclosed in Management's Discussion and Analysis of Financial
Condition and Results of Operations included in our Annual Report on Form 10-K
for the year ended July 31, 2004.
Overview
We were incorporated in California in January 1995 and reincorporated in
Delaware in December 1999. From the date of our incorporation through October
2001, we sold Linux-based hardware systems and services under the name VA Linux
Systems, Inc. On June 27, 2001, we announced our decision to exit our
Linux-based hardware business. Today, we do business under the name VA Software
Corporation and we develop, market and support a software application known as
SourceForge Enterprise Edition ("SourceForge") and also own and operate OSTG,
Inc. ("OSTG") and its wholly-owned subsidiaries, a network of Internet Web sites
offering advertising, retail and animation services and products.
We currently view our business in four operating segments: SourceForge,
Online Media, E-commerce and Online Images. Our SourceForge segment focuses on
our SourceForge software products and services. Our Online Media segment
represents a network of Internet Web sites serving the IT professional and
software development communities. Our E-commerce segment provides online sales
of a variety of retail products of interest to the software development and IT
communities through ThinkGeek, Inc. ("ThinkGeek") a wholly-owned subsidiary of
OSTG. Our Online Images segment provides online sales of digital animation sold
in the form of CD's or as a subscription offered through Animation Factory,
Inc., a wholly-owned subsidiary of OSTG.
Within the SourceForge segment, we continued to increase the number of
customers to whom we have sold our SourceForge products, totaling 125 at April
30, 2005. Within the Online Media segment, during the third quarter of fiscal
2005 we reached record levels of page views, unique visitors and advertisers. As
of April 30, 2005, OSTG reached nearly 19 million unique visitors and served
more than 290 million page views per month. Within the E-commerce segment, we
continued to increase our customer base, increasing the number of orders by 12%
from the prior year. Within the Online Images segment, we grew our revenue for
the three and nine month periods year over year by 13% and 21%, respectively.
Net revenues during the three and nine months ended April 30, 2005 increased
as compared to the three and nine months ended April 30, 2004 primarily due to
increased sales in our SourceForge, E-commerce and Online Images businesses,
offset by a decrease in our Online Media business and other revenue derived from
our previous hardware business. SourceForge sales increased due to an increase
in the number of customers to whom we have licensed SourceForge and an increase
in the average contract value. E-commerce sales increased due to an increase in
our customer base and an increase in the average order size. Online Images sales
increased due to an increase in our customer base related to this segment.
Online Media revenues decreased primarily as a result of the Company's decision
to eliminate its revenue generating barter transactions.
Our sales continue to be primarily attributable to customers located in the
United States of America.
For total operations, the net loss was $1.4 million and $4.1 million during
the three months ended April 30, 2005 and April 30, 2004, respectively, or $0.02
and $0.07, respectively, in basic and diluted net loss per share. The net loss
was $3.7 million and $6.8 million during the nine months ended April 30, 2005
and April 30, 2004, respectively, or $0.06 and $0.11, respectively, in basic and
diluted net loss per share. Each of the three and nine months ended April 30,
2004 included restructuring charges of $3.2 million.
Results of Operations
The application of accounting standards is central to a company's
reported financial position, results of operations and cash flows. We review our
annual and quarterly results, along with key accounting policies, with our audit
17
committee prior to the release of financial results. We do not use
off-balance-sheet arrangements with unconsolidated related parties, nor do we
use other forms of off-balance-sheet arrangements such as research and
development arrangements.
We have completed fourteen quarters of operations focused on building our
application software business, and accordingly have a limited operating history
in this business. While we believe that we are making good progress in our
application software business, a substantial majority of our revenues continue
to be derived from our other businesses and we face numerous risks and
uncertainties that commonly confront businesses in emerging markets, some of
which we have identified in the "Risk Factors" section below.
The following table sets forth our operating results for the periods
indicated as a percentage of net revenues, represented by selected items from
the unaudited condensed consolidated statements of operations. This table should
be read in conjunction with the consolidated financial statements and the
accompanying notes included in this Form 10-Q.
Three Months Ended Nine Months Ended
----------------------- ------------------------
April 30, April 30, April 30, April 30,
2005 2004 2005 2004
---- ---- ---- ----
Consolidated Statements of Operations Data:
SourceForge revenues ............................................. 25.2% 18.9% 21.9% 15.4%
Online Media revenues ............................................ 27.0 35.2 24.1 32.2
E-commerce revenues .............................................. 39.7 38.4 47.0 45.8
Online Images revenues ........................................... 8.1 7.5 7.0 6.5
Other revenues ................................................... 0.0 0.0 0.0 0.2
----- ----- ----- -----
Net revenues .................................................. 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
SourceForge cost of revenues ..................................... 3.3 4.9 3.1 6.8
Online Media cost of revenues .................................... 11.4 10.1 10.2 10.0
E-commerce cost of revenues ...................................... 30.6 31.2 36.9 36.6
Online Images cost of revenues.................................... 1.7 1.9 1.6 1.7
----- ----- ----- -----
Cost of revenues .............................................. 47.0 48.2 51.8 55.0
----- ----- ----- -----
Gross margin ..................................................... 53.0 51.8 48.2 45.0
----- ----- ----- -----
Operating expenses:
Sales and marketing ........................................... 35.9 36.2 30.8 34.7
Research and development ...................................... 20.8 22.9 18.9 23.7
General and administrative .................................... 17.4 20.4 16.8 17.2
Restructuring costs and other special charges ................. 0.0 44.5 (0.4) 14.6
Amortization of deferred stock compensation ................... 0.0 0.0 0.0 0.1
Total operating expenses .................................... 74.1 124.0 66.1 90.3
----- ----- ----- -----
Loss from operations ............................................. (21.2) (72.2) (17.9) (45.3)
Remeasurement of warrant liability ............................... 0.0 12.7 0.0 7.1
Interest Income, net ............................................. 3.0 3.0 2.5 3.2
Other income, net ................................................ 0.2 (0.1) 0.4 4.2
----- ----- ----- -----
Net loss ......................................................... (18.0)% (56.6)% (15.0)% (30.8)%
===== ===== ===== =====
Net Revenues
Three Months Ended Nine Months Ended
------------------------ ---------------------- % Change % Change
April 30, April 30, April 30, April 30, Three Nine
($ in thousands) 2005 2004 2005 2004 Months Months
------- ------- ------- ------- -------- --------
SourceForge revenues ................. $ 1,918 $ 1,379 $ 5,380 $ 3,377 39% 59%
Online Media revenues ................ 2,052 2,563 5,909 7,062 (20%) (16%)
E-commerce revenues .................. 3,021 2,798 11,535 10,040 8% 15%
Online Images revenues ............... 620 548 1,712 1,416 13% 21%
Other revenues ....................... -- 3 -- 49 (100%) (100%)
------- ------- ------- -------
Net revenues ......................... $ 7,611 $ 7,291 $24,536 $21,944 4% 12%
======= ======= ======= =======
Net revenues increased during the three months ended April 30, 2005 as
compared to the three months ended April 30, 2004 due primarily to an increase
in our SourceForge, E-commerce and Online Images businesses, offset by a
decrease in Online Media business and other revenues derived from our previous
hardware business.
18
Net revenues increased during the nine months ended April 30, 2005 as
compared to the nine months ended April 30, 2004 due primarily to an increase in
our SourceForge, E-commerce and Online Images businesses, offset by a decrease
in Online Media business and other revenues derived from our previous hardware
business.
Sales for the three and nine months ended April 30, 2005 and April 30, 2004
were primarily to customers located in the United States of America.
For the three and nine months ended April 30, 2005 and April 30, 2004 no
one customer represented 10% or greater of net revenues. We do not anticipate
that any one customer will represent more than 10% of net revenues in the near
future.
Net Revenues by Segment
SourceForge Revenues
Three Months Ended Nine Months Ended
------------------------ ---------------------- % Change % Change
April 30, April 30, April 30, April 30, Three Nine
($ in thousands) 2005 2004 2005 2004 Months Months
------- ------- ------- ------- -------- --------
SourceForge revenues ..................... $1,918 $1,379 $5,380 $3,377 39% 59%
Percentage of total net revenues........... 25% 19% 22% 15%
Aggregate # of customers sold to.......... 125 86 125 86 45% 45%
Avg. contract value ...................... $ 131 $ 92 $ 112 $ 75 42% 49%
SourceForge revenues consist principally of fees for licenses of our
SourceForge software products, maintenance, consulting and training.
The growth during the three months ended April 30, 2005 as compared to the
three months ended April 30, 2004 was primarily related to the SourceForge
licensing and maintenance components of SourceForge revenue. The number of
customers to whom we have licensed SourceForge increased to 125 and our average
value of contracts sold during the quarter ended April 30, 2005 increased to
$131,000. This is compared to 86 customers to whom we had licensed SourceForge
with an average value of contracts sold during the quarter ended April 30, 2004
of $92,000.
The growth during the nine months ended April 30, 2005 was primarily related
to the SourceForge licensing and maintenance components of SourceForge revenue.
We have increased the number of customers to whom we have licensed SourceForge
to 125 and increased our average value of contracts sold during the nine months
ended April 30, 2005 to $112,000. This is compared to 86 customers to whom we
had licensed SourceForge with an average value of contracts sold during the nine
months ended April 30, 2004 of $75,000.
We expect SourceForge revenues to continue to increase as our new and
returning customer base grows.
Online Media Revenues
Three Months Ended Nine Months Ended
------------------------ ---------------------- % Change % Change
April 30, April 30, April 30, April 30, Three Nine
($ in thousands) 2005 2004 2005 2004 Months Months
------- ------- ------- ------- -------- --------
Online Media revenues .................. $2,052 $2,563 $5,909 $7,062 (20%) (16%)
Percentage of total net revenues........ 27% 35% 24% 32%
During the three and nine months ended April 30, 2005, Online Media revenues
were primarily derived from cash sales of advertising space on our various Web
sites, as well as sponsorship and royalty related arrangements associated with
advertising on these Web sites. During the three and nine months ended April 30,
2004, Online Media revenues also included $0.3 million and $1.2 million of
barter revenue, respectively.
19
Three Months Ended Nine Months Ended
------------------------ ---------------------- % Change % Change
April 30, April 30, April 30, April 30, Three Nine
($ in thousands) 2005 2004 2005 2004 Months Months
------- ------- ------- ------- -------- --------
Cash advertising ..................... $1,912 $2,069 $5,582 $5,198 (8%) 7%
Barter advertising ................... -- 300 -- 1,229 (100%) (100%)
Sponsorships ......................... 128 188 303 629 (32%) (52%)
Donations ............................ 12 6 24 6 100% 300%
------ ------ ------ ------
Online Media revenues ................ $2,052 $2,563 $5,909 $7,062 (20%) (16%)
====== ====== ====== ======
Cash advertising revenue is primarily derived from the number of impressions
delivered and the average CPM rate (i.e., the average rate at which we receive
revenue per 1,000 banner advertisements (impressions) we display to users of our
online services) charged for the impressions delivered.
Barter advertising is derived from banner advertising delivered in exchange
for similar banner advertising on third-party Web sites. We record barter
revenue transactions at their estimated fair value based on our historical
experience of selling similar advertising for cash. Beginning in the first
quarter of fiscal 2005, we eliminated our revenue generating barter related
programs. Going forward, we do not anticipate any Online Media revenue to be
associated with barter programs.
Sponsorship revenue is derived from non-CPM rate Web marketing programs that
are used to increase brand awareness. Revenue related to sponsorships is
recognized ratably over the term of the marketing program. Sponsorship revenue
in the three and nine months ended April 30, 2005 and April 30, 2004 relates to
certain contracts with one customer, IBM. The decrease in sponsorship revenue in
the three and nine months ended April 30, 2005 as compared to the three and nine
months ended April 30, 2004 was due to the expiration of one of those IBM
contracts in the fourth quarter of fiscal 2004.
