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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
ý ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the
fiscal year ended: February 28, 2005
o 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 000-25249
INTRAWARE, INC.
(Exact
name of registrant as specified in its charter)
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Delaware
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68-0389976
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification Number)
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25 Orinda Way, Orinda, California
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94563
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(Address of principal executive offices)
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(Zip Code)
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Registrant’s telephone number, including
area code: (925) 253-4500
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Securities registered pursuant to Section 12(b) of
the Act: None
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Securities registered pursuant to Section 12(g) of
the Act:
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Title of Class Common Stock, $0.0001 par value
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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 ý No o
Indicate by check mark if disclosure of delinquent
filers pursuant to item 405 of Regulation S-K is not contained herein, and will
not be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate by
check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2
of the Act). Yes o No ý
The aggregate market value of the voting and
non-voting common equity held by non-affiliates, computed by reference to the
price at which the common equity was last sold as of the last business day of
the registrant’s most recently completed second fiscal quarter, is $71,156,627.
For purposes of this disclosure, shares of common stock held by persons who
hold more than 10% of the outstanding shares of common stock and shares held by
officers and directors of the registrant, have been excluded in that such
persons may be deemed to be affiliates. This determination is not necessarily
conclusive.
As of April 15, 2005, the registrant had
outstanding 60,454,872 shares of common stock.
This annual report on Form 10-K contains
forward-looking statements (within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended) that involve risks and uncertainties. We use
words such as “anticipate,” “believe,” “plan,” “expect,” “future,” “intend” and
similar expressions to identify forward-looking statements. Actual results and
the timing of events could differ materially from those projected in the
forward-looking statements as a result of known and unknown factors, including
the risk factors beginning on page 31 below and other factors discussed
elsewhere in this annual report. We have identified many of these
forward-looking statements for your convenient reference.
“Intraware” and “SubscribeNet” are registered
trademarks or service marks of Intraware.
This annual report also refers to other trademarks of Intraware and
trademarks of other companies.
Intraware, Inc.,
was incorporated in August 1996 under the laws of the State of Delaware.
In this annual report, Intraware, Inc. is sometimes referred to as “the
Registrant,” “the Company,” “Intraware,” “we,” “our” and “us.” The mailing
address for our headquarters is 25 Orinda Way, Orinda, California 94563, and
our telephone number at that location is (925) 253-4500. Intraware
can also be reached through our web site http://www.intraware.com.
ITEM 1. BUSINESS.
Overview
We launched the first
outsourced Web-based electronic software delivery and management (ESDM)
solution in 1996. Today, we are a leading provider of global ESDM services for
enterprise software publishers and resellers. Our ESDM services help software
publishers, software resellers and other technology companies streamline
manufacturing, distribution and support costs; develop business intelligence
about their customers; strengthen customer retention and maintenance renewals;
accelerate and document software and license key delivery for revenue
recognition purposes; and comply with U.S. export controls. Over 90% of Fortune
500 companies have received access to enterprise software or licenses through
our ESDM services.
We
also offer complementary services, including enterprise software sales and
marketing, license management, e-commerce, and on-demand physical fulfillment
through our alliances with companies including Software Spectrum, Inc.,
Macrovision Corporation and Nexstra.
Drivers of Demand for ESDM Services
According to IDC, an information technology analysis
and advisory firm, worldwide spending on electronic software distribution is
expected to grow by more than 40% annually between 2004 and 2008.(1) This
demand is driven by a number of factors, including:
(1) IDC, “Worldwide Electronic Software
Distribution 2004-2008 Forecast: Segmented Growth” (May 2004). This is a forward-looking statement subject
to risks and uncertainties. See “Risk
Factors” beginning on page 31 below.
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• Cost Savings by Software
Providers. Through ESDM, software
providers can significantly reduce manufacturing and distribution costs
associated with creating, duplicating and shipping CDs, diskettes and
packaging.
• Entitlement Management and
Licensing. ESDM enables software providers and end-users
manage software entitlements and electronically generate and deliver licenses,
helping software providers maximize revenues and helping customers quickly and
easily ensure license compliance in dynamic environments.
• Tax Savings by End-Users. A number of states exempt software license
purchases from sales tax if the software is delivered electronically, providing
a competitive advantage to software providers that are able to effect such
delivery.
• Customer Satisfaction. ESDM enables end-users to receive software
and licenses within minutes after purchase or release. ESDM can also provide an
online library of an end-user’s software entitlements, as well as tools for IT
departments to monitor and control licensing and downloads of that software
throughout their organizations.
• Business Intelligence. An ESDM solution can generate reports to
help software providers understand end-users’ use of and experience with the
software providers’ products, including reports that help identify key
individual end-users, track the download frequency of different releases, and
track the speed and quality of downloads.
• Accelerated Delivery. Accelerated delivery of bug-fixes and
patches can shorten resolution times for software errors, viruses and security
flaws affecting end-users. Real-time online fulfillment of software sales may
also accelerate revenue recognition for software providers.
• Regulatory Compliance. By automatically providing third-party
confirmation of software availability, ESDM can help software providers’ finance
departments document compliance with delivery requirements under software
revenue recognition rules. An ESDM service can also screen software downloads
worldwide for compliance with U.S. export controls.
SubscribeNet ESDM Service
Our central offering is the SubscribeNet ESDM
service. First offered in 1996, the SubscribeNet service is an integrated
web-based solution that enables software providers and their channel partners to
distribute all of their software releases online, manage licensing and entitlement
across their global customer base, track and report deliveries and download
activity, and manage export compliance. Software providers use the SubscribeNet
service to help reduce costs associated with manufacturing and distributing CDs
and packaging, automate and simplify licensing processes, provide sales tax
advantages to their end-users in certain states, increase customer retention
and maintenance renewal rates, generate data on their end-users’ use of their
software, accelerate delivery of software to their end-users, and enhance
export and revenue recognition compliance.
Revenues
associated with our SubscribeNet service comprised approximately 77%, 66%, and
51% of our revenues in our 2005, 2004 and 2003 fiscal years, respectively.
Strategic Advantages
Among
competitive ESDM offerings, or compared to solutions developed in-house by
software providers, the SubscribeNet service offers strategic advantages,
including:
• Integrated Software and
License Delivery and Management. The SubscribeNet
service offers a single integrated solution for delivery and management of full
catalogs of enterprise
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software and electronic
licenses. Software providers can
electronically fulfill orders, manage update processes, and generate, assign
and deliver licenses through a single Web interface.
• Entitlement Management. Software providers can manage relationships
among the products in their catalogs, the various releases of those products,
and the files that comprise each such release. Software providers can assign
entitlements for any combination of those items to their customers and
individual end-users. Entitlements can be assigned in the SubscribeNet service
through our extended license generation solution, or directly from the software
provider’s order processing, customer relationship management (CRM), e-commerce
or licensing system, and can be time-limited to match the duration of customer
maintenance contracts.
• Technology Infrastructure. The technology infrastructure underlying
the SubscribeNet service is engineered to provide scalability, redundancy,
platform independence and 24x7 service.
• Integration with Software
Provider’s Systems. The
SubscribeNet service integrates with major enterprise resource planning (ERP),
processing, and CRM systems used by software providers.
• Reporting. The SubscribeNet service provides extensive
reporting capabilities to support software providers’ internal transaction
reporting requirements and to help them analyze end-user usage trends.
• Regulatory Compliance. The SubscribeNet service provides automated
screening and reporting to support compliance with U.S. export regulations, and
provides third-party evidence of software availability to support compliance
with software revenue recognition rules.
• Rapid Implementation. Once the software provider’s particular
requirements are defined and its resources are allocated, our implementation
methodology enables standard SubscribeNet implementations to be completed in as
few as 21 business days.
• Channel Management. Our Channel Manager module enables software providers to extend some or
all of the benefits of the SubscribeNet service to their resellers and their
resellers’ end-users, while keeping confidential data segregated among the
software provider and its various resellers.
• Focus and Expertise. For the past 8 years, Intraware has
focused on creating ESDM solutions for the enterprise software marketplace.
This focus has enabled us to develop domain expertise and technology in the
ESDM field that we believe differentiates us from other ESDM providers.
Customers
As
of April 15, 2005, 49 software providers subscribed to the SubscribeNet
service. These include companies whose main business is providing software,
companies that distribute software as a secondary business, and companies that
resell software. Seven of those customers each accounted for 5% or more of our
Online services and technology and Related party online services and technology
revenue during our 2005 fiscal year. One of our customers, Software Spectrum, Inc.,
accounted for more than 10% of our total revenue during our 2005 fiscal year
(see “Risk Factors” beginning on page 31 below, and Note 2 of our “Notes
to Consolidated Financial Statements” in Item 8 below).
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Outsourced Sales and Marketing Services
We provide contracted sales and marketing services
(Sales and Marketing Services) to Software Spectrum, Inc. (“Software
Spectrum”) Software Spectrum is a global business-to-business software services
company that is one of the world’s largest software resellers and a wholly
owned subsidiary of Level 3 Communications, Inc. Under our agreement with
Software Spectrum, we act as an outsourced sales force assisting Software
Spectrum in its resales and marketing of third-party enterprise software, in
exchange for a portion of the gross margin from those resales and reimbursement
of certain costs. Currently we provide Sales and Marketing Services to Software
Spectrum for Sun Microsystems, Inc. Java Enterprise System and Sun ONE
software and for Websense, Inc. software. We also provide our SubscribeNet
service to Software Spectrum to enable it to deliver Sun software to its
customers electronically. We describe this relationship between Intraware and
Software Spectrum further in Note 2 of our “Notes to Consolidated
Financial Statements” in Item 8 below.
Sales
Direct Sales of SubscribeNet ESDM Service
We typically sell the SubscribeNet service on a
subscription basis, charging a periodic service fee.
We
sell our SubscribeNet service primarily through a direct sales force dedicated
to our SubscribeNet business. We
have established direct sales offices for our SubscribeNet sales at our
headquarters in Orinda, California, and in Boston, Massachusetts. Each
SubscribeNet sales representative has a territory that he or she covers through
telecommunications and in-person sales calls. The sales cycle for these
services is typically lengthy, as our sales efforts must target the prospective
customer’s senior personnel across multiple departments.
Sales of SubscribeNet ESDM Service through Strategic
Alliances
We
maintain a number of strategic alliances intended to complement our direct
sales efforts and broaden sales of our SubscribeNet service.
• Alliances with Software
Spectrum for SubscribeNet Service.
• Sun Software.
Software Spectrum uses our SubscribeNet service to manage electronic
delivery of Sun software to end-users who purchase the software licenses and maintenance
through Software Spectrum. Software Spectrum pays us a periodic SubscribeNet
service fee based on software license and maintenance sales generated through
our Sales and Marketing Services (see Note 2 of our “Notes to Consolidated
Financial Statements” in Item 8 below). This agreement expires in June 2005
and is renewable for subsequent one-year terms. We expect but cannot guarantee
that it will be renewed this year (see “Risk Factors” beginning on page 31
below).
• Other Enterprise Software. Software Spectrum also uses our SubscribeNet
solution to manage electronic delivery of enterprise software that it resells
independently of Intraware. Under this agreement, we are currently managing
delivery to large end-user customers under their enterprise license agreements
with Software Spectrum for software published by a leading information
technology company. Software Spectrum pays us a one-time SubscribeNet service
fee for each end-user customer, based on the software license and maintenance
fee charged by Software Spectrum to that customer. The term of this agreement
expires in October 2005.
• Agreement with
Hewlett-Packard. Hewlett-Packard Company (“HP”) is a reseller
of our SubscribeNet service through its Software Publisher Services
division. HP’s Software Publisher
Services division has provided a global business process outsourcing solution
for multiple aspects of software publishing and distribution for more than 30
years. Under our agreement, HP has the
right to market and resell the SubscribeNet solution with its suite of
outsourced services. Customers who purchase the SubscribeNet solution through
HP contract directly with HP. HP pays us for services as they are provided to
customers. The agreement automatically renews for a one-year term in September,
subject to either party’s right to cancel a renewal. We describe the relationship between HP and
Intraware further in Note 2 of our “Notes to Consolidated Financial
Statements” in Item 8 below.
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• Agreement with Zomax. Zomax
Incorporated, a leading international outsource provider of supply chain
management services, is a reseller of the SubscribeNet service. Customers who purchase the SubscribeNet
solution through Zomax contract directly with Zomax. Zomax pays us for services
as they are provided to customers. The agreement automatically renews for a
one-year term in April (it renewed in April 2005), subject to either
party’s right to cancel a renewal. We
describe the relationship between Zomax and Intraware further in Note 2 of
our “Notes to Consolidated Financial Statements” in Item 8 below.
• Referral Arrangements for
SubscribeNet Sales. We also
maintain various other referral arrangements under which we pay fees to
companies that refer new SubscribeNet customers to us.
Sales and Marketing Services
We
use an inside sales and marketing team to provide Sales and Marketing Services
to Software Spectrum for resale and marketing of Sun and Websense software and
related maintenance. Inside sales representatives typically have a territory
that he or she covers using telephone, facsimile and email communications. We
also have a marketing manager who conducts marketing programs for Sun and
Websense software. The length of sales cycles for Sun and Websense software
tends to correspond to the dollar values of those sales. Our Sales and
Marketing Services business is somewhat seasonal, with sales tending to be
stronger in the non-summer months than the summer months, and strongest at the
end of the calendar year.
Under
our agreement for our provision of Sales and Marketing Services to Software
Spectrum, Software Spectrum is the reseller of record for Sun and Websense
software and maintenance, and we assist Software Spectrum in selling and
marketing that software and maintenance. We also provide our SubscribeNet
service to Software Spectrum to enable it to deliver Sun software to its
customers electronically. As part of this arrangement, Software Spectrum pays
us a percentage of the gross profit derived from its sales of Sun and Websense
software licenses and maintenance services, and reimburses us for our cost in
maintaining a Sales and Marketing Services team dedicated to sales of Sun and
Websense software licenses and maintenance. Software Spectrum also pays us a
periodic SubscribeNet service fee based on software license and maintenance
sales generated by Intraware through our Sales and Marketing Services for
Software Spectrum. The term of this agreement will expire in June 2005 and
is renewable for subsequent one-year terms. We expect but cannot guarantee that
it will be renewed (see “Risk Factors” beginning on page 31 below).
Sales Outside the United States
Approximately
$1.2 million of our total revenue for the year ended February 28, 2005,
$0.7 million of our total revenue for the year ended February 29, 2004,
and $0.4 million of our total revenue for the year ended February 28,
2003, was from sales to companies based outside the United States of
America. All of this revenue was
categorized as Online services and technology revenue. This accounted for approximately 11% of our
total revenue and 15% of our Online services and technology revenue for the
year ended February 28, 2005, 6% of our total revenue and 10% our Online
services and technology revenue for the year ended February 29, 2004, and 3%
of our total revenue and 6% Online services and technology revenue for the year
ended February 28, 2003.
Total Annual Contract Value
We track a metric for our
SubscribeNet service business, that we call “total annual contract value.” We use this metric to approximate what the
total ongoing annual SubscribeNet service fees would be under our existing
contracts with our customers, assuming all those contracts renewed on their
current terms and, in the case of variable-fee contracts, the customers
maintained the same level of fee-generating activity as they had in the prior
twelve months. (We cannot guarantee that
those assumptions will be true, as we describe further below.) We define “total annual contract value” as,
on any given date, the aggregate annual service fees paid or expected to be
paid by our customers for services we have contracted to provide during the
then-current annual periods of the customers’ respective contracts with us. To
be included in total annual contract value, service fees must be either
contractually required to be paid, or expected to be paid based on a minimum
12-month history of prior charges and payments that were not required by
contractual minimums. Total annual
contract value includes amounts that have been recognized as revenue as well as
amounts that may be recognized as revenue in the future.
As of March 31, 2005, the
total annual contract value of our SubscribeNet service customer base was $7.9
million.
We caution that total annual
contract value is not necessarily indicative of current revenues or of future
revenues in any given fiscal period and should not be relied upon to assess our
financial condition. In addition to the
“Risk Factors” beginning on page 31 below, factors that could cause differences
between total annual contract value and revenues include unexpected contract
terminations, reductions in customer activity, the application of our revenue
recognition policies described under “Critical Accounting Policies and
Estimates: Revenue Recognition” in Item 7 (“Management’s Discussion and
Analysis of Financial Condition and Results of Operation”) and under “Revenue
Recognition” in Note 1 of “Notes to Consolidated Financial Statements” in Item
8 below, and the arising of any contingencies that make deferral of revenue
recognition appropriate under any given contract. We also caution that total annual contract
value is different from backlog. Backlog
typically excludes amounts already recognized as revenue, while total annual
contract value may include amounts already recognized as revenue for portions
of the current annual terms of our existing SubscribeNet contracts. In addition, total annual contract value
includes fees paid, payable or expected for the current annual terms of our
existing SubscribeNet contracts, even if we expect to provide the related
services after our current fiscal year.
Marketing
Our central marketing goals
are to attract and retain customers for our services. We target our marketing
efforts to senior personnel across multiple departments in software companies
and other mid-sized and large corporations. We use an integrated approach of
targeted advertising; direct mail, email and online promotions; interactive
web-based seminars, or “webinars”; event sponsorships; trade shows;
brand-awareness campaigns; and regular meetings with existing customers to
stimulate demand for our services, generate sales leads and maintain customer
relationships.
We
employ a variety of tools to achieve our marketing goals. Our print and online
advertising campaigns are designed to target senior personnel across multiple
departments in software companies, and
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educate
them on our products and services. Our direct mail, email and online promotions
are designed to highlight specific benefits of our services and offer
limited-time incentives to enter into purchase or evaluation agreements. In our webinars, our senior executives and
other panelists who may include independent IT analysts, senior executives of
our customers and partners, and other industry experts, educate prospective
customers on ESDM and other topics relevant to our business. Our co-branding
with Software Spectrum for sales of Sun software and maintenance helps us
penetrate highly qualified market segments. We also use trade shows, event
sponsorships, and regional marketing to target key audiences, expand our
customer base and heighten awareness of the “Intraware” brand.
We
also hold user conferences and periodic meetings with our customers to educate
them on our service offerings, gather feedback from them about our services,
and learn about their evolving requirements.
Competition
The
ESDM market is rapidly evolving and intensely competitive, and we expect
competition to increase in the future. Our primary competition comes from our
potential customers, including software companies and other companies that
distribute software or digital goods, who choose to develop an in-house
alternative to the SubscribeNet service. However, we also face increasing
competition from a small number of other providers of outsourced electronic
software delivery services. A number of these competitors have historically
provided related services, such as e-commerce services, replication and
distribution of physical media such as CDs, or product lifecycle management
solutions, and relatively recently have begun to provide electronic software
delivery services. We believe this trend will continue as software and other
digital goods companies convert from physical to digital distribution of their
products, stimulating additional demand for ESDM services.
We
believe we compete effectively as a result of our early deployment of a
centralized, high-capacity, web-based, customizable ESDM solution containing
valuable administrative and reporting tools. Principal competitive factors
include:
• the performance, features and functionality
of an ESDM solution;
• the comprehensiveness of the services offered
by the ESDM provider, such as integration with licensing and physical
fulfillment solutions;
• the cost of a provider’s ESDM solution versus
the cost of competing ESDM solutions or the cost to a potential customer of
building, deploying and maintaining an alternative service in-house;
• the ESDM provider’s experience in and focus
on providing ESDM services;
• the ESDM provider’s track record of
successful project implementations;
• positive references by the ESDM provider’s
existing customers; and
• the openness of an ESDM solution’s
architecture and the ease with which it integrates with major customer
relations management, order processing and enterprise resource planning systems
used by software providers.
We
believe we compete effectively as to all of these factors. We believe our
principal advantages include:
• our relatively senior position as one of the
first ESDM service providers;
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• the depth and breadth of features and
functionality of an ESDM solution;
• our high-capacity, high-availability network
for delivery of enterprise-class software applications rapidly and securely;
• the suite of services that we offer through
alliances, including licensing, desktop deployment, and on-demand physical
fulfillment;
• the price of our solution, particularly
compared with the cost to software providers of developing and maintaining an
alternative service in-house;
• our strong track record of successful project
implementations;
• existing customers who are willing to provide
positive references;
• the flexibility of our solution, which is
easily customized and integrated with customers’ ERP, CRM and licensing
systems; and
• our suite of administrative and reporting
tools that add value for software companies and their end-users.
Nevertheless,
we face a number of competitive challenges. A key challenge is resistance from
software companies that determine, for perceived strategic reasons or based on
their cost assessments, that they do not wish to outsource electronic software
delivery. Another principal challenge is our focus on ESDM, and our reliance on
third-party alliances for key ancillary services such as hosted license
generation and desktop deployment. While we believe our focus has enabled us to
offer a superior ESDM solution to our competitors, and our integration with
best-of-breed ancillary solutions addresses a broad set of customer needs, some
prospective customers prefer this set of solutions to be supported by a single
provider. A third principal challenge is
our small size, as some large software providers prefer to outsource services
to larger suppliers with greater resources.
In
addition, many of our competitors have longer and more profitable operating
histories than we have. They may also have significantly greater financial and
other resources, wider name recognition, and a larger installed base of
customers (including non-ESDM customers) than we have. They also may be able to
devote greater resources to the development, promotion and sale of their products
than we can, which would allow them to respond more quickly to new or emerging
technologies and changes in customer requirements. In addition, many of our
competitors have existing relationships with divisions of our current or
potential customers, and may be able to leverage their existing relationships
to discourage these customers from purchasing additional services or products
from us, or may be able to persuade these customers to replace our services or
products with their own.