Three Months Ended Nine Months Ended
------------------------ ---------------------- % Change % Change
April 30, April 30, April 30, April 30, Three Nine
($ in thousands) 2005 2004 2005 2004 Months Months
------- ------- ------- ------- -------- --------
Cash advertising ..................... $ 1,912 $ 2,069 $ 5,582 $ 5,198 (8%) 7%
Impressions delivered ................ 116,820 344,300 415,838 840,136 (66%) (51%)
Average CPM rate ..................... $ 16.37 $ 6.01 $ 13.42 $ 6.19 172% 117%
The decrease in cash advertising revenue during the three months ended
April 30, 2005 as compared to the three months ended April 30, 2004 was due to
the significant decrease in the number of impressions delivered, offset by an
increase in the average contract CPM rate. The decrease in the number of
impressions delivered was primarily due the decline in online advertising
associated with an individually significant customer who had received a volume
discount. The increase in average CPM rates was the result of the decline in
advertising associated with this individually significant customer, driving the
average CPM rate for the three months ended April 30, 2004 down. In the three
months ended April 30, 2005, this customer represented only 2% of total cash
advertising revenues. However, in the three months ending April 30, 2004, this
same customer represented 31% of cash advertising revenues.
The increase in cash advertising revenue during the nine months ended April
30, 2005 as compared to the nine months ended April 30, 2004 was due to the
substantial increase in the average contract CPM rate, offset by a significant
decrease in the number of impressions delivered. The increase in average CPM
rates was the result of the decline in advertising associated with an
individually significant customer who had received a volume discount, driving
the average CPM rate for the nine months ended April 30, 2004 down. The decrease
in the number of impressions delivered was primarily due to the decline in
online advertising associated with this individually significant customer. In
the nine months ended April 30, 2005, this customer represented only 3% of total
cash advertising revenues. However, in the nine months ending April 30, 2004,
this same customer represented 31% of cash advertising revenues.
We believe that our prominent position in serving the growing Open Source
software and Linux markets, along with our favorable online visitor
demographics, make us an attractive advertising vehicle for advertising
customers.
E-commerce Revenues
Three Months Ended Nine Months Ended
------------------------ ---------------------- % Change % Change
April 30, April 30, April 30, April 30, Three Nine
($ in thousands) 2005 2004 2005 2004 Months Months
------- ------- ------- ------- -------- --------
E-commerce revenues ...................... $ 3,021 $ 2,798 $ 11,535 $ 10,040 8% 15%
Percentage of total net revenues ......... 40% 38% 47% 46%
# of Orders (per quarter) ................ 47,924 45,756 181,749 162,151 5% 12%
Avg. order size (in whole dollars) .... $ 63.04 $ 61.15 $ 63.47 $ 61.92 3% 3%
20
E-commerce revenues are derived from the online sale of consumer goods,
including shipping, net of any returns and allowances.
The growth in the three and nine months ended April 30, 2005 as compared to
the three and nine months ended April 30, 2004 is primarily due to increased
consumer awareness of our site as a result of expanded advertising, a broader
product offering which attracted a larger customer base, as well as Web site
enhancements and affiliate programs that drove more traffic to our site. As a
result of our efforts we experienced a 12% increase in the number of orders
placed year over year for the nine months ended April 30.
We expect E-commerce revenues to continue to grow as our E-commerce
customer base grows.
Online Images Revenues
Three Months Ended Nine Months Ended
------------------------ ---------------------- % Change % Change
April 30, April 30, April 30, April 30, Three Nine
($ in thousands) 2005 2004 2005 2004 Months Months
------- ------- ------- ------- -------- --------
Online Images revenues ............. $ 620 $ 548 $1,712 $1,416 13% 21%
Percentage of total net revenues ... 8% 8% 7% 7%
Online Images revenues are derived from the online sale of
three-dimensional art, animations and presentations.
The growth in the three and nine months ended April 30, 2005 as compared to
the three and nine months ended April 30, 2004 is primarily due to increased
consumer awareness of our site as a result of a broader product offering which
attracted a larger customer base, as well as Web site enhancements and affiliate
programs that drove more traffic to our site.
We expect Online Images revenues to continue to grow as our customer base
grows.
Other Revenues
Three Months Ended Nine Months Ended
------------------------ ---------------------- % Change % Change
April 30, April 30, April 30, April 30, Three Nine
($ in thousands) 2005 2004 2005 2004 Months Months
------- ------- ------- ------- -------- --------
Other revenues ............................ $-- $ 3 $-- $ 49 (100%) (100%)
Percentage of total net revenues........... 0% 0% 0% 0%
Other revenues were derived from our former hardware, and related customer
support, and professional services businesses. The decrease in other revenues in
the three and nine months ended April 30, 2005 as compared to the three and nine
months ended April 30, 2004 is the direct result of exiting these former
businesses. We expect other revenues to remain at zero throughout fiscal 2005
and thereafter.
Cost of Revenues/Gross Margin
Three Months Ended Nine Months Ended
------------------------ ---------------------- % Change % Change
April 30, April 30, April 30, April 30, Three Nine
($ in thousands) 2005 2004 2005 2004 Months Months
------- ------- ------- ------- -------- --------
Cost of revenues ............. $ 3,582 $ 3,513 $12,712 $12,077 2% 5%
Gross margin ................. $ 4,029 $ 3,778 $11,824 $ 9,867 7% 20%
Gross margin % ............... 53% 52% 48% 45%
21
Cost of revenues consist of personnel costs and related overhead
associated with providing software professional services, personnel costs and
related overhead associated with providing and running advertising campaigns and
product costs associated with our E-commerce business.
The increase in gross margins in the three and nine months ended April 30,
2005 as compared to the three and nine months ended April 30, 2004 was primarily
the result of improvements in the SourceForge, E-commerce and Online Images
businesses, offset by a decline in the Online Media margins.
Cost of Revenues/Gross Margin by Segment
SourceForge Cost of Revenues/Gross Margin
Three Months Ended Nine Months Ended
------------------------ ---------------------- % Change % Change
April 30, April 30, April 30, April 30, Three Nine
($ in thousands) 2005 2004 2005 2004 Months Months
------- ------- ------- ------- -------- --------
SourceForge cost of revenues ........... $ 254 $ 360 $ 774 $1,496 (29%) (48%)
SourceForge gross margin ............... $1,664 $1,019 $4,606 $1,881 63% 145%
SourceForge gross margin % ............. 87% 74% 86% 56%
SourceForge cost of revenues consist of personnel and outside contractor
costs associated with providing software customer and professional services.
The increase in our SourceForge gross margin percentages for the three
months ended April 30, 2005 as compared to the three months ended April 30, 2004
was primarily the result of leveraging our fixed personnel costs while
increasing revenue levels.
The increase in our SourceForge gross margin percentages for the nine months
ended April 30, 2005 as compared to the nine months ended April 30, 2004 was
primarily the result of lower outside contractor costs, decreased personnel
costs due to a decrease in headcount and leveraging our fixed personnel costs
while increasing revenue levels. The increased margin associated with lower
outside contractor costs accounted for $0.3 million. The increased margin
associated with decreased personnel accounted for $0.2 million, and the
increased margin associated with leveraging our fixed personnel costs accounted
for $0.2 million.
Online Media Cost of Revenues/Gross Margin
Three Months Ended Nine Months Ended
------------------------ ---------------------- % Change % Change
April 30, April 30, April 30, April 30, Three Nine
($ in thousands) 2005 2004 2005 2004 Months Months
------- ------- ------- ------- -------- --------
Online Media cost of revenues ........... $ 869 $ 738 $2,509 $2,189 18% 15%
Online Media gross margin ............... $1,183 $1,825 $3,400 $4,873 (35%) (30%)
Online Media gross margin % ............. 58% 71% 58% 69%
Online Media cost of revenues consist of personnel costs and related
overhead associated with developing the editorial content of the sites and
providing and running advertising campaigns.
The decrease in Online Media gross margin percentages for the three months
ended April 30, 2005 as compared to the three months ended April 30, 2004 was
primarily driven by the increase in Online Media cost of revenues on lower
overall revenue volumes, primarily due to our elimination of our revenue
generating barter programs. The increase in cost of revenues was primarily due
to an increase in personnel costs related to editorial content contractors of
$0.1 million.
The decrease in Online Media gross margin percentages for the nine months
ended April 30, 2005 as compared to the nine months ended April 30, 2004 was
primarily driven by the increase in Online Media cost of revenues on lower
overall revenue volumes, primarily due our elimination of our revenue generating
barter programs. The increase in cost of revenues was primarily due to an
increase in personnel costs related to editorial content contractors of $0.2
million and an increase in corporate overhead facilities costs of $0.1 million
as a result of consolidating operations, offset by a decrease in depreciation
expense and bandwidth costs associated with delivering advertising of $0.1
million.
22
E-commerce Cost of Revenues/Gross Margin
Three Months Ended Nine Months Ended
------------------------ ---------------------- % Change % Change
April 30, April 30, April 30, April 30, Three Nine
($ in thousands) 2005 2004 2005 2004 Months Months
------- ------- ------- ------- -------- --------
E-commerce cost of revenues .............. $2,329 $2,277 $9,043 $8,028 2% 13%
E-commerce gross margin .................. $ 692 $ 521 $2,492 $2,012 33% 24%
E-commerce gross margin % ................ 23% 19% 22% 20%
E-commerce cost of revenues consist of product costs, shipping and
fulfillment costs and personnel costs associated with the operations and
merchandising functions.
The increase in E-commerce cost of revenues in absolute dollars in the three
months ended April 30, 2005 as compared to the three months ended April 30, 2004
was primarily due to increased shipping costs of $0.1 million. The increase in
shipping costs was partially related to increased revenue levels and partially
due to rate increases and fuel surcharges by both UPS and DHL. E-commerce gross
margin percentages have increased for the three months ended April 30, 2005 as
compared to the three months ended April 30, 2004 primarily as a result of
higher product margins due to product mix. Product cost decreased slightly on
increased revenue levels.
The increase in E-commerce cost of revenues in absolute dollars in the nine
months ended April 30, 2005 as compared to the nine months ended April 30, 2004
was primarily due to increased product costs of $0.3 million, shipping costs of
$0.5 million and fulfillment costs of $0.2 million. The increase in product
costs was the result of increased E-commerce revenue levels. The increase in
shipping costs was partially related to increased revenue levels and partially
due to rate increases and fuel surcharges by both UPS and DHL. The increase in
fulfillment costs was partially related to increased revenue levels and
partially due to the transition associated with changing our third party
fulfillment partner in the later part of the fourth quarter of fiscal year 2004.
E-commerce gross margin percentages have increased for the nine months ended
April 30, 2005 as compared to the nine months ended April 30, 2004 as a result
of higher product margins due to product mix, offset by a slight deterioration
in shipping and fulfillment margins.
We expect E-commerce cost of revenues in absolute dollars to grow
proportionately with E-commerce revenues in the future. In addition, we expect
E-commerce overall gross margins to improve slightly as volume grows.
Online Images Cost of Revenues/Gross Margin
Three Months Ended Nine Months Ended
------------------------ ---------------------- % Change % Change
April 30, April 30, April 30, April 30, Three Nine
($ in thousands) 2005 2004 2005 2004 Months Months
------- ------- ------- ------- -------- --------
Online Images cost of revenues ............ $ 130 $ 138 $ 386 $ 364 (6%) 6%
Online Images gross margin ................ $ 490 $ 410 $1,326 $1,052 20% 26%
Online Images gross margin % .............. 79% 75% 77% 74%
Online Images cost of revenues consist of direct material costs for
animation CDs and personnel costs associated with the operations.
The increase in our Online Images gross margin percentages for the three and
nine months ended April 30, 2005 as compared to the three and nine months ended
April 30, 2004 was primarily due to increased material costs consistent with the
increase in revenues, offset by a decrease in costs associated with bandwidth.
Operating Expenses
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of salaries, commissions and
related expenses for personnel engaged in sales, marketing and sales support
functions, as well as costs associated with trade shows, advertising and
promotional activities.