Intellectual Property, Proprietary Rights and Licenses
Our
future success depends in part on our proprietary rights and technology. We
rely on a combination of patent, copyright, trademark and trade secret laws,
employee and third-party nondisclosure agreements and other methods to protect
our proprietary rights. Although we seek to take advantage of available
intellectual property protections, we believe that factors such as the
technological and creative skills of our personnel, new product developments,
frequent product enhancements and reliable product maintenance are more
essential to establishing and maintaining a technology leadership position.
There can be no assurance that others will not develop technologies that are
similar or superior to our technology.
To
date, we own three U.S. patents on electronic commerce technologies, expiring
in July 2016, September 2017, and February 2018, respectively.
In addition, we have four patent applications pending in
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the
United States on our SubscribeNet ESDM technology. We plan to file additional
patent applications on our SubscribeNet ESDM technology in the current fiscal
year.
We
have 10 trademark registrations in the United States. Our key registered and
unregistered trademarks and service marks include Intraware, SubscribeNet, The
Way Digital Goods Move, and Control Your Technology. We also hold registrations
and pending applications for a number of trademarks and service marks outside
the United States. We are aware that certain other companies are using the name
“Intraware” as a company name or as a trademark or service mark outside the
United States. While we do not believe we have infringed any rights and we have
received no notice of any claims of infringement from any of those companies,
and we own registrations for the “Intraware” trademark in the United States and
in other countries, we can make no assurance that these or other companies will
not claim superior rights to “Intraware” or other marks used in our business.
We
generally enter into confidentiality or license agreements with our employees,
consultants and corporate partners, and generally control access to and
distribution of our software, documentation and other proprietary information.
Despite our efforts to protect our proprietary rights, it may be possible for
unauthorized parties to copy certain portions of our products or services, or
reverse-engineer or obtain and use information that we regard as proprietary.
There can be no assurance that the steps we take will prevent misappropriation
of our technology, particularly in foreign countries where the laws may not
protect our proprietary rights as fully as do the laws of the United States.
We
purchase licenses and will continue to purchase licenses for certain products
integral to our services and products, including products which are integrated
with our software code and used with our products to provide key functionality.
We cannot be assured that these third party product licenses will continue to be
available to us on commercially reasonable terms or that we will be able to
successfully integrate such third party products into our solutions.
Employees
As
of April 15, 2005, we had 60 employees, including part-time employees.
None of our employees is represented by a labor union. We have not experienced
any work stoppages and consider our relations with our employees to be
good.
ITEM 2. PROPERTIES.
We rent
approximately 16,000 square feet of office space located in Orinda, California
under a lease expiring in August 2009.
We have an additional field sales office in Boston, Massachusetts.
ITEM 3. LEGAL PROCEEDINGS.
In re Intraware, Inc. Initial Public Offering
Securities Litigation
In
October 2001, we were served with a summons and complaint in a purported
securities class action lawsuit. On or about April 19, 2002, we were
served with an amended complaint in this action, which is now titled In re Intraware, Inc. Initial Public Offering
Securities Litigation, Civ. No. 01-9349 (SAS) (S.D.N.Y.),
related to In re Initial Public Offering
Securities Litigation, 21 MC 92 (SAS) (S.D.N.Y.). The amended
complaint is brought purportedly on behalf of all persons who purchased our
common stock from February 25, 1999 (the date of our initial public
offering) through December 6, 2000. It names as defendants Intraware,
three of our present and former officers and directors, and several investment
banking firms that served as underwriters of our initial public offering. The
complaint alleges liability under Sections 11 and 15 of the Securities Act of
1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of
1934, on the grounds that the registration statement for the offerings did not
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disclose
that: (1) the underwriters had agreed to allow certain customers to
purchase shares in the offerings in exchange for excess commissions paid to the
underwriters; and (2) the underwriters had arranged for certain customers
to purchase additional shares in the aftermarket at predetermined prices. The
amended complaint also alleges that the underwriters misused their securities
analysts to manipulate the price of our stock. No specific damages are claimed.
Lawsuits containing similar allegations have been
filed in the Southern District of New York challenging over 300 other initial
public offerings and secondary offerings conducted in 1999 and 2000. All
of these lawsuits have been
consolidated for pretrial purposes before United States District Court Judge
Shira Scheindlin of the Southern District of New York. On July 15, 2002,
an omnibus motion to dismiss was filed in the coordinated litigation on behalf
of the issuer defendants, of which Intraware and its three named current and
former officers and directors are a part, on common pleadings issues. On or
about October 9, 2002, the Court entered and ordered a Stipulation of
Dismissal, which dismissed the three named current and former officers and
directors from the litigation without prejudice. On February 19, 2003, the
Court entered an order denying in part the issuer defendants’ omnibus motion to
dismiss, including those portions of the motion to dismiss relating to
Intraware.
In June 2004, a stipulation of settlement for
the claims against the issuer defendants, including us, was submitted to the
Court. The underwriter-defendants in the
In re Initial Public Offering Securities
Litigation (collectively, the “underwriter-defendants”), including
the underwriters of our initial public offering, are not parties to the stipulation
of settlement.
The settlement provides that, in exchange for a
release of claims against the settling issuer-defendants, the insurers of all
of the settling issuer-defendants will provide a surety undertaking to
guarantee plaintiffs a $1 billion recovery from the non-settling
defendants, including the underwriter-defendants. The amount our insurers would be required to
pay to the plaintiffs could range from zero to approximately $3.5 million,
depending on plaintiffs’ recovery from the underwriter-defendants and from
other non-settling parties. If the plaintiffs recover at least $1 billion
from the underwriter-defendants, our insurers would have no liability for
settlement payments under the terms of the settlement. If the plaintiffs
recover less than $1 billion, we believe our insurance will likely cover
our share of any payments towards satisfying plaintiffs’ $1 billion
recovery deficit. Management estimates that its range of loss relative to
this matter is zero to $3.5 million. Presently there is no more likely
point estimate of loss within this range. As a consequence of the uncertainties
described above regarding the amount we will ultimately be required to pay, if
any, as of February 28, 2005, we have not accrued a liability for this matter. There is no guarantee the settlement will
become final, as it is subject to a number of conditions, including the final
approval of the Court.
Leon Segen v. ComVest Venture Partners, LP, et al.
In July 2004, a complaint was filed in the
United States District Court for the District of Delaware, Civ. No. 04-822,
against ComVest Venture Partners, LP; ComVest Management, LLC; Commonwealth
Associates Management Company, Inc.; Commonwealth Associates, LP; RMC
Capital, LLC; Michael S. Falk; Robert Priddy; Travis L. Provow; Keith
Rosenbloom; and Intraware. The complaint describes Intraware as a nominal
defendant. The complaint alleges that, between August 2001 and January 2002,
all of the defendants other than Intraware were members of a group, and
therefore should be treated as a single “person,” for purposes of Sections
13(d)(3) and 16(b) of the Securities Exchange Act of 1934 (the “1934
Act”). The complaint further alleges that ComVest Venture Partners, LP
and Mr. Priddy, while they and the other alleged group members
collectively owned more than 10% of a class of our equity securities, bought
and sold our equity securities within a 6-month period and failed to
disgorge to us the profits allegedly realized in those trades, thereby
violating Section 16(b) of the 1934 Act. Mr. Falk was a
member of our Board of Directors from April 2001 to May 2002 and Mr. Provow
was a member of our Board of Directors from October 2001 to May 2002.
The complaint demands that ComVest Venture Partners, LP and Mr. Priddy pay
over to Intraware the profits they allegedly realized and retained in violation
of Section 16(b) of the 1934 Act, together with interest and legal
costs. According to the complaint, the amount of those alleged profits is
unknown to the plaintiff, however, the information alleged in the
11
complaint
suggests that amount may be approximately $1.3 million. The complaint does
not seek damages against us. After the complaint was filed, the plaintiff
and Intraware signed a stipulation acknowledging that Intraware takes no
position with respect to the claims in the action, and providing that Intraware
accepts service of the complaint, that Intraware is not required to file an
answer or other response to the complaint, and that Intraware will otherwise
have the rights and responsibilities of a party to the action.
We are also subject to legal proceedings, claims and
litigation arising in the ordinary course of business. We do not expect that
the ultimate costs to resolve these matters will have a material adverse effect
on our consolidated financial position, results of operations, or cash flows.
ITEM
4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
|
ITEM 5.
|
MARKET FOR THE REGISTRANT’S COMMON EQUITY,
RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
|
To date, we have not
declared or paid dividends on our common stock. Our Board of Directors
presently intends to retain all earnings for use in our business and therefore
does not anticipate declaring or paying any cash dividends in the foreseeable
future.
Our common stock was traded
on the Nasdaq National Market under the symbol “ITRA” from February 26,
1999 until May 29, 2002. Since May 30, 2002, our common stock has
traded on the Nasdaq SmallCap Market under the symbol “ITRA.” The following
table reflects the range of reported high and low sale prices for our common
stock for the periods indicated.
|
|
|
High
|
|
Low
|
|
|
|
|
|
|
|
|
|
For the quarter ended
|
|
|
|
|
|
|
February 28, 2005
|
|
$
|
1.28
|
|
$
|
0.80
|
|
|
November 30, 2004
|
|
1.50
|
|
0.79
|
|
|
August 31, 2004
|
|
2.01
|
|
1.20
|
|
|
May 31, 2004
|
|
2.18
|
|
1.60
|
|
|
For the quarter ended
|
|
|
|
|
|
|
February 29, 2004
|
|
$
|
2.49
|
|
$
|
1.56
|
|
|
November 30, 2003
|
|
2.86
|
|
1.29
|
|
|
August 31, 2003
|
|
1.90
|
|
1.01
|
|
|
May 31, 2003
|
|
1.52
|
|
0.86
|
|
On
April 15, 2005, the last reported sale price for our common stock on the
Nasdaq SmallCap Market was $0.52 per share. As of April 15, 2005,
Intraware estimates that there were approximately 14,000 holders of record of
Intraware common stock and a substantially greater number of beneficial owners.
On February 23, 2005,
we received a letter from The Nasdaq Stock Market indicating that, for 30
consecutive business days, the bid price of our stock had closed below the
minimum $1.00 per share requirement for continued listing on the Nasdaq
SmallCap Market and that, in accordance with NASD rules, we had 180 calendar
days to regain compliance. The letter also stated that if, at any time
before August 22, 2005, the bid price of our stock closes at $1.00 per
share or more for a minimum of 10
12
consecutive business days,
Nasdaq will notify us that we comply with the listing requirements. If we do not regain compliance by August 22,
2005, we may be granted an additional 180-day period (until February 22,
2006) to regain compliance if we meet The Nasdaq SmallCap Market initial
listing criteria other than the minimum bid price requirement. If we do
not regain compliance within the allotted compliance period (including any
extensions that may be granted by Nasdaq), Nasdaq staff will notify us that our
stock will be delisted from The Nasdaq SmallCap Market. At that time, we
would be entitled to appeal the staff’s determination to a Nasdaq Listing
Qualifications Panel.