Three Months Ended Nine Months Ended
------------------------ ---------------------- % Change % Change
April 30, April 30, April 30, April 30, Three Nine
($ in thousands) 2005 2004 2005 2004 Months Months
------- ------- ------- ------- -------- --------
Sales & Marketing ........................ $2,730 $2,639 $7,546 $7,623 3% (1%)
Percentage of total net revenues ......... 36% 36% 31% 35%
Headcount ................................ 35 25 35 25
23
The slight increase in absolute dollars in the three months ended April 30,
2005 as compared to the three months ended April 30, 2004 was primarily related
to an increase in employee expenses of $0.3 million, offset by a decrease in our
Online Media marketing expense related to barter of $0.3 million. The $0.3
million increase in employee expense was primarily related to an increase in
headcount. The decline in our barter marketing expense was due to the
elimination of our revenue generating barter related programs in the first
quarter of fiscal 2005. Going forward, we do not anticipate any expense related
to barter programs.
The slight decrease in absolute dollars in the nine months ended April 30,
2005 as compared to the nine months ended April 30, 2004 was primarily related
to a decrease in our Online Media marketing expense related to barter of $1.2
million, offset by increases in employee expenses of $0.6 million, commission
expenses of $0.3 million, credit card fees of $0.1 million and marketing expense
of $0.1 million. The decline in our barter marketing expense was due to the
elimination of our revenue generating barter related programs in the first
quarter of fiscal 2005. The $0.6 million increase in employee expense was
primarily related to an increase in headcount. The $0.3 million in commission
expense was a direct result of increased revenue related to our SourceForge
segment. The increase in credit card fees was related to our ThinkGeek segment
and was the result of increased sales volumes. The increase in marketing expense
was related to public relations for our Online Media segment. The decrease as a
percentage of net revenues was due to increased revenue levels.
Going forward, we do not anticipate any expense related to barter programs.
We believe our sales and marketing expenses in absolute dollars will increase in
the future as we intend to grow our sales force. However, in the future, we
expect sales and marketing expenses to decrease slightly as a percentage of
revenue.
Research and Development Expenses
Research and development ("R&D") expenses consist primarily of salaries and
related expenses for software engineers. We expense all of our research and
development costs as they are incurred.
Three Months Ended Nine Months Ended
------------------------ ---------------------- % Change % Change
April 30, April 30, April 30, April 30, Three Nine
($ in thousands) 2005 2004 2005 2004 Months Months
------- ------- ------- ------- -------- --------
SourceForge R&D ........................... $ 996 $1,128 $2,862 $3,655 (12%) (22%)
Online Media R&D .......................... 455 390 1,317 1,142 17% 15%
E-commerce R&D ............................ 54 53 177 125 2% 42%
Online Images R&D ......................... 80 96 285 288 (17%) (1%)
------ ------ ------ ------
Total Research & Development .............. $1,585 $1,667 $4,641 $5,210 (5%) (11%)
====== ====== ====== ======
Percentage of total net revenues .......... 21% 23% 19% 24%
Headcount ................................. 37 38 37 38
The decrease in absolute dollars in the three months ended April 30, 2005
as compared to the three months ended April 30, 2004 was primarily due to a
decrease in allocated facility expenses of $0.1 million. The decrease in
allocated facility expenses was primarily related to rent and depreciation. Rent
expense has decreased for the three months ended April 30, 2005 as compared to
the three months ended April 30, 2004 as a result of moving into a smaller
facility late in the third quarter of fiscal 2004. Depreciation expense has
decreased as well due to moving into the smaller facility and writing off the
remaining assets associated with the larger facility occupied in the third
quarter of fiscal 2004. The decrease as a percentage of net revenues was
primarily due to our decreased spending levels as described above as well as
increased revenue levels.
The decrease in absolute dollars in the nine months ended April 30, 2005 as
compared to the nine months ended April 30, 2004 was primarily due to a decrease
in allocated facility expenses of $0.5 million and a decrease in the use of
SourceForge contractors of $0.1 million. The decrease in allocated facility
expenses was primarily related to rent and depreciation. Rent expense has
decreased for the nine months ended April 30, 2005 as compared to the nine
months ended April 30, 2004 as a result of moving into a smaller facility late
in the third quarter of fiscal 2004. Depreciation expense has decreased as well
due to moving into the smaller facility and writing off the remaining assets
associated with the larger facility occupied in the first nine months of fiscal
2004. The decrease in SourceForge contractors was specifically related to a
decrease in our utilization of Cybernet Software Solutions, Inc. following the
completion of the development phase of SourceForge Version 3.4 in the later part
of the first quarter of fiscal 2004. The decrease as a percentage of net
revenues was primarily due to our decreased spending levels as described above
as well as increased revenue levels.
24
We expect research and development expenses to increase slightly in absolute
dollars and decrease as a percentage of revenue in the future.
In accordance with SFAS No. 86, "Accounting for the Cost of Computer
Software to be Sold, Leased, or Otherwise Marketed," development costs incurred
in the research and development of new software products are expensed as
incurred until technological feasibility in the form of a working model has been
established at which time such costs are capitalized, subject to a net
realizable value evaluation. Technological feasibility is established upon the
completion of an integrated working model. To date, our software development has
been completed concurrent with the establishment of technological feasibility
and, accordingly, all software development costs have been charged to research
and development expense in the accompanying consolidated statements of
operations. Going forward, should technological feasibility occur prior to the
completion of our software development, all costs incurred between technological
feasibility and software development completion will be capitalized.
General and Administrative Expenses
General and administrative expenses consist of salaries and related
expenses for finance and administrative personnel, bad debts and professional
fees for accounting and legal services.
Three Months Ended Nine Months Ended
------------------------ ---------------------- % Change % Change
April 30, April 30, April 30, April 30, Three Nine
($ in thousands) 2005 2004 2005 2004 Months Months
------- ------- ------- ------- -------- --------
General & Administrative .................. $1,328 $1,490 $4,133 $3,722 (11%) 11%
Percentage of total net revenues .......... 17% 20% 17% 17%
Headcount ................................. 19 20 19 20
The decrease in absolute dollars in the three months ended April 30, 2005 as
compared to the three months ended April 30, 2004 was primarily related to
employee expenses of $0.2 million, recruiting expenses of $0.1 million and
allocated facility expenses of $0.2 million, offset by an increase in accounting
fees of $0.1 million and franchise tax expense of $0.1 million. The decrease of
employee expenses of $0.2 million was associated with severance paid in the
third quarter of fiscal 2004. The decrease in recruiting expenses of $0.1
million was associated with the placement fee for one of the company's
executives in the third quarter of 2004. The decrease in allocated facility
expenses of $0.2 million was primarily related to rent and depreciation. Rent
expense has decreased for the three months ended April 30, 2005 as compared to
the three months ended April 30, 2004 as a result of moving into a smaller
facility late in the third quarter of fiscal 2004. Depreciation expense has
decreased as well due to moving into the smaller facility and writing off the
remaining assets associated with the larger facility occupied in the third
quarter of fiscal 2004. The increase in accounting fees of $0.1 million was due
to additional costs associated with Sarbanes-Oxley compliance. The increase in
franchise tax expense was the result of a credit received for overpayment in the
third quarter of fiscal 2004. The slight decrease as a percentage of net
revenues was primarily due to our decreased expense levels and increased
revenue.
The increase in absolute dollars in the nine months ended April 30, 2005 as
compared to the nine months ended April 30, 2004 was primarily related to the
reversal of legal expenses in the first quarter of fiscal 2004 of $1.2 million,
$0.9 million of which was associated with the IPO Securities Litigation that was
ultimately paid by one of our insurers and $0.3 million of which related to a
lawsuit that was favorably resolved. Excluding these reversals, general and
administrative expenses decreased $0.8 million in the nine months ended April
30, 2005 as compared to the nine months ended April 30, 2004. The decrease,
excluding reversals of legal expenses, was primarily related to decreased
employee expenses, consulting expenses, recruiting expenses and allocated
facility expenses, offset by an increase in accounting fees and franchise tax
expense. The decrease in employee expenses of $0.5 million was associated with
bonuses. The decrease in consulting expenses of $0.1 million was related to
engaging an outside firm to assist us in a sales tax audit in fiscal 2004. The
audit was concluded in fiscal 2004, therefore, no such expenses were incurred in
the first quarter of fiscal 2005. The decrease in recruiting expenses of $0.2
million was associated with the placement fee for one of the company's
executives in the second and third quarters of 2004. The decrease in allocated
facility expenses of $0.2 million was primarily related to rent and
depreciation. Rent expense has decreased for the nine months ended April 30,
2005 as compared to the nine months ended April 30, 2004 as a result of moving
into a smaller facility late in the third quarter of fiscal 2004. Depreciation
expense has decreased as well due to moving into the smaller facility and
writing off the remaining assets associated with the larger facility occupied in
the first nine months of fiscal 2004. The increase in accounting fees of $0.1
million was due to additional costs associated with Sarbanes-Oxley compliance.
The increase in franchise tax expense was the result of a credit received for
25
overpayment in the third quarter of fiscal 2004. The increase as a percentage of
net revenues was primarily due to our increased expense levels related to legal
accrual reversals in the first quarter of fiscal 2004.
We expect general and administrative expenses to increase in absolute
dollars as we continue to prepare for the requirements of Section 404 of the
Sarbanes-Oxley Act of 2002 and increase slightly as a percentage of revenue in
the future.
Restructuring Costs and Other Special Charges
In fiscal 2001 and 2002, we adopted plans to exit our hardware systems and
hardware-related software engineering and professional services businesses, as
well as exit a sublease agreement and reduce our general and administrative
overhead costs. We exited these activities to pursue our current SourceForge,
Online Media, E-commerce and Online Images businesses and reduce our operating
losses in order to improve cash flow. We recorded restructuring charges of
$168.5 million related to exiting these activities, $160.4 million of which was
included in restructuring charges and other special charges in operating
expenses and $8.1 million of which was included in cost of sales. Included in
the restructuring were charges related to excess facilities from non-cancelable
leases. During the third quarter of fiscal 2004, in connection with our original
2002 restructuring plan which included an assumption to sublet all idle
facilities, we relocated our Fremont, California headquarters to a smaller
building in the same complex. As a result of the change in circumstances,
original accruals were reevaluated and we accordingly recorded a restructuring
adjustment of $2.9 million. Included in the $2.9 million dollar restructuring
adjustment was $2.5 million of expense related to writing off leasehold
improvements and fixed assets and an additional $0.4 million expense related to
excess facilities from non-cancelable leases. In addition, during the third
quarter of fiscal 2004, we reached agreements in principal to sublet unoccupied
portions of properties that we lease in Sunnyvale, California and Fremont,
California, which was finalized in the fourth quarter of fiscal 2004. As a
result of the change in circumstances due to the agreements in principal, which
were thereafter formalized in executed agreements, original accruals were
reevaluated and we accordingly recorded a restructuring adjustment of $0.3
million in the third quarter of fiscal 2004. The $3.2 million total adjustment
to restructuring expenses in fiscal 2004 has been recorded in the consolidated
statement of operations for that period. In the second quarter of fiscal 2005, a
minor credit adjustment of $0.1 million was recorded to accurately reflect the
current common area maintenance fees associated with the Fremont facilities. The
remaining accrual from non-cancelable lease payments is based on current
circumstances. These accruals are subject to change should actual circumstances
change. We will continue to evaluate and update, if applicable, these accruals
quarterly. As of April 30, 2005, we had an accrual of approximately $8.5 million
outstanding related to these non-cancelable leases, all of which was originally
included in operating expenses.
All charges as a result of restructuring activities have been recorded in
accordance with EITF 94-3 "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs incurred in a Restructuring)". Restructuring charges recorded in fiscal
2004 were considered adjustments to the original restructuring plans, therefore,
SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities"
was not applicable.
Below is a summary of the restructuring charges in operating expenses (in
thousands):
Total
Charged To Total Total Total
Operations Charged To Charged To Cash Restructuring
Fiscal Operations Operations Receipts/ Liabilities
2001-2003 Fiscal 2004 Fiscal 2005 (Payments) April 30, 2005
--------- ----------- ----------- ---------- --------------
Cash Provisions:
Other special charges relating to
restructuring activities.............................. $ 1,349 $ -- $ -- $ (1,349) $ --
Facilities charges...................................... 16,176 713 (101) (8,301) 8,487
Employee severance and other related charges............ 5,532 -- -- (5,532) --
-------- -------- -------- ---------- --------
Total cash provisions............................... 23,057 713 (101) $ (15,182) $ 8,487
-------- -------- -------- ---------- --------
Non-cash:
Write-off of goodwill and intangibles ................. 90,355 -- --
Write-off of other special charges relating to
restructuring activities ........................... 9,323 2,496 --
Write-off of accelerated options from
terminated employees.................................. 1,352 -- --
Acceleration of deferred stock compensation............ 36,064 -- --
-------- -------- ----------
Total non-cash provisions........................... 137,094 2,496 --
-------- -------- ----------
Total provisions.................................... $160,151 $ 3,209 $ (101)
======== ======== ==========
26
Below is a summary of the changes to the restructuring liability (in thousands):
Balance at Charged to Balance at
Changes in the total accrued restructuring liability Beginning Costs and End
- ----------------------------------------------------- of Period Expenses Deductions of Period
--------- -------- ---------- ---------
From July 29, 2000 through July 31, 2003 .......................... $ -- $ 23,057 $ (8,168) $ 14,889
For the year ended July 31, 2004 ................................... $ 14,889 $ 713 $ (4,319) $ 11,283
For the nine months ended April 30, 2004 ........................... $ 14,889 $ 713 $ (3,104) $ 12,498
For the nine months ended April 30, 2005 ........................... $ 11,283 $ (101) $ (2,695) $ 8,487
Components of the total accrued restructuring liability Short Long Total
- ------------------------------------------------------- Term Term Liability
---- ---- ---------
As of July 31, 2003 ................................................ $ 4,117 $ 10,772 $ 14,889
As of July 31, 2004 ................................................ $ 3,440 $ 7,843 $ 11,283
As of April 30, 2004 ............................................... $ 4,023 $ 8,475 $ 12,498
As of April 30, 2005 ............................................... $ 1,982 $ 6,505 $ 8,487
Amortization of Deferred Stock Compensation
In connection with the grant of stock options to employees during fiscal
1999 and prior to our initial public offering in fiscal 2000, we recorded
deferred stock compensation within stockholders' equity that was amortized on an
accelerated basis over the vesting period for the individual award. We expensed
deferred stock compensation of $20,000 during the nine months ended April 30,
2004. Deferred stock compensation was fully amortized as of October 31, 2003. As
such, there was no deferred stock compensation expense during the three months
ended April 30, 2004 or for the three and nine months ended April 30, 2005.
In December 2004, the FASB issued SFAS 123--revised 2004 ("SFAS 123R"),
"Share-Based Payment" which requires the measurement of all share-based payments
to employees, including grants of employee stock options, using a
fair-value-based method and the recording of such expense in our consolidated
statements of income. Beginning in the first fiscal quarter of 2006, we will
adopt SFAS 123R. We are evaluating the requirements under SFAS 123R and expect
the adoption to have a significant adverse impact on our consolidated statements
of income and net income per share.
Remeasurement of Warrant Liability
On November 6, 2003, we entered into a securities purchase agreement in
which we completed a private placement of 3,529,412 shares of our common stock
with The Riverview Group LLC ("Riverview") at an issue price of $4.25 per share
for aggregate proceeds of approximately $15 million (the "Private Placement").
In connection with the Private Placement, the Company retained Wharton Capital
Partners Ltd. ("Wharton") to act as a financial consultant and placement agent.
Also in connection with the Private Placement, Riverview and Wharton received
three-year warrants to purchase a total of 705,883 and 25,000 shares of our
common stock, respectively, at an exercise price of $6.00 and $6.14 per share,
respectively (collectively, the "Warrants"). We entered into a registration
rights agreement with Riverview on November 6, 2003 (the "Registration Rights
Agreement") in which we agreed to provide certain registration rights under the
Securities Act of 1933, as amended and the rules and regulations promulgated
thereunder, and applicable state securities laws with respect to the common
stock and the warrants issued to Riverview.
Pursuant to the terms of the Registration Rights Agreement, we filed a
registration statement (the "Registration Statement") on Form S-3 in order to
register the common stock and warrants issued in the Private Placement. The SEC
declared the Registration Statement effective on April 30, 2004. Before the
effective date of the Registration Statement, the shares of our common stock
sold in the Private Placement and the shares of our common stock underlying the
Warrants did not have the same rights as the other shares which were included in
the Equity section of the Consolidated Balance sheet. Therefore, the shares of
our common stock sold in the Private Placement and the shares of our common
stock underlying the Warrants were classified as liabilities on the Consolidated
Balance sheet. Liabilities must be reported at fair value as of the balance
sheet date. Initially the Warrants were valued as of November 6, 2003, and were
revalued on January 31, 2004 using the Black-Scholes valuation model and then,
on April 30, 2004, the effective date of the Registration Statement, revalued
again using the same Black-Scholes valuation model. As a result of these
remeasurements, a non-cash credit adjustment of $1.9 million was recorded to
properly value the liability. This credit adjustment was offset by a $0.3
million non-cash expense which was recorded as a result of not having the common
27
stock shares associated with the Private Placement registered. Both adjustments
have been recorded in "Remeasurement of warrant liability" in the Consolidated
Statement of Operations. As a result of the S-3 becoming effective on April 30,
2004, the remaining liability for the warrants of $0.6 million was reclassified
to equity as of that date.
Interest and Other Income, Net
Three Months Ended Nine Months Ended
------------------------ ---------------------- % Change % Change
April 30, April 30, April 30, April 30, Three Nine
($ in thousands) 2005 2004 2005 2004 Months Months
------- ------- ------- ------- -------- --------
Interest Income ......................... $ 233 $ 224 $ 646 $ 713 4% (9%)
Interest Expense ........................ $ (4) $ (1) $ (35) $ (5) * *
Other Income (Expense) .................. $ 12 $ (8) $ 101 $ 923 * (89%)
*Percentage not meaningful
The increase in interest income in the three months ended April 30, 2005 as
compared to the three months ended April 30, 2004 was due to a slight increase
in returns on our cash as interest rates have begun to improve.
The decrease in interest income in the nine months ended April 30, 2005 as
compared to the nine months ended April 30, 2004 was due to decreased returns on
our cash as a result of declining interest rates from the same period for the
prior year.
The increase in interest expense in the three and nine months ended April
30, 2005 as compared to the three and nine months ended April 30, 2004 was due
to the equipment capital lease that we entered into in the second quarter of
fiscal 2005. The capital lease expires in October 2005.
Other income and expenses decreased in the nine months ended April 30, 2005
as compared to the nine months ended April 30, 2004 primarily due to proceeds
received from a legal settlement in the first quarter of fiscal 2004 of $1.0
million.
Income Taxes
As of April 30, 2005, we had federal and state net operating loss
carry-forwards for tax reporting purposes available to offset future taxable
income. A valuation allowance has been recorded for the total deferred tax
assets as a result of uncertainties regarding realization of the assets based on
the lack of consistent profitability to date and the uncertainty of future
profitability. The federal and state net operating loss carry-forwards expire at
various dates through fiscal year 2024 and fiscal year 2014, respectively, to
the extent that they are not utilized. We have not recognized any benefit from
these net operating loss carry-forwards because of uncertainty surrounding their
realization. The amount of net operating losses that we can utilize is limited
under tax regulations because we have experienced a cumulative stock ownership
change of more than 50% over the last three years.
Liquidity and Capital Resources
Nine Months Ended
-------------------------------------
(in thousands) April 30, 2005 April 30, 2004
-------------- --------------
Net cash provided by (used in):
Operating activities ........................................................ $ (4,835) $ (9,064)
Investing activities ........................................................ (3,418) (8,521)
Financing activities ........................................................ 17,884
456
Effect of exchange rate changes on cash and cash equivalents (68) 4
-------- --------
Net increase (decrease) in cash and cash equivalents ............................. $ (7,865) $ 303
======== ========
Our principal sources of cash as of April 30, 2005 are our existing cash,
cash equivalents, short-term and long-term investments of $39.2 million, which
excludes restricted cash of $1.5 million (refer to financing activities below
for discussion on restricted cash). Cash and cash equivalents decreased by $3.5
million, and short-term and long-term investments decreased by $3.9 million at
April 30, 2005 when compared to April 30, 2004. This decrease is primarily due
to cash used in operations and payments related to idle facilities and capital
expenditures.
28
The cash flow discussion below describes the cash used or provided in one
period as compared to the cash used or provided in the same period for the
previous year. As such, the year to year fluctuations discussed can be
calculated from the Consolidated Statements of Cash Flows.
Operating Activities
The decrease in cash usage related to operating activities, net of non cash
expense, in the first nine months of fiscal 2005, as compared to the first nine
months of fiscal 2004, was primarily the result of a decrease in net loss, net
of non-cash expense, of $1.7 million, a decrease in accounts receivable of $1.2
million, a decrease in inventories of $0.5 million, a decrease in cash payments
related to excess facilities and an increase in accrued liabilities and other of
$1.9 million. The increased cash inflow related to accounts receivable was
primarily the result of increased collections in the first nine months of fiscal
2005 compared to the first nine months of fiscal 2004. The increased cash inflow
related to inventories was primarily the result of decreased purchasing levels
and increased sales levels compared to fiscal 2004. The increased cash inflow
related to accrued restructuring was due to decreased cash payments related to
excess facilities. Cash payments related to excess facilities in the first nine
months of fiscal 2005 were $2.7 million compared to $3.1 million in the first
nine months of fiscal 2004. The decreased change in restructuring liability for
the first nine months of fiscal 2004 was due to a $0.7 million adjustment
recorded based on the change in events related to excess facilities in the third
quarter of fiscal 2004. The increased cash inflow related to accrued liabilities
and other was primarily related to the reversal of legal expenses in the first
quarter of fiscal 2004 of $1.2 million and increasing accounting accruals
related to the Company's Sarbanes-Oxley efforts in fiscal 2005. The increase in
cash inflow was offset by an increase in accounts payable of $0.6 million as a
result of the timing of payments.
Investing Activities
Our investing activities primarily include purchases of property and
equipment and purchases and sales of marketable securities.
The decrease in cash usage related to investing activities in the first nine
months of fiscal 2005, as compared to the first nine months of fiscal 2004, was
primarily the result of a decrease in net purchases of marketable securities of
$4.5 million and a decrease in capital expenditures of $0.4 million. During the
first nine months of fiscal 2005, we purchased (net) $3.0 million in short and
long-term marketable securities compared to a net purchase of $7.5 million in
the first nine months of fiscal 2004. The decrease in cash usage related to
capital expenditures was primarily related to a significant purchase of servers
associated with our Online Media segment in the first quarter of 2004. The
decrease in short and long-term marketable securities in the nine months of
fiscal 2005 was due to liquidating the investments for use in operations and
payments related to idle facilities and capital expenditures
Financing Activities
The decrease in cash provided by financing activities in the first nine
months of fiscal 2005, as compared to the first nine months of fiscal 2004, was
the result of a private placement issuance of shares of our common stock during
the second quarter of fiscal 2004 and a decline in the cash generated from the
issuance of common stock to our employees in the first nine months of fiscal
2005 as compared to the first nine months of fiscal 2004. We are uncertain of
the level of cash that will be generated in the future from the issuance of
common stock to our employees as the exercising of options is dependant upon
several factors such as the price of our common stock and the number of
employees participating in our stock option plans.
For the first nine months of fiscal 2005 and 2004, exchange rate changes
had an immaterial effect on cash and cash equivalents. We expect that exchange
rate changes will have an immaterial effect on cash and cash equivalents in the
near future due to our focus on US-based business.