Equity
Compensation Plan Information
The following table sets
forth information, as of February 28, 2005 about equity awards under our
equity compensation plans (in thousands, except weighted average exercise price
information):
|
Plan Category
|
|
A
Number of Securities to be
Issued upon Exercise of
Outstanding Options
|
|
B
Weighted Average
Exercise Price of
Outstanding Options
|
|
C
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation
Plans (Excluding
Securities Reflected in
Column A)
|
|
|
Equity Compensation Plans Approved by Shareholders
(1)
|
|
10,293
|
(2)
|
$
|
1.81
|
|
4,330
|
(3)
|
|
Equity Compensation Plans Not Approved by
Shareholders
|
|
1,042
|
(4)
|
$
|
3.67
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
11,335
|
|
$
|
1.98
|
|
4,330
|
|
(1) Includes our 1996 Stock Option Plan, which provides for an annual
increase in the number of shares available for issuance under the plan equal to
the lesser of (i) 3,000,000 shares, (ii) 6% of the number of
outstanding shares of our common stock on such date, or (iii) a lesser amount
determined by the Board of Directors; our 1998 Director Option Plan; and our
1998 Employee Stock Purchase Plan, which provides for an annual increase in the
number of shares available for issuance under the plan equal to the lesser of (i) 400,000
shares, (ii) 1% of the number of outstanding shares of our common stock on
such date, or (iii) a lesser amount determined by the Board of Directors.
(2) Includes shares of common stock issuable upon exercise of options
granted under our 1996 Stock Option Plan and 1998 Director Option Plan.
(3) Number of securities available for future issuance includes
approximately 3,368,000 shares of common stock available for issuance under our
1996 Stock Option Plan, 208,000 shares available for issuance under our 1998
Director Option Plan, and approximately 754,000 shares of common stock
available for issuance under our Employee Stock Purchase Plan. (See Note 9
of our “Notes to Consolidated Financial Statements” in Item 8 below for a
description of our equity compensation plans.)
(4) Includes shares of common stock to be issued upon exercise of options
granted under our 1999 Non-Qualified Acquisition Stock Option Plan.
Our Non-Qualified
Acquisition Stock Option Plan, adopted in October 1999 (the “1999 Plan”),
has not been approved by our shareholders. The 1999 Plan provided for the
granting of NSOs to our
13
employees and consultants. Officers could only receive grants under the
1999 Plan in connection with their initial service to us, and Board members
could not receive any grants under the 1999 Plan. The standard form of Stock
Option Agreement used under the 1999 Plan provides that the options are
exercisable over a period not to exceed ten years from the date of the grant.
Options granted under the 1999 Plan generally vest as to 25% of the shares one
year after the date of grant and as to the remaining options in equal monthly
installments over the next 36 months. The exercise price of all options
granted under the 1999 Plan has been the fair market value of our common stock
on the grant date, as determined by the closing price of the common stock on
the applicable Nasdaq exchange on that date.
Effective May 30, 2002,
the day our common stock began trading on the Nasdaq SmallCap Market, we ceased
granting options under the 1999 Plan. However, the 1999 Plan remains in effect
solely to the extent of options granted before May 30, 2002 that remain
outstanding. As of February 28, 2005, approximately 1,042,000 shares of
our common stock were reserved for issuance under the 1999 Plan, and the same
number of shares were issuable pursuant to options outstanding under the plan
as of that date.
ITEM 6. SELECTED FINANCIAL DATA.
The following tables present
selected historical financial information for Intraware. This information has
been derived from our respective consolidated financial statements and notes,
some of which are included elsewhere in this annual report. The following
selected financial data should be read in conjunction with “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,” and
are qualified by reference to the consolidated financial statements and notes
thereto and appearing elsewhere in this annual report. The consolidated statement
of operations data set forth below for the years ended February 28, 2005, February 29,
2004, and February 28, 2003, and the consolidated balance sheet data at February 28,
2005 and February 29, 2004, are derived from, and are qualified by
reference to, the audited consolidated financial statements of Intraware
included elsewhere in this annual report. The consolidated statement of
operations data for the years ended February 28, 2002 and February 28,
2001, and the balance sheet data at February 28, 2003, February 28,
2002, and February 28, 2001, are derived from audited consolidated
financial statements of Intraware which are not included or incorporated by
reference in this annual report. The historical results are not necessarily
indicative of results to be expected for any future period.
14
|
|
|
For the
Years Ended
|
|
|
|
|
February 28,
2005
|
|
February 29,
2004
|
|
February 28,
2003
|
|
February 28,
2002
|
|
February 28,
2001
|
|
|
|
|
(in
thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Online services and technology
|
|
$
|
7,816
|
|
$
|
6,768
|
|
$
|
6,872
|
|
$
|
14,015
|
|
$
|
23,027
|
|
|
Alliance and reimbursement
|
|
2,431
|
|
3,311
|
|
4,271
|
|
2,621
|
|
—
|
|
|
Related party online services and technology
|
|
546
|
|
466
|
|
277
|
|
—
|
|
—
|
|
|
Software product sales
|
|
42
|
|
362
|
|
2,622
|
|
36,801
|
|
98,809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
10,835
|
|
10,907
|
|
14,042
|
|
53,437
|
|
121,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Online services and technology
|
|
3,009
|
|
2,339
|
|
2,385
|
|
3,752
|
|
4,773
|
|
|
Alliance and reimbursement
|
|
1,523
|
|
1,814
|
|
2,023
|
|
1,210
|
|
—
|
|
|
Software product sales
|
|
37
|
|
307
|
|
1,972
|
|
29,304
|
|
80,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
4,569
|
|
4,460
|
|
6,380
|
|
34,266
|
|
85,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
6,266
|
|
6,447
|
|
7,662
|
|
19,171
|
|
36,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
2,892
|
|
2,616
|
|
5,430
|
|
12,647
|
|
37,564
|
|
|
Product development
|
|
1,531
|
|
2,733
|
|
6,184
|
|
10,119
|
|
19,632
|
|
|
General and administrative
|
|
3,767
|
|
3,368
|
|
3,017
|
|
6,898
|
|
20,451
|
|
|
Amortization of intangibles
|
|
—
|
|
—
|
|
1,085
|
|
6,125
|
|
5,248
|
|
|
Amortization of goodwill
|
|
—
|
|
—
|
|
—
|
|
2,397
|
|
3,297
|
|
|
Restructuring
|
|
(75
|
)
|
—
|
|
1,239
|
|
2,356
|
|
2,841
|
|
|
(Gain) loss on disposal of assets
|
|
47
|
|
(14
|
)
|
—
|
|
—
|
|
—
|
|
|
Impairment of assets
|
|
—
|
|
—
|
|
792
|
|
—
|
|
—
|
|
|
Loss on abandonment of assets
|
|
—
|
|
—
|
|
128
|
|
6,735
|
|
6,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
8,162
|
|
8,703
|
|
17,875
|
|
47,277
|
|
95,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
(1,896
|
)
|
(2,256
|
)
|
(10,213
|
)
|
(28,106
|
)
|
(58,406
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
(101
|
)
|
(206
|
)
|
(2,650
|
)
|
(2,728
|
)
|
(660
|
)
|
|
Interest and other income and expenses, net
|
|
139
|
|
82
|
|
544
|
|
(3,844
|
)
|
675
|
|
|
Gain on sale of Asset Management software business
|
|
—
|
|
—
|
|
2,656
|
|
—
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
(1,858
|
)
|
(2,380
|
)
|
(9,663
|
)
|
(34,678
|
)
|
(58,391
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable convertible preferred stock accrued dividends, accretion
to liquidation and beneficial conversion feature
|
|
—
|
|
—
|
|
—
|
|
(2,696
|
)
|
(10,026
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(1,858
|
)
|
$
|
(2,380
|
)
|
$
|
(9,663
|
)
|
$
|
(37,374
|
)
|
$
|
(68,417
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share attributable to common
stockholders
|
|
$
|
(0.03
|
)
|
$
|
(0.04
|
)
|
$
|
(0.20
|
)
|
$
|
(1.18
|
)
|
$
|
(2.57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares - basic and diluted
|
|
60,127
|
|
55,910
|
|
47,722
|
|
31,690
|
|
26,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 28, 2005
|
|
February 29, 2004
|
|
February 28, 2003
|
|
February 28, 2002
|
|
February 28, 2001
|
|
|
|
|
(in thousands)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents and investments
|
|
$
|
9,463
|
|
$
|
11,804
|
|
$
|
6,841
|
|
$
|
2,979
|
|
$
|
7,046
|
|
|
Working capital (deficit)
|
|
7,247
|
|
8,575
|
|
2,642
|
|
(9,320
|
)
|
(7,488
|
)
|
|
Total assets
|
|
12,966
|
|
14,770
|
|
10,936
|
|
26,519
|
|
80,227
|
|
|
Long term obligations, less current portion
|
|
342
|
|
766
|
|
906
|
|
2,235
|
|
3,339
|
|
|
Redeemable convertible preferred stock
|
|
897
|
|
897
|
|
2,473
|
|
3,347
|
|
4,666
|
|
|
Total stockholders’ equity
|
|
$
|
6,857
|
|
$
|
7,590
|
|
$
|
764
|
|
$
|
110
|
|
$
|
18,428
|
|
Note: Historical results of
operations are not necessarily indicative of future results. Refer to the “Risk
Factors” under Item 7 “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” for discussion of factors that may impact
future results. Our historical results of operations reflect our acquisition of
Janus Technologies, Inc. in July 2000.
In our year ended February 28,
2003 we adopted Statement of Financial Accounting Standards No. 142, which
requires that assembled workforce be reclassified to goodwill and that goodwill
(including assembled workforce) no longer be amortized.
15
With respect to the
calculation of net loss per share and weighted average shares, Note 1 of
the “Notes to Consolidated Financial Statements” in Item 8 below provides an
explanation of the determination of the weighted average shares used to compute
net loss per share.
We have not paid cash
dividends on our common stock.
16
|
ITEM 7.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION.
|
We begin Management’s
Discussion and Analysis of Financial Condition and Results of Operation
(MD&A) with our overall strategy to give the reader an overview of the
goals of our business and the direction in which our business is moving. This
is followed by a discussion of the Critical Accounting Policies and Estimates
that we believe are important to understanding the assumptions and judgments
incorporated in our reported financial results. In the next section, we discuss
our Results of Operations for our 2005 fiscal year compared to our 2004 and
2003 fiscal years. We then analyze our Liquidity and Capital Resources and
discuss relevant Recent Accounting Pronouncements.