As of April 30, 2005 and July 31, 2004, we had outstanding letters of
credit issued under a line of credit of approximately $1.5 million related to
our corporate facility lease. The amount related to this letter of credit is
recorded in the "Restricted cash" section of the condensed consolidated balance
sheet. We anticipate that this balance will decline by $0.5 million in the
fourth quarter of fiscal year 2005 under the terms of our existing lease
agreement. The remaining $1.0 million will decline as the Company meets certain
financial covenants.
Our liquidity and capital requirements depend on numerous factors, including
market acceptance of our products, the resources we devote to developing,
marketing, selling and supporting our products, the timing and expense
associated with expanding our distribution channels, potential acquisitions and
other factors. We expect to devote capital resources to continue our research
and development efforts, to invest in our sales, support, marketing and product
development organizations, to enhance and introduce marketing programs, and for
29
other general corporate activities. We believe that our existing cash balances
will be sufficient to fund our operations through fiscal 2006 under our current
business strategy; however, if we fail to adequately monitor and minimize our
use of existing cash, cash equivalents and marketable securities, we may need
additional capital to fund continued operations beyond fiscal year 2006. We
expect to continue to experience negative cash flow from operations in the
foreseeable future. See "Risks Related to our Financial Results" in the Risk
Factors section of this Form 10-Q.
Financial Risk Management
Because we continue to derive a substantial majority of our sales from
customers located in the United States, we face limited exposure to adverse
movements in foreign currency exchange rates and we do not engage in hedging
activity. We do not anticipate significant currency gains or losses in the near
term. These exposures may change over time as business practices evolve and
could have a material adverse impact on our financial results.
We maintain investment portfolio holdings of various issuers, types and
maturities. These securities are classified as available-for-sale, and
consequently are recorded on the consolidated balance sheet at fair value with
unrealized gains and losses reported as a separate component of accumulated
other comprehensive income (loss). These securities are not leveraged and are
held for purposes other than trading.
Recent Accounting Pronouncements
In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an
amendment of ARB No. 43, Chapter 4. SFAS No. 151 clarifies the accounting for
abnormal amounts of idle facility expense, freight, handling costs and wasted
material. SFAS No. 151 is effective for inventory costs incurred during fiscal
years beginning in our first quarter of fiscal 2006. We do not believe adoption
of SFAS No. 151 will have a material effect on our consolidated financial
position, results of operations or cash flows.
In December, 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 29. SFAS No. 153 addresses the
measurement of exchanges of nonmonetary assets and redefines the scope of
transactions that should be measured based on the fair value of the assets
exchanged. SFAS No. 153 is effective for nonmonetary asset exchanges beginning
in our first quarter of fiscal 2006. We do not believe adoption of SFAS No. 153
will have a material effect on our consolidated financial position, results of
operations or cash flows.
In December 2004, the FASB issued SFAS 123--revised 2004 ("SFAS 123R"),
"Share-Based Payment" which replaces SFAS 123, "Accounting for Stock-Based
Compensation" and supersedes APB No. 25, "Accounting for Stock Issued to
Employees." SFAS 123R requires the measurement of all employee share-based
payments to employees, including grants of employee stock options, using a
fair-value-based method and the recording of such expense in our consolidated
statements of income. The accounting provisions of SFAS 123R are effective for
reporting periods beginning after June 15, 2005.
We are required to adopt SFAS 123R in the first quarter of fiscal 2006. The
pro forma disclosures previously permitted under SFAS 123 no longer will be an
alternative to financial statement recognition. See Note 1 in our Notes to
Consolidated Financial Statements for the pro forma net income and net income
per share amounts, for fiscal 2004 and fiscal 2005 presented, as if we had used
a fair-value-based method similar to the methods required under SFAS 123R to
measure compensation expense for employee stock incentive awards. Although we
have not yet determined whether the adoption of SFAS 123R will result in amounts
that are similar to the current pro forma disclosures under SFAS 123, we are
evaluating the requirements under SFAS 123R and expect the adoption to have a
significant adverse impact on our consolidated statements of operations and net
loss per share.
Risk Factors
CURRENT AND PROSPECTIVE INVESTORS IN VA SOFTWARE SECURITIES SHOULD CAREFULLY
CONSIDER THE RISKS DESCRIBED BELOW BEFORE MAKING AN INVESTMENT DECISION. IN
ADDITION, THESE RISKS ARE NOT THE ONLY ONES FACING OUR COMPANY. ADDITIONAL RISKS
OF WHICH WE ARE NOT PRESENTLY AWARE OR THAT WE CURRENTLY BELIEVE ARE IMMATERIAL
MAY ALSO IMPAIR OUR BUSINESS OPERATIONS. OUR BUSINESS COULD BE HARMED BY ANY OF
THESE RISKS. THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE DUE TO ANY OF
THESE RISKS, AND INVESTORS MAY LOSE ALL OR PART OF THEIR INVESTMENT.
30
Risks Related To Our SourceForge Business
Because the market for our SourceForge application software is still emerging,
we do not know whether existing and potential customers will license SourceForge
in sufficient quantities for us to achieve profitability.
Our future growth and financial performance will depend on market acceptance of
SourceForge and our ability to license our software in sufficient quantities and
under acceptable terms. The number of customers using SourceForge is still
relatively small. We expect that we will continue to need intensive marketing
and sales efforts to educate prospective clients about the uses and benefits of
SourceForge. Various factors could inhibit the growth of the market for and
market acceptance of SourceForge. In particular, potential customers may be
unwilling to make the significant capital investment needed to license
SourceForge. Many of our customers have licensed only limited quantities of
SourceForge, and these or new customers may decide not to deploy our software
more broadly. We cannot be certain that a viable market for SourceForge will
emerge or, if it does emerge, that it will be sustainable. If a sustainable
viable market for SourceForge fails to emerge, this would have a significant,
adverse effect upon our software business and operating results.
We are devoting the majority of our research and development spending to our
SourceForge application, so if this software does not achieve market acceptance
we are likely to experience continued operating losses.
Although in the first nine months of our fiscal year 2005, which ended on April
30, 2005, approximately 22% of our revenue was derived from our SourceForge
business, we devoted 62%, or $2.9 million, of our research and development
spending to research and development associated with our SourceForge software
application. We expect to continue to allocate the majority of our research and
development resources to SourceForge for the foreseeable future. There can be no
assurance, however, that we will be sufficiently successful in marketing,
licensing, upgrading and supporting SourceForge to offset our substantial
software research and development expenditures. A failure to grow SourceForge
revenue sufficiently to offset SourceForge's significant research and
development costs will materially and adversely affect our business and
operating results.
If we fail to attract and retain larger corporate and enterprise-level
customers, our revenues will not grow and may decline.
We have focused our sales and marketing efforts upon larger corporate and
enterprise-level customers. This strategy may fail to generate sufficient
revenue to offset the substantial demands that this strategy will place on our
business, in particular the longer sales cycles, higher levels of service and
support and volume pricing and terms that larger corporate and enterprise
accounts often demand. In addition, these larger customers generally have
significant financial and personnel resources. As a result, rather than license
SourceForge, our target customers may develop collaborative software development
applications internally, including ad hoc development of applications based on
open source code. A failure to successfully obtain revenues from larger
corporate or enterprise-level customers will materially and adversely affect our
operating results.
If we fail to anticipate or respond adequately to technology developments,
industry standards or practices, and customer requirements, or if we experience
any significant delays in product development, introduction, or integration,
SourceForge may become obsolete or unmarketable, our ability to compete may be
impaired, and our SourceForge revenues may not grow or may decline.
Rapid technological advances, changes in customer requirements, and frequent new
product introductions and enhancements characterize the software industry
generally. We must respond rapidly to developments related to hardware
platforms, operating systems, and software development tools. These developments
will require us to make substantial product development investments. We believe
the success of our SourceForge business will become increasingly dependent on
our ability to:
o support multiple platforms, including Linux, commercial UNIX and
Microsoft Windows;
o use the latest technologies to continue to support Web-based
collaborative software development; and
o continually support the rapidly changing standards, tools and
technologies used in software development.
Our SourceForge application software has a long and unpredictable sales cycle,
which makes it difficult to forecast our future results and may cause our
operating results to vary significantly.
31
The period between initial contact with a prospective customer and the licensing
of SourceForge varies and has often exceeded three and occasionally exceeded
twelve months. Additionally, our sales cycle is complex because customers
consider a number of factors before committing to license SourceForge. Factors
that our customers and potential customers have informed us that they considered
when evaluating SourceForge include product benefits, cost and time of
implementation, and the ability to operate with existing and future computer
systems and applications. We have found that customer evaluation, purchasing and
budgeting processes vary significantly from company to company. We spend
significant time and resources informing prospective customers about our
SourceForge products, which may not result in completed transactions and
associated revenue. Even if SourceForge has been chosen by a customer,
completion of the transaction is subject to a number of contingencies, which
make our quarterly revenues difficult to forecast. These contingencies include
but are not limited to the following:
o Our ability to sell SourceForge licenses may be impacted by changes in
the strategic importance of software projects due to our customers'
budgetary constraints or changes in customer personnel;
o A customer's internal approval and expenditure authorization process
can be difficult and time consuming. Delays in approvals, even after we
are selected as a vendor, could impact the timing and amount of
revenues recognized in a quarterly period; and
o The number, timing and significance of enhancements to our SourceForge
products and future introductions of new software by our competitors
and us may affect customer-purchasing decisions.
If we do not continue to receive repeat business from existing SourceForge
customers, our revenue will not grow and may decline.
We generate a significant amount of our SourceForge license revenues from
existing customers. Generally, our customers initially purchase a limited number
of licenses as they evaluate, implement and adopt SourceForge. Even if customers
successfully use SourceForge, such customers may not purchase additional
licenses to expand the use of our product. Purchases of additional licenses by
these customers will depend on their success in deploying SourceForge, their
satisfaction with our product and support services and their use of competitive
alternatives. A customer's decision to widely deploy SourceForge and purchase
additional licenses may also be affected by factors that are outside of our
control or which are not related to our product or services. In addition, as we
deploy new versions of SourceForge, or introduce new products, our current
customers may not require the functionality of our new versions or products and
may decide not to license these products.
If we fail to maintain our strategic relationship with IBM, the market
acceptance of our products and our financial performance may suffer.
To date, the majority of our SourceForge revenue continues to come from our
direct sales efforts. To offer products and services to a larger customer base,
in August 2002 we entered into a commercial relationship with IBM. In February
2003, IBM purchased Rational Software Corporation, a supplier of software
programming tools. Although SourceForge is designed to integrate with Rational's
ClearCase software, IBM may nonetheless perceive SourceForge as an indirect
competitor of Rational's. If we are unable to maintain our contractual
relationship with IBM, which is eligible for renewal in August of 2005, our
ability to increase our sales may be harmed. In addition, IBM may pursue other
relationships with companies, or attempt to develop or acquire additional
products or services that compete with our products and services. Even if we
succeed in maintaining or expanding our relationship with IBM, the relationship
may not result in additional customers or revenues. We have begun exploring
other possible relationships and marketing alliances to obtain customer leads,
referrals and distribution opportunities. Even if we succeed in securing such
additional strategic relationships, the relationships may not result in
additional customers or revenues.
Increased utilization and costs of our technical support services may adversely
affect our financial results.
Over the short term, we may be unable to respond to fluctuations in customer
demand for support services. We may also be unable to modify the format of our
support services to compete with changes in support services provided by
competitors. Further, customer demand for these services could cause increases
in the costs of providing such services and adversely affect our operating
results.
Contractual issues may arise during the negotiation process that may delay the
anticipated closure of a transaction and our ability to recognize revenue as
anticipated. The occurrence of such issues might cause our SourceForge revenue
and operating results to fall below our publicly-stated expectations, the
expectations of securities analysts or the expectations of investors. Failure to
meet public expectations is likely to materially and adversely affect the
trading price of our common stock.
32
Because we focus on selling enterprise solutions, the process of contractual
negotiation is critical and may be lengthy. Additionally, several factors may
require us to defer recognition of license revenue for a significant period of
time after entering into a license agreement, including instances where we are
required to deliver either unspecified additional products or specified upgrades
for which we do not have vendor-specific objective evidence of fair value. While
we have a standard software license agreement that provides for revenue
recognition provided that delivery has taken place, collectibility from the
customer is reasonably assured and assuming no significant future obligations or
customer acceptance rights exist, customer negotiations and revisions to these
terms could impact our ability to recognize revenues at the time of delivery.
Many enterprise customers negotiate software licenses near the end of each
quarter. In part, this is because enterprise customers are able, or believe that
they are able, to negotiate lower prices and more favorable terms at that time.
Our reliance on a large portion of SourceForge revenue occurring at the end of
the quarter and the increase in the dollar value of transactions that occur at
the end of a quarter can result in increased uncertainty relating to quarterly
revenues. Due to end-of-period variances, forecasts may not be achieved, either
because expected sales do not occur or because they occur at lower prices or on
terms that are less favorable to us.
In addition, slowdowns in our quarterly license contracting activities may
impact our service offerings and may result in lower revenues from our customer
training, professional services and customer support organizations. Our ability
to maintain or increase service revenues is highly dependent on our ability to
increase the number of license agreements we enter into with customers.
Risks Related To Our Online Media Business
If our online business fails to continue to deliver original and compelling
content and services, we will be unable to attract and retain users, which will
adversely affect our financial results.
The successful development and production of content and services is subject to
numerous uncertainties, including our ability to:
o anticipate and successfully respond to rapidly changing consumer tastes
and preferences;
o fund new program development; and
o attract and retain qualified editors, writers and technical personnel.
We cannot assure you that our online content and services will be attractive to
a sufficient number of users to generate revenues consistent with our estimates
or sufficient to sustain operations. In addition, we cannot assure you that any
new content or services will be developed in a timely or cost-effective manner.
If we are unable to develop content and services that allow us to attract,
retain and expand a loyal user base that is attractive to advertisers, we will
be unable to generate sufficient revenue to grow our online business.
If our online business fails to deliver innovative marketing programs, we will
be unable to attract and retain advertisers, which will adversely affect our
financial results.
The successful development and production of marketing programs is subject to
numerous uncertainties, including our ability to:
o enable advertisers to showcase products, services and/or brands to
their intended audience;
o anticipate and successfully respond to emerging trends in online
advertising; and
o attract and retain qualified marketing and technical personnel.
We cannot assure you that our online marketing programs will enable us to
attract and retain advertisers and generate revenues consistent with our
estimates or sufficient to sustain operations. In addition, we cannot assure you
that any new marketing programs will be developed in a timely or cost-effective
manner. If we are unable to deliver innovative marketing programs that allow us
to expand our advertiser base, we will be unable to generate sufficient revenue
to grow our online business.
33
Decreases or delays in advertising spending due to general economic conditions
could harm our ability to generate advertising revenue, which would adversely
affect our financial results.
Expenditures by advertisers tend to be cyclical, reflecting overall economic
conditions as well as budgeting and buying patterns. The overall market for
advertising, including Internet advertising, has been generally characterized in
recent quarters by modest growth of marketing and advertising budgets. Because
we derive a large part of our revenues from advertising fees, decreases in or
delays of advertising spending could reduce our revenues or negatively impact
our ability to grow our revenues. Even if economic conditions continue to
improve, marketing budgets and advertising spending may not increase from
current levels.
If we fail to maintain our strategic relationship with IDG, our advertising
revenue will not grow as anticipated and may decline, and our financial
performance will suffer.
During the first quarter of fiscal year 2005, we entered into a marketing and
sales agreement with International Data Group ("IDG"). Under the agreement with
IDG, IDG's Global Solution's sales force will sell international advertising on
OSTG's network of Web sites. If we are unable to maintain this strategic
relationship with IDG, our ability to increase our online advertising sales may
be harmed. In addition, IDG can terminate this relationship with us, pursue
other relationships, or attempt to develop or acquire Web sites that compete
with our Web sites for online advertising revenue. Even if we succeed in
maintaining or expanding our relationship with IDG, the relationship may not
result in additional online advertising customers or revenues.
Risks Related To Our E-Commerce Business
We cannot predict our E-commerce customers' preferences with certainty and such
preferences may change rapidly. If we fail to accurately assess and predict our
E-commerce customers' preferences, it will adversely impact our financial
results.
Our E-commerce offerings on our ThinkGeek.com Web site are designed to appeal to
IT professionals, software developers and others in technical fields. Misjudging
either the market for our products or our customers' purchasing habits will
cause our sales to decline, our inventories to increase and/or require us to
sell our products at lower prices, all of which would have a negative effect on
our business.
We are exposed to significant inventory risks as a result of seasonality, new
product launches, rapid changes in product cycles and changes in consumer tastes
with respect to our products offered at our ThinkGeek E-commerce Web site.
Failure to properly assess our inventory needs will adversely affect our
financial results.
In order to be successful, we must accurately predict our consumer tastes and
avoid overstocking or under-stocking products. Demand for products can change
significantly between the time inventory is ordered and the date of sale. In
addition, when we begin selling a new product, it is particularly difficult to
forecast product demand accurately. The acquisition of certain types of
inventory, or inventory from certain sources, may require significant lead-time
and prepayment, and such inventory may not be returnable. We carry a broad
selection and significant inventory levels of certain products and we may be
unable to sell products in sufficient quantities or during the relevant selling
seasons.
If we do not maintain sufficient E-commerce inventory levels, or if we are
unable to deliver our E-commerce products to our customers in sufficient
quantities, our E-commerce business operating results will be adversely
affected.
We must be able to deliver our merchandise in sufficient quantities to meet the
demands of our customers and deliver this merchandise to customers in a timely
manner. We must be able to maintain sufficient inventory levels, particularly
during the peak holiday selling seasons. If we fail to achieve these goals, we
may be unable to meet customer demand, and our financial results will be
adversely affected.
Our ThinkGeek E-commerce Web site is dependent upon a single third party
fulfillment and warehouse provider. The satisfaction of our E-commerce customers
is highly dependent upon fulfillment of orders in a professional and timely
manner, so any decrease in the quality of service offered by our fulfillment and
warehouse provider will adversely affect our reputation and the growth of our
E-commerce business.
Our ThinkGeek E-commerce Web site's ability to receive inbound inventory and
ship completed orders efficiently to our customers is substantially dependent on
a third-party contract fulfillment and warehouse provider. We currently utilize
the services of Dotcom Distribution, Inc. ("Dotcom Distribution"), located in
Edison, New Jersey. If Dotcom Distribution fails to meet our future distribution
and fulfillment needs, our relationship with and reputation among our E-commerce
customers will suffer and this will adversely affect our E-commerce growth.
34
Additionally, if Dotcom Distribution cannot meet our distribution and
fulfillment needs, particularly during the peak holiday selling seasons, or our
contract with Dotcom Distribution terminates, we may fail to secure a suitable
replacement or second-source distribution and fulfillment provider on comparable
terms, which would adversely affect our E-commerce financial results.
Risks Related To Our Financial Results
If we fail to adequately monitor and minimize our use of existing cash, we may
need additional capital to fund continued operations beyond fiscal year 2006.
Since becoming a public company, we have experienced negative cash flow from
operations and expect to experience negative cash flow from operations for all
or part of fiscal year 2005. Our average net monthly cash flow shortfall during
the first nine months of fiscal 2005, which ended April 30, 2005 was
approximately $0.5 million. Although this average net monthly cash flow
shortfall approximation should not be relied upon as an indicator of our average
net monthly cash flow shortfall in the future, it further illustrates that
unless we monitor and minimize the level of use of our existing cash, cash
equivalents and marketable securities, we may require additional capital to fund
continued operations beyond our fiscal year 2006. While we believe we will not
require additional capital to fund continued operations through fiscal year
2006, we may require additional funding within this time frame, and this
additional funding, if needed, may not be available on terms acceptable to us,
or at all. A slowdown in technology or advertising spending, as well as other
factors that may arise, could affect our future capital requirements and the
adequacy of our available funds. As a result, we may be required to raise
additional funds through private or public financing facilities, strategic
relationships or other arrangements. Any additional equity financing would
likely be dilutive to our stockholders. Debt financing, if available, may
involve restrictive covenants on our operations and financial condition. Our
inability to raise capital when needed could seriously harm our business.
Certain factors specific to our businesses over which we have limited or no
control may nonetheless adversely impact our quarterly total revenues and
financial results.
The primary factors over which we have limited or no control that may adversely
impact our quarterly total revenues and financial results include the following:
o specific economic conditions relating to IT spending;
o the discretionary nature of our software customers' purchase and budget
cycles;
o the size and timing of software customer orders;
o long software sales cycles;
o our ability to retain skilled software engineers and sales personnel;
o economic conditions relating to online advertising and sponsorship, and
E-commerce;
o our ability to demonstrate and maintain attractive online user
demographics;
o our ability to retain a skilled online advertising and sponsorship
sales force;
o the addition or loss of specific online advertisers or sponsors, and
the size and timing of advertising or sponsorship purchases by
individual customers; and
o our ability to keep our Web sites operational at a reasonable cost.
35
If our revenues and operating results fall below our expectations, the
expectations of securities analysts or the expectations of investors, the
trading price of our common stock will likely be materially and adversely
affected. You should not rely on the results of our business in any past periods
as an indication of our future financial performance.
Future guidelines and interpretations regarding software revenue recognition
could cause delays in our ability to recognize revenue, which will adversely
impact our quarterly financial results.
From time to time, the American Institute of Certified Public Accountants
("AICPA"), the Public Company Accounting Oversight Board ("PCAOB") and the SEC
may issue guidelines and interpretations regarding the recognition of revenue
from software and other activities. These new guidelines and interpretations
could result in a delay in our ability to recognize revenue. If the Company has
to delay the recognition of a significant amount of revenue in the future, this
will have a material impact on the Company's reported financial results.
We have a history of losses and expect to continue to incur net losses for the
foreseeable future. Failure to become and remain profitable may materially and
adversely affect the market price of our common stock and our ability to raise
capital and continue operations.
We incurred a loss of $1.4 million for our third fiscal quarter ended April 30,
2005, and we had an accumulated deficit of $751.1 million as of April 30, 2005.
We may continue to incur net losses in the future. If we do achieve
profitability, we may not be able to sustain it. Failure to become and remain
profitable may materially and adversely affect the market price of our common
stock and our ability to raise capital and continue operations beyond our fiscal
year 2006.
Despite reductions in the size of our workforce, our business may fail to grow
rapidly enough to offset our ongoing operating expenses.
During fiscal years 2001, 2002 and 2003, we substantially reduced the size of
our workforce. As of April 30, 2005, we had 124 employees. Despite these
reductions in our workforce, our business may fail to grow rapidly enough to
offset our ongoing operating expenses. As a result, our quarterly operating
results could fluctuate, and such fluctuation could adversely affect the market
price of our common stock.
Risks Related To Competition
If we do not effectively compete with new and existing competitors, our revenues
will not grow and may decline, which will adversely impact our financial
results.
We believe that the emerging collaborative software development market is
fragmented, subject to rapid change and highly sensitive to new product
introductions and marketing efforts by industry participants. Competition in
related markets is intense. If our products gain market acceptance, we expect
the competition to rapidly intensify as new competitors enter the marketplace.
Our potential competitors include companies entrenched in closely related
markets who may choose to enter and focus on collaborative software development.
We expect competition to intensify in the future if the market for collaborative
software development applications continues to expand. Our potential competitors
include providers of software and related services as well as providers of
hosted application services. Many of our potential competitors have
significantly more resources, more experience, longer operating histories and
greater financial, technical, sales and marketing resources than we do. In
addition, open source code can be used to address some collaborative software
development challenges. We cannot guarantee that we will be able to compete
successfully against current and future competitors or that competitive pressure
and/or the availability of open source code will not result in price reductions,
reduced operating margins and loss of market share, any one of which could
seriously harm our business. Because individual product sales often lead to a
broader customer relationship, our products must be able to successfully compete
with and complement numerous competitors' current and potential offerings.