This MD&A should be read
in conjunction with the other sections of this Annual Report on Form 10-K,
including “Item 1: Business”; “Item 6: Selected Financial Data”; and “Item 8:
Financial Statements and Supplementary Data.” The various sections of this
MD&A contain a number of forward-looking statements, all of which are based
on our current expectations and could be affected by the uncertainties and risk
factors described throughout this filing and particularly in the “Risk Factors”
section. Our actual results may differ materially.
Overview
Our
goal is to become the de facto standard
among digital delivery solution providers.
We are pursuing a three-pronged strategy to achieve this goal.
First, we are working to become a profitable, cash-generating company by
growing our SubscribeNet business and practicing stringent fiscal
responsibility. Second, we are seeking
to extend and strengthen our customer base by executing on our sales and
marketing plan and by providing exceptional customer service. Third, we are seeking to solidify and
strengthen our technological advantage by further improving our ESDM technology
solutions through internal research and development and through alliances with
adjacent technology providers.
We currently see a number of trends in the
marketplace that are potentially important for our business. First, growth in
the macroeconomy and the technology sector have improved in the last year, but
remain uneven. In the current climate,
spending by technology companies remains cautious. Second, there appears to be an increasing
pace of mergers and acquisitions in the enterprise software sector. These
consolidations pose both opportunities and risks for us, potentially leading
either to growth in our contracts with those customers or to cancellation of
customer contracts. Third, technology companies are increasingly outsourcing
operational functions to reduce costs. Our services enable enterprise software
companies to outsource key operational functions in a manner that we believe is
financially compelling. Therefore, we may benefit from this outsourcing trend.
Fourth, the use of hosted web-based applications, which in the past has been
limited by concerns about speed, reliability and security, is now becoming more
accepted among mainstream businesses, largely because of a desire for cost
savings. This trend may benefit us because our SubscribeNet service is a hosted
web-based application.
Our management is focused on four key areas. The
first is what appears to be growing demand for electronic delivery and
management of enterprise software applications.
We believe this presents opportunities for both acquiring new customers
and increasing the value of existing customer contracts. The second is to leverage our relationships
with our strategic allies, including HP and Software Spectrum, to reach larger
customers. The third is to take
advantage of the drive toward greater efficiency among large information technology
companies, as evidenced by the increasing consolidation in that sector, by
emphasizing the cost savings that can be realized through broad adoption of
electronic software delivery and management.
The fourth area is the development of new pricing packages for our
services that emphasize shorter sales and implementation cycles and strong
profit margins.
We also face a number of key risks, which are
described in the “Risk Factors” beginning on page 31 below.
17
We earn revenues and generate cash principally
through recurring service fees charged for our SubscribeNet service,
professional services fees charged for customization of our SubscribeNet
service, and profit-sharing and cost reimbursement received for our sales and
marketing services. Historically, we have also raised substantial amounts of
cash through private stock placements.
We have incurred losses and negative cash flows
during each fiscal year since inception. For the year ended February 28, 2005,
we narrowed our net losses to approximately $1.9 million. Despite our improvements, we continued to
experience recurring losses and negative cash flows from operations for the
year ended February 28, 2005. Under our June 2001 agreement with Software
Spectrum, we provide Sales and Marketing Services to Software Spectrum to
assist in its resale and marketing of Sun and Websense software licenses and
maintenance. This contract accounted for more than 10% of our total revenues in
our 2005 fiscal year. The term of this agreement will expire in June 2005, is
renewable for subsequent one-year terms, and may be terminated without cause by
either party on 90 days’ notice. It is possible that Software Spectrum will
terminate this agreement without cause or will choose not to renew the
agreement at any renewal point. Any termination or non-renewal of our agreement
with Software Spectrum, or termination of Software Spectrum’s rights to resell
Sun software, would likely cause a substantial and immediate decrease in our
revenues. We believe that the effects of
our capital financing, strategic actions implemented to improve revenue, and
cost controls will be adequate to generate sufficient cash resources to fund
our future operations. However, if we fail to sufficiently increase our
revenues or control spending, our business could be materially adversely
affected.
Critical
Accounting Policies and Estimates
This
MD&A discusses our consolidated financial information, which has been
prepared in accordance with generally accepted accounting principles in the
United States of America. In preparing this financial information, we are
required to make estimates and assumptions affecting the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial information and the reported amounts of revenues
and expenses during the reporting period and related disclosures. On an ongoing
basis, we evaluate our estimates and judgments. We base our estimates and judgments
on historical experience and on various other factors believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities not readily
apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions.
We consider
accounting policies related to revenue recognition, costs of deferred revenue,
stock-based compensation, allowance for doubtful accounts, goodwill and
intangibles, and income taxes to be critical accounting policies due to the
estimation process involved in each.
Revenue Recognition
We
recognize revenue when all of the following conditions are met:
• There is
persuasive evidence of an arrangement;
• We have
provided the service to the customer, made the software available for customer
download through our website, or shipped the software to the customer;
• We believe
that collection of these fees is reasonably assured; and
• The amount
of fees to be paid by the customer is fixed or determinable.
Online
services and technology revenue results primarily from three types of
arrangements. First, it results from sales of our SubscribeNet ESDM
service to software vendors and other companies that distribute software as
part of their business. Second, it results from professional services
that we provide to customize our SubscribeNet service for customers, to convert
data for customers, and to integrate our proprietary software. Third, it
results from the sale of our proprietary software licenses and related
maintenance to companies using those products internally or using those
products to provide web-based services to their customers. As a result of the
sale of our Asset Management software business in May 2002, we are not
currently deriving revenue from licenses, maintenance or integration services
for our proprietary software; however, we may recognize such revenues in the
future if opportunities arise to sell licenses for our proprietary software
underlying our SubscribeNet service and related maintenance. We sell our
SubscribeNet service, and will sell proprietary software licenses if
opportunities present themselves, primarily through our direct sales force and
authorized resellers.
18
Alliance
and reimbursement revenue primarily relates to our alliance agreement with
Software Spectrum for sales and marketing services. This revenue consists of a
percentage of the gross profit derived from Software Spectrum’s sales of the
third-party software and maintenance for which we provide sales and marketing
services, and reimbursement for the costs of maintaining a sales team dedicated
to providing sales and marketing services to Software Spectrum for that
third-party software and maintenance. This revenue is recognized as we provide
the services to Software Spectrum.
We derive
software product revenues from our past resales of licenses and maintenance for
multiple business software product lines. As of July 1, 2001, we generally
no longer resell third-party software licenses and maintenance, though we still
resell licenses for third-party products complementary to our SubscribeNet
service. Since July 1, 2001, we have continued to recognize revenue from
our resale of third-party software licenses and related maintenance contracts
over the life of the arrangements made prior to July 1, 2001. Vendor
specific objective evidence of fair value for the maintenance element of the
resold software arrangements has been based on historical and contractual
renewal rates for maintenance. We deferred the maintenance revenue at the
outset of the arrangement and recognized it ratably over the period during
which the maintenance was to be provided. This period normally commenced
on the date the software was delivered and generally continued for 12 months,
although certain maintenance contracts continued for longer periods. At February 28,
2005, we did not have any deferred revenue relating to software product
revenues.
We defer
online services and technology revenues related to our SubscribeNet ESDM
service and generally recognize them ratably over the term of the service
arrangement. Some SubscribeNet service implementations for new customers
involve customization essential to the functionality of the service. In
those cases, we defer revenue recognition until the service go-live date is
reached and recognize the revenue on a ratable basis over the remaining
contract term. The go-live date is the later of the date on which the essential
functionality is delivered or the point at which no additional customization is
required. Our SubscribeNet contracts with customers typically give the
customer a period of time (generally five days) to evaluate a SubscribeNet
implementation after we have completed it, and provide that the customer is
deemed to have accepted the implementation if it has not affirmatively rejected
it within that period. We typically rely on such non-rejections by
customers to indicate their acceptance of implementations. Any subsequent
indications by our customers that their implementations have not been properly
completed could have a material adverse impact on our financial condition or
results of operations.
We also
sell additional professional services related to SubscribeNet agreements.
Generally, these services do not provide stand-alone value to a customer, and
accordingly, we defer recognition of that revenue until the go-live date for
the professional services, similar to the manner in which we treat SubscribeNet
service revenues as discussed above. Such professional services revenues
are recognized ratably over the longer of the remaining estimated customer life
or the remaining contract term, commencing with the completion of the
professional services. Estimated customer life requires that we periodically
estimate the projected life of our existing customers, based on historical
information, such as customer renewal rates. Although revenues generated from
additional professional services represent less than 5% of our overall revenues
for the year ended February 28, 2005, any change to our estimated customer
life could have a material adverse impact on our financial condition or results
of operations.
Revenue
from transactions through authorized resellers has been recognized when the
licenses and maintenance have been resold or utilized by the reseller or when
our related obligations have been satisfied. Those transactions primarily
consisted of resales, through our authorized resellers, of our proprietary Asset
Management software licenses and maintenance (we sold our Asset Management
software business to Computer Associates International, Inc. during our
fiscal year ended February 28, 2003). For those transactions, we
based vendor specific objective evidence of fair value for the maintenance
element of the proprietary software arrangements on historical and contractual
renewal rates for maintenance. We deferred the maintenance revenue at the
outset of the arrangement and recognized it ratably over the period during
which the maintenance was to be provided (generally 12 months), which
normally commenced on the date the software was delivered.
19
As
mentioned above, a determination that the collection of fees is reasonably
assured is a precursor to recognizing revenue. Determination of collectability
of payments requires judgment on the part of management and includes
periodically evaluating customers’ credit (see “Allowance for Doubtful Accounts”
below).
Costs of Deferred Revenue
We
capitalize direct costs of revenues related to significant implementation and
professional services contracts associated with our SubscribeNet
services. Direct costs include compensation and payroll-related fringe
benefits directly associated with the time spent on significant implementation
and professional services activities. These costs are recognized over the
same term as the associated revenue from those contracts (see “Revenue
Recognition” above). Any change in our revenue recognition estimates could
result in corresponding changes to our recognition of costs of deferred
revenues. At February 28, 2005, we had approximately $0.5 million in
capitalized costs of deferred revenues. We expense customer acquisition
costs, including sales commissions, as incurred.
Stock-based Compensation
We account
for stock-based compensation for our employees using the intrinsic value method
presented in Accounting Principles Board (APB) No. 25, ”Accounting
for Stock Issued to Employees,” and related interpretations, and comply with
the disclosure provisions of Statement of Financial Accounting Standard (SFAS) No. 123, ”Accounting
for Stock-Based Compensation,” and with the disclosure provisions of SFAS No. 148, ”Accounting
for Stock-Based Compensation—Transition and Disclosure Amendment of SFAS No. 123.”
Under APB No. 25, compensation expense is based on the difference, as of
the date of the grant, between the fair value of our stock and the exercise
price. For our fiscal year ended February 28, 2005, no stock-based
compensation was recorded for stock options granted to our employees because
the exercise price of all stock options granted to our employees was equal to
the market price of the underlying stock on the date of grant.
In October 2004,
the Financial Accounting Standards Board (FASB) issued SFAS No. 123
(Revised) “Share Based Payment” (SFAS No. 123R). The standard requires
companies to value employee stock options and stock issued under employee stock
purchase plans using the fair value based method on the grant date and record
stock-based compensation expense. The fair value based models that companies
are allowed to use can be different from the Black-Scholes option-pricing
model, which we currently use to calculate the pro forma effect on net income
and earnings per share if we had applied SFAS No. 123 to employee option
grants. Note 1 of our “Notes to Consolidated Financial Statements” in Item 8
below shows what the pro forma net loss and loss per share for the fiscal year
ended February 28, 2005 and February 29, 2004 would have been if we
had applied SFAS No. 123. However, the actual impact to our results
of operations upon adoption of the standard could materially differ from the
pro forma information included in Note 1 of our “Notes to Consolidated
Financial Statements” in Item 8 due to differences in the option-pricing model
used, estimates and assumptions required, and options to be included in the
calculation upon adoption. The fair value based models require the input of
highly subjective assumptions and do not necessarily provide a reliable single
measure of the fair value of our stock options. The Securities and Exchange
Commission has amended the deadline to adopt SFAS No. 123R; accordingly, we
will adopt the new accounting provisions in our first quarter of our fiscal
year ending February 28, 2007.
Allowance for Doubtful Accounts
We maintain
an allowance for doubtful accounts for estimated losses from our inability to
collect required payments from our customers. When evaluating the adequacy of
this allowance, we analyze specific accounts receivable, historical bad debts,
customer credit-worthiness, current economic trends and changes in our customer
payment history. We may need to record increases to our allowance balances
in the future. At February 28, 2005, we have many accounts
receivable balances and one large unbilled receivable balance. Any
dispute, early contract termination or other collection issue related to these
receivable balances could have a material adverse impact on our financial
condition or result of operations. At February 28, 2005, our unbilled
receivable balance was $0.4 million. This balance relates to our
20
Software Spectrum agreement (see “Revenue Recognition” above). There
are no allowances for doubtful accounts related to this balance. This estimate
involves management’s judgment, which takes into account Software Spectrum’s
prior payment history, current credit-worthiness and overall business condition.
Changes in the above factors could have a material impact on actual bad debts
incurred.
Goodwill and Intangibles
We are
required to regularly review all of our long-lived assets, including goodwill
and other intangible assets, for impairment whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. We
review goodwill balances for impairment at least once annually and have
determined that we have one reporting unit. Factors we consider important
which could trigger an impairment review include, but are not limited to,
significant underperformance relative to historical or projected future
operating results, significant changes in the manner of use of the acquired
assets or the strategy for our overall business, significant negative industry
or economic trends, a significant decline in our stock price for a sustained
period, and our market capitalization relative to net book value. When we
determine that an impairment review for intangible and long-lived assets is
necessary based upon the existence of one or more of the above indicators of
impairment, we compare the book value of such assets to the future undiscounted
cash flows attributable to those assets. If the book value is greater than the
future undiscounted cash flows, we measure any impairment based on a projected
discounted cash flow method using a discount rate commensurate with the risk
inherent in our current business model. When we determine an impairment review
of goodwill is necessary based on an impairment indicator or based on our
annual testing requirements, we compare the fair value of the reporting unit to
the carrying value of the reporting unit. If the carrying value of the
reporting unit is greater than the fair value of the reporting unit, an
impairment may be necessary. Significant judgment is required in the
development of projected cash flows for these purposes, including assumptions
regarding the appropriate level of aggregation of cash flows, their term and
discount rate as well as the underlying forecasts of expected future revenue
and expense.
Income Taxes
In
conjunction with preparing our financial statements, we must estimate our
income taxes in each of the jurisdictions in which we operate. This process
involves estimating our actual current tax expense together with assessing
temporary differences resulting from differing treatment of items for tax and
accounting purposes. These differences result in deferred tax assets and
liabilities. We must then assess the likelihood that our deferred tax assets
will be recovered from future taxable income and to the extent we believe that
recovery is not likely, we must establish a valuation allowance. Given that we
have incurred losses since inception and therefore have not been required to
pay income taxes, we have fully reserved our deferred tax assets at February 28,
2005. In the event that we are able to realize our deferred tax assets in
the future, an adjustment to the deferred tax asset would increase income in
the period that this is determined.
Results of
Operations
Total
Revenue
The
following table sets forth the revenue, changes in revenue and percentage of
total revenue for the periods indicated (in thousands, except percentage
amounts):
21
|
|
|
For the Years Ended
|
|
|
|
|
February 28, 2005
|
|
February 29, 2004
|
|
February 28, 2003
|
|
|
|
|
Total
|
|
Change
|
|
% of
Revenue
|
|
Total
|
|
Change
|
|
% of
Revenue
|
|
Total
|
|
% of
Revenue
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Online services and technology
|
|
$
|
7,816
|
|
$
|
1,048
|
|
73
|
%
|
$
|
6,768
|
|
$
|
(104
|
)
|
63
|
%
|
$
|
6,872
|
|
49
|
%
|
|
Alliance and reimbursement
|
|
2,431
|
|
(880
|
)
|
22
|
%
|
3,311
|
|
(960
|
)
|
30
|
%
|
4,271
|
|
30
|
%
|
|
Related party online services and
technology
|
|
546
|
|
80
|
|
5
|
%
|
466
|
|
189
|
|
4
|
%
|
277
|
|
2
|
%
|
|
Software product sales
|
|
42
|
|
(320
|
)
|
0
|
%
|
362
|
|
(2,260
|
)
|
3
|
%
|
2,622
|
|
19
|
%
|
|
Total revenues
|
|
$
|
10,835
|
|
$
|
(72
|
)
|
|
|
$
|
10,907
|
|
$
|
(3,135
|
)
|
|
|
$
|
14,042
|
|
|
|
Revenues for combined online
services and technology and related party online service and technology revenue
for the year ended February 28, 2005, increased from the prior year. This
increase was primarily due to a net increase of approximately $1.0 million in
revenue primarily recognized from five of our existing customers. The increase in combined online services and
technology revenue for the year ended February 28, 2004, as compared to
the year ended February 28, 2003, was primarily due to increased
SubscribeNet revenues from existing customers of approximately
$1.6 million. These increases were partially offset by the decrease in
revenue from our services agreement with Sun Microsystems, Inc. of
$1.4 million for the year ended February 29, 2004. We expect our
combined online services and technology revenue and related party online
services and technology revenue in our first quarter of fiscal year 2006 to be slightly
lower than those in our fiscal quarter ended February 28, 2005. The previous sentence is a forward-looking
statement and actual results could differ materially from those anticipated.
Alliance and reimbursement
revenue primarily relates to our alliance agreement with Software Spectrum for
sales of Sun software licenses and maintenance. This revenue consists of a
percentage of the gross profit derived from the sales of Sun software licenses
and maintenance services, and reimbursement for the costs of maintaining a
sales team dedicated to selling Sun software for Software Spectrum. The
decrease in alliance and reimbursement revenue for the year ended February 28,
2005, was primarily due to a reduction of the shared gross profit derived from
the sales of Sun software licenses and maintenance services of
$0.6 million. The decrease in alliance and reimbursement revenue for the
year ended February 28, 2004, was primarily due to a reduction of the
shared gross profit derived from the sales of Sun software licenses and
maintenance services of $0.7 million. We expect our alliance and
reimbursement revenues in our first quarter of fiscal year 2006 to be lower
than those in our three months ended February 28, 2005 due to seasonality
and forecasted reduced demand for Sun products. More generally, the Sun
software we resell through our alliance with Software Spectrum has experienced
decreased market share over the past three years, which has contributed to a
reduction in our alliance and reimbursement revenues, and we expect this
product line to experience continued pressure in the marketplace over the
longer term.
The decline in software
product revenue for the years ended February 28, 2005 and February 29,
2004, was due to our transition out of the business of reselling third-party
software products and related maintenance.
We do not expect to recognize future revenues from our exited
third-party resale business. However, we
may recognize future revenues from products and services complementary to our
SubscribeNet service, which originate with other companies and are sold to
customers through us as part of a comprehensive ESDM business solution. The previous two sentences are
forward-looking statements and actual results could differ materially from
those anticipated.
22
Costs and
Expenses
The following table sets
forth certain items from our consolidated statements of operations as a
percentage of total revenue for the periods indicated (in thousands, except
percentage amounts):
|
|
|
For the Years Ended
|
|
|
|
|
February 28, 2005
|
|
February 29, 2004
|
|
February 28, 2003
|
|
|
|
|
Total
|
|
Change
|
|
% of Revenue
|
|
Total
|
|
Change
|
|
% of Revenue
|
|
Total
|
|
% of Revenue
|
|
|
Total cost of revenues
|
|
$
|
4,569
|
|
$
|
109
|
|
42
|
%
|
$
|
4,460
|
|
$
|
(1,920
|
)
|
41
|
%
|
$
|
6,380
|
|
45
|
%
|
|
Gross Profit
|
|
6,266
|
|
(181
|
)
|
58
|
%
|
6,447
|
|
(1,215
|
)
|
59
|
%
|
7,662
|
|
55
|
%
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
2,892
|
|
276
|
|
27
|
%
|
2,616
|
|
(2,814
|
)
|
24
|
%
|
5,430
|
|
39
|
%
|
|
Product development
|
|
1,531
|
|
(1,202
|
)
|
14
|
%
|
2,733
|
|
(3,451
|
)
|
25
|
%
|
6,184
|
|
44
|
%
|
|
General and administrative
|
|
3,767
|
|
399
|
|
35
|
%
|
3,368
|
|
351
|
|
31
|
%
|
3,017
|
|
21
|
%
|
|
Amortization of intangibles
|
|
—
|
|
—
|
|
0
|
%
|
—
|
|
(1,085
|
)
|
0
|
%
|
1,085
|
|
8
|
%
|
|
Restructuring
|
|
(75
|
)
|
(75
|
)
|
-1
|
%
|
—
|
|
(1,239
|
)
|
0
|
%
|
1,239
|
|
9
|
%
|
|
(Gain) loss on disposal of assets
|
|
47
|
|
61
|
|
0
|
%
|
(14
|
)
|
(14
|
)
|
0
|
%
|
—
|
|
0
|
%
|
|
Impairment of assets
|
|
—
|
|
—
|
|
0
|
%
|
—
|
|
(792
|
)
|
0
|
%
|
792
|
|
6
|
%
|
|
Loss on abandonment of assets
|
|
—
|
|
—
|
|
0
|
%
|
—
|
|
(128
|
)
|
0
|
%
|
128
|
|
1
|
%
|
|
Total operating expenses
|
|
$
|
8,162
|
|
$
|
(541
|
)
|
75
|
%
|
$
|
8,703
|
|
$
|
(9,172
|
)
|
80
|
%
|
$
|
17,875
|
|
127
|
%
|
Cost of
Revenues
Total cost of revenues
remained at approximately $4.5 million for the years ended February 28,
2005, and February 29, 2004, but decreased from $6.4 million for the
year ended February 28, 2003. The decreases in cost of revenues during the
year ended February 28, 2004 was primarily due to the phasing out of our
third-party software reseller business, which resulted in a decrease of
$1.7 million in cost of revenues for the year ended February 29,
2004.