Moreover, we may be forced to compete with our strategic partners, and potential
strategic partners, and this may adversely impact our relationship with an
individual partner or a number of partners. Consolidation is underway among
companies in the software industry as firms seek to offer more extensive suites
of software products and broader arrays of software solutions. Changes resulting
from this consolidation may negatively impact our competitive position and
operating results.
Online competition is intense. Our failure to compete successfully could
adversely affect our revenue and financial results.
The market for Internet content and services is intensely competitive and
rapidly evolving. It is not difficult to enter this market and current and new
competitors can launch new Internet sites at relatively low cost. We derive
revenue from online advertising and sponsorships, for which we compete with
various media including newspapers, radio, magazines and various Internet sites.
36
We also derive revenue from E-commerce, for which we compete with other
E-commerce companies as well as traditional, "brick and mortar" retailers. We
may fail to compete successfully with current or future competitors. Moreover,
increased competition could result in price reductions, reduced margins or loss
of market share, any of which could have a material adverse effect on our future
revenue and financial results. If we do not compete successfully for new users
and advertisers, our financial results may be materially and adversely affected.
Risks Related To Intellectual Property
We are vulnerable to claims that our products infringe third-party intellectual
property rights. Any resulting claims against us could be costly to defend or
subject us to significant damages.
We expect that our software products will increasingly be subject to
infringement claims as the number of products and competitors in our industry
segment grows and the functionality of products in different industry segments
overlaps. In addition, we may receive patent infringement claims as companies
increasingly seek to patent their software. Our developers may fail to perform
patent searches and may therefore unwittingly infringe on third-party patent
rights. We cannot prevent current or future patent holders or other owners of
intellectual property from suing us and others seeking monetary damages or an
injunction against shipment of our software offerings. A patent holder may deny
us a license or force us to pay royalties. In either event, our operating
results could be seriously harmed. In addition, employees hired from competitors
might utilize proprietary and trade secret information from their former
employers without our knowledge, even though our employment agreements and
policies clearly prohibit such practices.
Any litigation regarding our intellectual property, with or without merit, could
be costly and time consuming to defend, divert the attention of our management
and key personnel from our business operations and cause product shipment
delays. Claims of intellectual property infringement may require us to enter
into royalty and licensing agreements that may not be available on terms
acceptable to us, or at all. In addition, parties making claims against us may
be able to obtain injunctive or other equitable relief that could effectively
block our ability to sell our products in the United States and abroad and could
result in an award of substantial damages against us. Defense of any lawsuit or
failure to obtain any required license could delay shipment of our products and
increase our costs. If a successful claim is made against us and we fail to
develop or license a substitute technology, our business, results of operations,
financial condition or cash flows could be immediately and materially adversely
affected.
If we fail to adequately protect our intellectual property rights, competitors
may use our technology and trademarks, which could weaken our competitive
position, reduce our revenues, and increase our costs.
We rely on a combination of copyright, trademark and trade-secret laws, employee
and third-party nondisclosure agreements, and other arrangements to protect our
proprietary rights. Despite these precautions, it may be possible for
unauthorized third parties to copy our products or obtain and use information
that we regard as proprietary to create products that compete against ours. Some
license provisions protecting against unauthorized use, copying, transfer, and
disclosure of our licensed programs may be unenforceable under the laws of
certain jurisdictions and foreign countries.
In addition, the laws of some countries do not protect proprietary rights to the
same extent as do the laws of the United States. To the extent that we increase
our international activities, our exposure to unauthorized copying and use of
our products and proprietary information will increase.
Our collection of trademarks is important to our business. The protective steps
we take or have taken may be inadequate to deter misappropriation of our
trademark rights. We have filed applications for registration of and registered
some of our trademarks in the United States and internationally. Effective
trademark protection may not be available in every country in which we offer or
intend to offer our products and services. Failure to protect our trademark
rights adequately could damage our brand identity and impair our ability to
compete effectively. Furthermore, defending or enforcing our trademark rights
could result in the expenditure of significant financial and managerial
resources.
The scope of United States patent protection in the software industry is not
well defined and will evolve as the United States Patent and Trademark Office
grants additional patents. Because patent applications in the United States are
not publicly disclosed until the patent is issued, applications may have been
filed that would relate to our products.
Our software business success depends significantly upon our proprietary
technology. Despite our efforts to protect our proprietary technology, it may be
possible for unauthorized third parties to copy certain portions of our products
or to reverse engineer or otherwise obtain and use our proprietary information.
We do not have any software patents, and existing copyright laws afford only
limited protection. In addition, we cannot be certain that others will not
develop substantially equivalent or superseding proprietary technology, or that
37
equivalent products will not be marketed in competition with our products,
thereby substantially reducing the value of our proprietary rights. We cannot
assure you that we will develop proprietary products or technologies that are
patentable, that any patent, if issued, would provide us with any competitive
advantages or would not be challenged by third parties, or that the patents of
others will not adversely affect our ability to do business. Litigation may be
necessary to protect our proprietary technology. This litigation may be
time-consuming and expensive.
Other Risks Related To Our Overall Business
If we fail to complete our internal control evaluations or if our independent
registered public accounting firm does not attest to our evaluation in a timely
manner, we could be subject to regulatory scrutiny and a loss of public
confidence in our internal controls.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 ("Section 404"), we
have begun to perform an evaluation of our internal controls over financial
reporting and are required to have our independent registered public accounting
firm test and evaluate the design and operating effectiveness of such internal
controls and publicly attest to such evaluation in our annual report on Form
10-K for our fiscal year ending July 31, 2005. We have prepared an internal plan
of action for compliance with the requirements of Section 404, which includes a
timeline and scheduled activities, although as of the date of this filing we
have not yet completed the evaluation. Compliance with the requirements of
Section 404 is expected to be expensive and time-consuming, and may require us
to increase staffing levels. If we fail to complete this evaluation in a timely
manner, or if our independent registered public accounting firm cannot attest in
a timely manner to our evaluation, we could be subject to regulatory scrutiny
and a loss of public confidence in our internal controls. In addition, any
failure to implement required new or improved controls, or difficulties
encountered in their implementation, could harm our operating results or cause
us to fail to meet our reporting obligations.
We may be subject to claims as a result of information published on, posted on
or accessible from our Internet sites, which could be costly to defend and
subject us to significant damage claims.
We may be subject to claims of defamation, negligence, copyright or trademark
infringement (including contributory infringement) or other claims relating to
the information contained on our Internet sites, whether written by third
parties or us. These types of claims have been brought against online services
in the past and can be costly to defend regardless of the merit of the lawsuit.
Although federal legislation protects online services from some claims when
third parties write the material, this protection is limited. Furthermore, the
law in this area remains in flux and varies from state to state. We receive
notification from time to time of potential claims, but have not been named as a
party to litigation involving such claims. While no formal complaints have been
filed against us to date, our business could be seriously harmed if one were
asserted.
We may be subject to product liability claims if people or property are harmed
by the products we sell on our E-commerce Web sites, which could be costly to
defend and subject us to significant damage claims.
Some of the products we offer for sale on our E-commerce Web sites, such as
consumer electronics, toys, computers and peripherals, toiletries, beverages and
clothing, may expose us to product liability claims relating to personal injury,
death or property damage caused by such products, and may require us to take
actions such as product recalls. Although we maintain liability insurance, we
cannot be certain that our coverage will be adequate for liabilities actually
incurred or that insurance will continue to be available to us on economically
reasonable terms, or at all. In addition, some of our vendor agreements with our
suppliers do not indemnify us from product liability.
If we are unable to implement appropriate systems, procedures and controls, we
may not be able to successfully offer our services and grow our business.
Our ability to successfully offer our services and grow our business requires an
effective planning and management process. We updated our operations and
financial systems, procedures and controls following our strategic decision to
exit the hardware business. Our systems will continue to require additional
modifications and improvements to respond to current and future changes in our
business. If we cannot grow our businesses, and manage that growth effectively,
or if we fail to implement in a timely manner appropriate internal systems,
procedures, controls and necessary modifications and improvements to these
systems, our businesses will suffer.
Our stock price has been volatile historically and may continue to be volatile.
The trading price of our common stock has been and may continue to be subject to
wide fluctuations. During the third quarter of fiscal year 2005, the closing
sale prices of our common stock on the Nasdaq ranged from $1.32 to $2.08 per
share and the closing sale price on April 29, 2005 was $1.37 per share. Our
38
stock price may fluctuate in response to a number of events and factors, such as
quarterly variations in operating results, announcements of technological
innovations or new products and media properties by us or our competitors,
changes in financial estimates and recommendations by securities analysts, the
operating and stock price performance of other companies that investors may deem
comparable to us, and news reports relating to trends in our markets or general
economic conditions.
In addition, the stock market in general, and the market prices for
Internet-related companies in particular, have experienced volatility that often
has been unrelated to the operating performance of such companies. These broad
market and industry fluctuations may adversely affect the price of our stock,
regardless of our operating performance. Additionally, volatility or a lack of
positive performance in our stock price may adversely affect our ability to
retain key employees, all of whom have been granted stock options.
Sales of our common stock by significant stockholders may cause the price of our
common stock to decrease.
Several of our stockholders own significant portions of our common stock. If
these stockholders were to sell significant amounts of their holdings of our
common stock, then the market price of our common stock could be negatively
impacted. The effect of such sales, or of significant portions of our stock
being offered or made available for sale, could result in strong downward
pressure on our stock price. Investors should be aware that they could
experience significant short-term volatility in our stock if such stockholders
decide to sell a substantial amount of their holdings of our common stock at
once or within a short period of time.
Our networks may be vulnerable to unauthorized persons accessing our systems,
which could disrupt our operations and result in the theft of our proprietary
information.
A party who is able to circumvent our security measures could misappropriate
proprietary information or cause interruptions or malfunctions in our Internet
operations. We may be required to expend significant capital and resources to
protect against the threat of security breaches or to alleviate problems caused
by breaches in security.
Increasing regulation of the Internet or imposition of sales and other taxes on
products sold or distributed over the Internet could harm our business.
The electronic commerce market on the Internet is relatively new and rapidly
evolving. While this is an evolving area of the law in the United States and
overseas, currently there are relatively few laws or regulations that directly
apply to commerce on the Internet. Changes in laws or regulations governing the
Internet and electronic commerce, including, without limitation, those governing
an individual's privacy rights, pricing, content, encryption, security,
acceptable payment methods and quality of products or services could have a
material adverse effect on our business, operating results and financial
condition. Taxation of Internet commerce, or other charges imposed by government
agencies or by private organizations, may also be imposed. Any of these
regulations could have an adverse effect on our future sales and revenue growth.
Business disruptions could affect our future operating results.
Our operating results and financial condition could be materially and adversely
affected in the event of a major earthquake, fire or other catastrophic event.
Our corporate headquarters, the majority of our research and development
activities and certain other critical business operations are located in
California, near major earthquake faults. A catastrophic event that results in
the destruction of any of our critical business or information technology
systems could severely affect our ability to conduct normal business operations
and as a result our future operating results could be adversely affected.
System disruptions could adversely affect our future operating results.
Our ability to attract and maintain relationships with users, advertisers,
merchants and strategic partners will depend on the satisfactory performance,
reliability and availability of our Internet channels and network
infrastructure. Our Internet advertising revenues relate directly to the number
of advertisements delivered to our users. System interruptions or delays that
result in the unavailability of Internet channels or slower response times for
users would reduce the number of advertisements and sales leads delivered to
such users and reduce the attractiveness of our Internet channels to users,
strategic partners and advertisers or reduce the number of impressions delivered
and thereby reduce revenue. In the past twelve months, some of our sites have
experienced a small number of brief service interruptions. We will continue to
suffer future interruptions from time to time whether due to natural disasters,
telecommunications failures, other system failures, rolling blackouts, viruses,
hacking or other events. System interruptions or slower response times could
have a material adverse effect on our revenues and financial condition.