Our
gross margin decreased to 58% for the year ended February 28, 2005, from
59% for the year ended February 29, 2004, and 55% for the year ended February 28,
2003. The gross margin decrease for the year ended February 28, 2005, primarily
reflects the decrease we have experienced in our Alliance and reimbursement
revenues as described above. The gross
margin increase for the year ended February 29, 2004, primarily reflects
our phasing out of our third-party software reseller business as described
above.
Cost of
revenues primarily consists of certain allocated costs related to our Internet
connectivity, assets supporting cost of revenues, and customer support, as well
as the costs of maintaining our team dedicated to helping Software Spectrum
sell Sun and Websense software (Software Spectrum reimburses us for our cost of
maintaining that team). Cost of revenues also consists of professional services
personnel costs and the cost of third-party products sold. When we were
in the business of directly reselling third-party software products, we
purchased those products at a discount from the third-parties’ established list
prices according to standard reseller terms. We expect total cost of
revenues and gross profit margin percentages for the next fiscal year to both
be slightly higher than the cost of revenues and gross profit margin
percentages for our fiscal year 2005. The previous sentence is a
forward-looking statement that is subject to risks and uncertainties. The
actual mix of sales transactions and the timing of the transactions, as well as
any reduction by Sun of Software Spectrum’s and our gross margins for Sun’s maintenance
renewals, may cause our cost of revenues and gross profit margins to fluctuate
materially from those anticipated (see “Risk Factors” beginning on page 31
below).
Sales and
Marketing Expenses
Sales
and marketing expenses consist primarily of employee salaries, benefits and
commissions, advertising, promotional materials and trade show expenses.
The
increase in our sales and marketing expenses for the year ended February 28,
2005, compared to the year ended February 29, 2004, is primarily due to an
increase of approximately $0.5 million in
23
outside services related to marketing and advertising, which were part
of our planned increase in sales and marketing expenditures. This increase was partially offset by
decreases in payroll related expenses of approximately $0.2 million.
The
decrease of our sales and marketing expenses for the year ended February 29,
2004 compared to the year ended February 28, 2003, is primarily due to our
restructuring efforts in connection with the sale of our Asset Management
software business in May 2002, which reduced expenditures on salaries and
marketing, and eliminated rent on closed offices for a total of approximately
$1.8 million in reduced expenses. The decrease is also attributable to
reduced stock-based employee compensation expense of $0.5 million.
We
plan to slightly reduce our sales and marketing expenses in our fiscal year
ending February 28, 2006, as compared with our fiscal year ended February 28,
2005, primarily by reducing expenses associated with marketing and branding
programs. We plan to increase the
efficiency of our marketing efforts by emphasizing lead generation through
internal telemarketing and by leveraging existing business alliances. The
previous two sentences are forward-looking statements and actual results could
differ materially from those anticipated, particularly in light of our ongoing
strategic review of our product and marketing direction. We cannot give assurance that any new efforts
to improve our marketing will result in additional sales or revenues.
Product
Development Expenses
Product
development expenses primarily consist of personnel, consulting, software and
related maintenance, equipment depreciation expense and allocated overhead
costs. Costs related to research, design and development of products and
services have been charged to product development expense as incurred.
The
decrease in our product development expenses for the year ended February 28,
2005, compared to those for the year ended February 29, 2004, is due
primarily to a decrease in software and equipment depreciation expense of
approximately $0.7 million, as many fixed assets have become fully depreciated
during the year. The decrease is also due to a one-time expense of
approximately $0.1 million related to lease buyouts that occurred during the
fiscal year ended February 29, 2004.
The
decrease in our product development expenses for the year ended February 29,
2004, compared to those for the year ended February 28, 2003, is primarily
due to our restructuring efforts in connection with the sale of our Asset
Management software business in May 2002, which eliminated expenditures on
salaries and consulting fees for Asset Management software development
personnel of $0.4 million, reduced software and related maintenance and
equipment depreciation expense through the disposal or retirement of software
and equipment of $1.7 million, and reduced stock-based employee
compensation expense of $0.3 million.
We
anticipate continuing to invest in additional functionality for our
SubscribeNet service and underlying proprietary software. However, we expect
those investments to fluctuate over time, and expect our product development
expenses to fluctuate accordingly. We expect total product development
expenditures to be approximately the same in fiscal year 2006 as they were in
fiscal year 2005. The previous sentences are forward-looking statements that
are subject to risks and uncertainties, and actual results could differ
materially from those anticipated (see “Risk Factors” beginning on page 31
below). We cannot give assurance that our product development efforts will
result in new or improved products, features or functionality or that the
market will accept the improvements to existing or new products, features or
functionality developed.
General
and Administrative Expenses
General
and administrative expenses consist primarily of compensation for
administrative and executive personnel, fees for professional services,
uncollectible account activity and certain allocated overhead costs.
24
The
increase in our general and administrative expenses for the year ended February 28,
2005, is primarily due to an increase of approximately $0.3 million in outside
consulting services and temporary costs associated with preparation for
evaluation of our internal controls to enable management to report on our
internal control over financial reporting as required by Section 404 of
the Sarbanes-Oxley Act of 2002. In
addition, we recognized a reduced recovery of $0.1 million for accounts
previously written off as described below.
A
significant part of the increase in our general and administrative expenses for
the year ended February 29, 2004, is the reduction in recovery of accounts
previously written off, as compared to our higher recovery of such accounts
during the year ended February 28, 2003. During our 2001 fiscal year, we
wrote off accounts that were deemed to be uncollectible at that time. However,
we continued to pursue collection efforts and ultimately succeeded in
recovering amounts from that time period. During the year ended February 28,
2003, we recovered approximately $1.3 million more than in the year ended February 29,
2004. These decreased recoveries were partially offset by reductions in payroll
related expenses of $0.4 million and external personnel costs and state
administrative fees of $0.4 million for the year ended February 29, 2004.
We
expect total general and administrative expenses in fiscal year 2006 to
approximate fiscal year 2005 levels. The previous sentence is a forward-looking
statement and actual results could differ materially from those anticipated.
Restructuring
and Sale of Asset Management Software Business
In
May 2002, we sold substantially all of the assets related to our Asset
Management software business to Computer Associates International, Inc.
for approximately $9.5 million in cash. In connection with this sale, our July 2001
agreement with Computer Associates for its resale of our Argis suite of
software products was terminated. In addition, as part of that asset sale, we
assigned to Computer Associates our May 2001 agreement with Corporate
Software (now Software Spectrum) for its resale of our Argis suite of software
products. Because of the asset sale, Software Spectrum has the right to
terminate that agreement. If it does so, all of the shares subject to the
warrant that we issued to Software Spectrum in May 2001 will immediately
become exercisable. We recorded the fair value of the warrant as prepaid
distribution costs and were recognizing it as a reduction of revenue over the
lesser of a ratable charge over the 24-month term of the agreement with
Software Spectrum or the period it took Software Spectrum to generate revenue
to Intraware of $1.6 million from Software Spectrum’s resale of our asset
management software. As a result of the asset sale, we recorded the remaining
unamortized prepaid distribution costs of $936,000 as a reduction to revenue
during the year ended February 28, 2003.
We recorded the total
proceeds from the sale of $9.5 million, less the book value of transferred
equipment, intangible assets, goodwill, deferred revenue, and transaction
costs, based on their respective carrying values at the sale date, as a gain on
sale of assets in the year ended February 28, 2003.
We determined the calculation
of the gain on the sale as follows (in thousands):
|
Total consideration
|
|
$
|
9,500
|
|
|
Net book value of equipment, intangible
assets and deferred revenue
|
|
(6,536
|
)
|
|
Transaction costs
|
|
(308
|
)
|
|
Gain on sale
|
|
$
|
2,656
|
|
In connection with our
disposition of the Asset Management software business, we announced a
restructuring and workforce reduction to reduce our operating expenses. We
recorded a charge of $1.8 million relating to this restructuring and the
impairment of assets during the three months ended May 31, 2002.
The impairment of assets
includes the write-off of approximately $403,000 in prepaid licenses that were
held for resale. The restructuring charge consisted of approximately $345,000
for severance and
25
benefits relating to the involuntary termination of 14 employees who
were not hired by Computer Associates. We terminated an additional 33
employees, all of whom were based in North America. These 33 terminated
employees were all hired by Computer Associates and therefore received no
severance payments. Of the 47 terminated employees, 22 were in Sales and
Marketing, 10 were in Product Development and 15 were directly involved in our
product support. We also closed our Pittsburgh, Pennsylvania office and various
satellite offices.
We accrued for lease and
related costs of approximately $983,000, principally pertaining to the
estimated future obligations of non-cancelable lease payments for excess
facilities that were vacated due to our workforce reductions. We also
recognized $63,000 relating to other restructuring expenses. Due to changes in
management’s estimates relating to the restructuring during the three months
ended August 31, 2002, we recognized an additional expense of $106,000 pertaining
to the estimated future obligations of non-cancelable lease payments for excess
facilities that were vacated due to our workforce reductions. In addition, we
did not incur projected severance and benefits of $106,000 and reduced the
reserve accordingly. During the three months ended February 28, 2003, we
agreed with the landlord to terminate our Pittsburgh, Pennsylvania lease and
realized a savings of approximately $152,000 that would otherwise have been
payable as rent under the lease.
In our December 2000
restructuring, we closed our Fremont, California office and assigned our lease
to a new tenant while acting as guarantor for that tenant. In May 2002,
the new tenant defaulted on its lease. During the three months ended November 30,
2002, we made a cash payment of approximately $214,000 to terminate this lease.
The following table sets
forth an analysis of the components of the restructuring and impairment of
assets charges recorded in the first quarter of fiscal year 2003 and subsequent
adjustments and payments made against the reserve (in thousands):
|
|
|
Severance and
benefits
|
|
Excess lease
and
related costs
|
|
Impairment of
assets
|
|
Other costs
|
|
Total
|
|
|
May 23, 2002 restructuring
|
|
$
|
345
|
|
$
|
983
|
|
$
|
403
|
|
$
|
63
|
|
$
|
1,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid
|
|
(239
|
)
|
(858
|
)
|
—
|
|
—
|
|
(1,097
|
)
|
|
Non-cash charges
|
|
—
|
|
(69
|
)
|
(403
|
)
|
(63
|
)
|
(535
|
)
|
|
Provision adjustment
|
|
(106
|
)
|
(46
|
)
|
—
|
|
—
|
|
(152
|
)
|
|
Reserve balance at February 28, 2003
|
|
—
|
|
10
|
|
—
|
|
—
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid
|
|
—
|
|
(10
|
)
|
—
|
|
—
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve balance at February 29, 2004
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
As of February 29,
2004, we have settled all liabilities associated with our May 2002
restructuring and the sale of our Asset Management software business, subject
to the ongoing indemnification obligation discussed in Note 5 to our “Notes
to Consolidated Financial Statements” in Item 8 below.