39
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The primary objective of our investment activities is to preserve principal
while at the same time maximizing the income we receive from our investments
without significantly increasing risk. Some of the securities that we have
invested in may be subject to market risk. This means that a change in
prevailing interest rates may cause the principal amount of the investment to
fluctuate. For example, if we hold a security that was issued with a fixed
interest rate at the then-prevailing rate and the prevailing interest rate later
rises, the principal amount of our investment will probably decline. To minimize
this risk, we maintain a portfolio of cash equivalents, short-term investments
and long-term investments in a variety of securities, including commercial
paper, money market funds and government and non-government debt securities. In
general, money market funds are not subject to market risk because the interest
paid on such funds fluctuates with the prevailing interest rate.
The following table presents the amounts of our cash equivalents, short-term
investments and long-term investments (in thousands) that are subject to market
risk and weighted-average interest rates, categorized by expected maturity
dates, as of April 30, 2005. 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 April 30, 2005
Cash equivalents $850
Weighted-average interest rate 2.95%
Short-term investments $32,319
Weighted-average interest rate 3.80%
Long-term investments $2,803
Weighted-average interest rate 5.08%
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
In connection with the interim review of the Company's financial statements
as of April 30, 2005, the Company's independent registered public accounting
firm communicated to the Company's management and the Audit Committee of the
Board of Directors that they had identified a control deficiency that existed in
the design or operation of the Company's internal controls over financial
reporting that they considered to be a material weakness, because the control
deficiency resulted in more than a remote likelihood that a material
misstatement could occur in the Company's annual or interim financial statements
and not be prevented or detected. The material weakness identified by the
Company's independent accountants pertains to the need for additional resources
and technical accounting expertise to be available to the Company's accounting
and financial reporting function to assist the Company in addressing relatively
complex transactions and/or accounting issues that arise from time to time in
the course of the Company's operations.
a) Evaluation of disclosure controls and procedures.
The Company's management evaluated, with the participation of its Chief
Executive Officer (CEO) and its Chief Financial Officer (CFO), the
effectiveness of the design and operation of its disclosure controls
and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the
Securities Exchange Act of 1934 (the "'34 Act")) as of the end of the
period covered by this report.
Disclosure controls and procedures are designed with the objective of
ensuring that (i) information required to be disclosed in the Company's
reports filed under the '34 Act is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms
and (ii) information is accumulated and communicated to management,
including the CEO and CFO, as appropriate to allow timely decisions
regarding required disclosure. Internal control procedures, which are
designed with the objective of providing reasonable assurance that the
Company's transactions are properly authorized, its assets are
safeguarded against unauthorized or improper use and its transactions
40
are properly recorded and reported, are intended to permit the
preparation of the Company's financial statements in conformity with
generally accepted accounting principles. To the extent that elements
of our internal control over financial reporting are included within
our disclosure controls and procedures, they are included in the scope
of our quarterly controls evaluation.
Based on that evaluation, the CEO and CFO concluded that as of the end
of the period covered by this report, the disclosure controls and
procedures were ineffective, due to the material weakness described
above, in ensuring that all material information required to be
disclosed in the reports the Company files and submits under the '34
Act has been made known to them on a timely basis and that such
information has been properly recorded, processed, summarized and
reported, as required. As discussed in Item 4 (b) below, the Company is
taking steps to remediate the material weakness.
b) Changes in internal controls over financial reporting.
The Company has identified the corrective actions necessary to address
the control deficiencies described above, as follows:
o Engage and involve outside contractors with technical accounting
expertise, as needed, early in the process of evaluating a complex,
non-routine transaction to obtain additional guidance as to the
application of generally accepted accounting principles to such
transaction; and
o Require senior accounting personnel and the principal accounting
officer to review, approve, establish standards for documentation
of and document, or directly oversee documentation of, the
accounting treatment for complex, non-routine transactions,
including the analysis thereof and related conclusions reached.
During the fourth quarter of fiscal year 2005, the Company began
implementing, and intends to fully implement, the foregoing corrective
actions. The Company believes that these corrective actions will
mitigate the control deficiencies during the Company's fourth fiscal
quarter of 2005 and intends to develop procedures for the testing of
these controls to determine if the material weakness has been
remediated. The Company expects that testing of these controls will be
completed prior to the end of its 2005 fiscal year and that its
controls and procedures will continue to improve as a result of the
further implementation of these measures.
c) Limitations on the Effectiveness of Controls.
The Company's management, including its CEO and CFO, does not expect
that its disclosure controls or its internal controls will prevent all
error or fraud. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a
control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the company
have been detected. These inherent limitations include the realities
that judgments in decision-making can be faulty, and that breakdowns
can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the
control. The design of any system of controls also is based in part
upon certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions; over time, control
may become inadequate because of changes in conditions, or the degree
of compliance with the policies or procedures may deteriorate. Because
of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected on a
timely basis.
d) Sarbanes-Oxley Section 404 Compliance.
Section 404 of the Sarbanes-Oxley Act of 2002 (the "Act") will require
the Company to include an internal control report in its Annual Report
on Form 10-K for the year ended July 31, 2005 and in subsequent Annual
Reports thereafter. The internal control report must include the
following: (i) a statement of management's responsibility for
establishing and maintaining adequate internal control over financial
reporting, (ii) a statement identifying the framework used by
management to conduct the required evaluation of the effectiveness of
the Company's internal control over financial reporting, (iii)
management's assessment of the effectiveness of the Company's internal
control over financial reporting as of July 31, 2005, including a
statement as to whether or not internal control over financial
reporting is effective, and (iv) a statement that the Company's
independent auditors have issued an attestation report on management's
assessment of internal control over financial reporting.
41
The Company acknowledges its responsibility for establishing and
maintaining internal controls over financial reporting and seeks to
continually improve those controls. In addition, in order to achieve
compliance with Section 404 of the Act within the required timeframe,
the Company has been conducting a process to document and evaluate
internal controls over financial reporting since mid fiscal 2004. In
this regard, the Company has dedicated internal resources, engaged
outside consultants and adopted a detailed work plan to: (i) assess and
document the adequacy of internal control over financial reporting;
(ii) take steps to improve control processes where required; (iii)
verify through testing whether controls are functioning; and (iv)
implement a continuous reporting and improvement process for internal
control over financial reporting.
Although the Company's independent registered public accounting firm
identified a control deficiency that existed in the design or operation
of the Company's internal controls over financial reporting as of April
30, 2005, the Company believes that the corrective actions noted above
will mitigate the control deficiencies during the Company's fourth
fiscal quarter of 2005. However, given the risks inherent in the design
and operation of internal controls over financial reporting, the
Company can provide no assurance at this time as to its, or its
independent auditor's, conclusions as of July 31, 2005 with respect to
the effectiveness of its internal controls over financial reporting.
PART II
Item 1. Legal Proceedings
The Company, two of its former officers (the "Former Officers"), and the
lead underwriter in its initial public offering ("IPO") were named as defendants
in a consolidated shareholder lawsuit in the United States District Court for
the Southern District of New York, captioned In re VA Software Corp. Initial
Public Offering Securities Litigation, 01-CV-0242. This is one of a number of
actions coordinated for pretrial purposes as In re Initial Public Offering
Securities Litigation, 21 MC 92 with the first action filed on January 12, 2001.
Plaintiffs in the coordinated proceeding are bringing claims under the federal
securities laws against numerous underwriters, companies, and individuals,
alleging generally that defendant underwriters engaged in improper and
undisclosed activities concerning the allocation of shares in the IPOs of more
than 300 companies during late 1998 through 2000. Among other things, the
plaintiffs allege that the underwriters' customers had to pay excessive
brokerage commissions and purchase additional shares of stock in the aftermarket
in order to receive favorable allocations of shares in an IPO. The consolidated
amended complaint in the Company's case seeks unspecified damages on behalf of a
purported class of purchasers of its common stock between December 9, 1999 and
December 6, 2000. Pursuant to a tolling agreement, the individual defendants
were dismissed without prejudice. On February 19, 2003, the court denied the
Company's motion to dismiss the claims against it. The litigation is now in
discovery.
In June 2004, a stipulation of settlement and release of claims against the
issuer defendants, including the Company, was submitted to the court for
approval. The terms of the settlement if approved, would dismiss and release all
claims against the participating defendants (including the Company). In exchange
for this dismissal, D&O insurance carriers would agree to guarantee a recovery
by the plaintiffs from the underwriter defendants of at least $1 billion, and
the issuer defendants would agree to an assignment or surrender to the
plaintiffs of certain claims the issuer defendants may have against the
underwriters. The proposed settlement remains subject to a number of conditions,
including receipt of final approval of the court. If the settlement does not
occur, and litigation against the Company continues, the Company believes it has
meritorious defenses and intends to defend the case vigorously.
On Nov 9, 2001, a former employee of the Company, who had worked as a sales
person in the Company's former hardware business, filed a complaint captioned
Okerman v. VA Linux Systems, Inc. & Larry Augustin, Civil No. 01-01825 (Norfolk
Superior Court), in the Commonwealth of Massachusetts. As amended, the complaint
alleges that changes made to certain commission and bonus plans during the
plaintiff's tenure at the Company entitled him to recover damages for Breach of
Contract, Breach of the Implied Covenant of Good Faith and Fair Dealing,
violation of the Massachusetts Wage Act Statute, Promissory Estoppel, and
Quantum Meruit. On June 25, 2002, the Court dismissed the Massachusetts Wage Act
claim brought against the Company's former chief executive officer. On July 26,
2002, dismissal of the Wage Act claim in favor of the Company's former chief
executive officer was upheld on interlocutory appeal. On July 9, 2003, the Court
granted summary judgment in the Company's favor regarding claims for Breach of
Contract, Promissory Estoppel, and Quantum Meruit, and granted judgment on the
pleadings in favor of the Company regarding the Massachusetts Wage Act claim. On
September 24, 2004, following a jury trial on the sole remaining claim for
Breach of the Covenant of Good Faith and Fair Dealing, a jury awarded damages of
$136,876 to the plaintiff. The plaintiff has since filed a notice of appeal of
his previously-dismissed claims and the judgment for Breach of Contract and
Breach of the Covenant of Good Faith and Fair Dealing, and the Company has filed
a notice of appeal of the judgment for Breach of the Covenant of Good Faith and
Fair Dealing.
42
The Company is subject to various claims and legal actions arising in the
ordinary course of business. The Company has accrued for estimated losses in the
accompanying consolidated financial statements for those matters where it
believes that the likelihood that a loss will occur is probable and the amount
of loss is reasonably estimable.
Item 6. Exhibits
Exhibits
------------------- ------------------------------------------------------------------------------------------------------------
Exhibit No. Description
------------------- ------------------------------------------------------------------------------------------------------------
31.1 Rule 13a-14(a) Certification of Chief Executive Officer.
------------------- ------------------------------------------------------------------------------------------------------------
31.2 Rule 13a-14(a) Certification of Chief Financial Officer.
------------------- ------------------------------------------------------------------------------------------------------------
32.1 Certification Of Chief Executive Officer and Chief Financial Officer Pursuant To 18 U.S.C. Section 1350,
As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002.
------------------- ------------------------------------------------------------------------------------------------------------
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
VA SOFTWARE CORPORATION
By: /s/ ALI JENAB
----------------------------------
Ali Jenab
President and
Chief Executive Officer
By: /s/ KATHLEEN R. MCELWEE
----------------------------------
Kathleen R. McElwee
Senior Vice President and
Chief Financial Officer
Date: June 9, 2005
43
EXHIBIT INDEX
Exhibit
Number
------
31.1 -- Rule 13a-14(a) Certification of Chief Executive Officer.
31.2 -- Rule 13a-14(a) Certification of Chief Financial Officer.
32.1 -- Certification Of Chief Executive Officer and Chief Financial
Officer Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant
To Section 906 Of The Sarbanes-Oxley Act Of 2002
44