During
the year ended February 28, 2005, we realized a payroll tax refund for
overpaid payroll taxes of approximately $75,000. These overpaid payroll
taxes related to supplemental unemployment compensation benefits for
involuntarily terminated employees during our restructuring events in December 2000,
August 2001 and May 2002. As of February 28, 2005, we
believe all transactions relating to past restructuring events have been
recognized.
Interest
Expense
For the year ended February 28,
2005, interest expense was $0.1 million, a decrease from $0.2 million
for the year ended February 29, 2004, and a decrease from
$2.7 million for the year ended
26
February 28, 2003.
Interest
expense primarily relates to obligations under capital leases and notes
payable.
The
decrease in interest expense for the year ended February 28, 2005 and February 29,
2004, is primarily due to the reduction and elimination of the principal
balance on our capital lease obligations. In August 2003, we
replaced certain capital leases with a note payable bearing a lower interest
rate (see Note 8 to our “Notes to Consolidated Financial Statements” in Item 8
below, and “Liquidity and Capital Resources” below).
Interest
and Other Income and Expenses, Net
For the year ended February 28,
2005, interest and other income and expenses, net was a $139,000 credit, an
increase from an $82,000 credit for the year ended February 29, 2004, and
decrease from a $544,000 credit for the year ended February 28, 2003.
Interest and other income
and expenses, net primarily relates to interest earned on our investment
balances. The increase in interest and other income and expenses, net for
the year ended February 28, 2005, is primarily the result of increased
rate of return on our cash balances from the prior year. The increase in
interest and other income and expenses, net for the year ended February 29,
2004, is primarily due to the fact that we did not incur any credits to adjust
the warrants we issued in connection with our August 31 and September 20,
2001, debt issuances, and our May 24, 2002, common stock financing to fair
value. During the year ended February 28,
2003, we recognized a credit of $0.5 million to adjust warrants to fair value.
Income
Taxes
From inception through
February 28, 2005, we incurred net losses for federal and state tax purposes
and have not recognized any tax provision or benefit. As of February 28, 2005, we had approximately
$88 million of federal and $47 million of state net operating loss
carryforwards available to offset future taxable income, which expire in
varying amounts between fiscal year 2006 and 2025. The Tax Reform Act of 1986
limits the use of net operating losses and tax credit carryforwards in certain
circumstances where changes occur in the stock ownership of a company. Because
of cumulative ownership changes in the past, the federal and state loss
carryforwards have been reduced by the amount of the net operating loss
carryforwards that will expire. Because of these cumulative ownership changes,
federal loss carry forwards totaling approximately $44 million and state loss
carry forwards totaling approximately $22 million are subject to limitation. At
February 28, 2005, $44 million and $25 million of federal and state net
operating losses, respectively, are available without limitation to offset
future taxable income. Should there be a change of ownership in the future, the
available net operating losses may be further limited. Given our limited operating history, losses
incurred to date and the difficulty in accurately forecasting our future
results, management does not believe that the realization of the related
deferred income tax asset meets the criteria required by generally accepted
accounting principles. Accordingly, we have recorded a 100% valuation
allowance. (See Note 4 to our “Notes to Consolidated Financial Statements”
in Item 8 below.)
Liquidity
and Capital Resources
The following table presents
our liquidity position at the end of our fiscal years 2005 and 2004 (in
thousands):
|
|
|
For the Years Ended
|
|
|
|
|
February 28,
2005
|
|
February 29,
2004
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
9,463
|
|
$
|
11,804
|
|
|
Working capital
|
|
$
|
7,247
|
|
$
|
8,575
|
|
|
Net cash used in operating activities
|
|
$
|
(2,290
|
)
|
$
|
(1,455
|
)
|
|
Net cash provided by financing activities
|
|
$
|
461
|
|
$
|
6,979
|
|
|
Net cash used in investing activities
|
|
$
|
(512
|
)
|
$
|
(561
|
)
|
During
the year ended February 28, 2005 we used $2.3 million in cash to
support our operations,
27
up from $1.4 million used in the prior fiscal year. This increase was
primarily due to approximately $0.6 million in additional marketing related
activities and approximately $0.2 million in payments made for outside
consulting services costs associated with preparation for evaluation of our
internal controls as described above.
Our overall net cash used in operating activities primarily resulted
from our net loss for the year and the timing of our payments to vendors and
receipts from customers. The majority of
our operating costs continue to relate to employee payroll and related expenditures. The net cash used in operations primarily
came from our existing cash and cash equivalents, and partially from the
proceeds we received upon the exercise of stock options and warrants and sales
of stock under our employee stock purchase plan. We expect to continue to improve our cash
used in operations by increasing our billings to customers as more end-users
are added to our SubscribeNet service.
The previous sentence is a forward-looking statement that is subject to
risks and uncertainties, and actual results could differ materially from those
anticipated (see “Risk Factors” beginning on page 31 below). Our ability
to improve our uses of cash and generate positive cash flows in future periods
will largely depend on our ability to increase the number of customers of our
SubscribeNet service while increasing existing subscriptions through strong
contract renewals. It is also important for us to increase our current level of
sales through our Software Spectrum sales alliance, and continue to control our
operational and customer support costs in future periods.
Our
net cash provided by financing activities was approximately $0.5
million for the year ended February 28, 2005. Most of this
amount came from the issuance of approximately 0.9 million shares of common
stock pursuant to warrant and stock option exercises and employee stock
purchases for approximately $1.1 million.
In addition we made draws on our existing equipment advance agreement in
the amount of $0.4 million (see below). The proceeds from these stock
issuances were offset by payments on our notes payable of approximately $1.1
million (see below).
As
of February 28, 2005, we carry an agreement with a bank under which we
previously issued a note payable for proceeds of approximately
$2.0 million and obtained access to $500,000 for equipment advances. The
note payable bears an annual interest rate of the greater of 1% in excess of
the bank’s prime rate (5.5% at February 28, 2005) or 5.25%. In August 2004,
the initial equipment advance agreement, with a balance of $360,000, became
payable over two years with the same interest rate as the note payable
mentioned previously. Also, in August 2004,
we entered into second equipment advance agreement which allows us to draw up
to $500,000, through August 2005, for equipment purchases at the same
interest rate that applies to the note payable.
After August 2005, the second equipment advance will become payable
over two years with the same interest rate as the first equipment advance.
Under
the agreement for the note payable and equipment advance agreements, all
borrowings are collateralized by a senior security interest in substantially
all of our assets. The agreement also requires us to comply with financial
covenants, with which we complied as of February 28, 2005. The agreement further
restricts us from incurring or assuming additional indebtedness outside of
these note payable and equipment advances, excluding trade payables and certain
other liabilities incurred in the ordinary course of business.
Our
net cash used in investing activities during the year ended February 28,
2005, included $0.5 million for our purchase of fixed assets. We
originally paid for these equipment purchases from our cash and cash
equivalents, but later drew down $0.4 million under the above-mentioned equipment
advance agreements to finance these purchases. We used these fixed asset
purchases primarily to upgrade and expand our SubscribeNet infrastructure and
corporate information systems. We expect to continue to use and renew our
equipment advances to finance additional fixed asset purchases.
We
believe our existing cash and cash equivalents, together with any cash
generated from operations, will be sufficient to fund our operating activities,
capital expenditures and financing arrangements for the foreseeable future.
However, if our SubscribeNet business fails to grow significantly or declines
from its current level, we could be forced to seek additional capital to fund
our operations. Such additional capital
may not be available on reasonable terms, if at all, especially if we are still
out of compliance with the Nasdaq $1 minimum bid price requirement at the time
we are seeking to raise capital.
At
February 28, 2005, we did not have any other relationships with
unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities,
28
which would have been established for the purpose of facilitating
off-balance sheet arrangements or other contractually narrow or limited
purposes. As such, we are not materially exposed to any financing, liquidity,
market or credit risk that could arise if we had engaged in such relationships.
The following table
summarizes our debt and lease obligations at February 28, 2005, and the
effect such obligations are expected to have on our liquidity and cash flow in
future periods (in thousands). This table provides information through our year
ending February 29, 2008, as we do not have any debt or lease obligations
beyond that point.
|
|
|
Payments due by period
|
|
|
|
|
2006
|
|
2007
|
|
2008
|
|
Total
|
|
|
Long-term
debt
|
|
$
|
857
|
|
$
|
263
|
|
$
|
95
|
|
$
|
1,215
|
(a)
|
|
Operating leases
|
|
287
|
|
2
|
|
1
|
|
290
|
(b)
|
|
|
|
$
|
1,144
|
|
$
|
265
|
|
$
|
96
|
|
$
|
1,505
|
|
(a) This amount includes approximately $46,000 in interest.
(b) This amount excludes approximately $281,000, $569,000, $579,000,
$597,000, and $300,000 per year for the periods of 2006 through 2010, which
would become due and payable if we do not exercise our right to exit our
operating lease for our Orinda office.
As of February 28,
2005, our Series A redeemable convertible preferred stock entitled its
holders to a liquidation preference of $1.0 million in the event of
Intraware’s liquidation.
Recent
Accounting Pronouncements
29
In
December 2004, the FASB issued SFAS No. 123 (Revised 2004) “Share-Based
Payment” (“SFAS No. 123R”). SFAS No. 123R addresses all forms of
share-based payment (“SBP”) awards, including shares issued under employee
stock purchase plans, stock options, restricted stock and stock appreciation
rights. SFAS No. 123R will require us to expense SBP awards with
compensation cost for SBP transactions measured at fair value. The FASB
originally stated a preference for a lattice model because it believed that a
lattice model more fully captures the unique characteristics of employee stock
options in the estimate of fair value, as compared to the Black-Scholes model
which we currently use for our footnote disclosure. The FASB decided to remove
its explicit preference for a lattice model and not require a specific
valuation methodology. The Securities and Exchange Commission (“SEC”) has
amended the deadline to adopt SFAS 123R. Accordingly, we will be required to
adopt the new accounting provisions beginning in our first quarter of our
fiscal year ending February 28, 2007. In addition, the SEC, in March 2005,
issued Staff Accounting Bulletin No. 107 (“SAB 107”). SAB 107 provides guidance regarding the
interaction between SFAS No. 123R and SEC rules and regulations. We expect the adoption of SFAS No.123R
and SAB 107 will have a material adverse impact on our results of operations
and loss per share. We are currently in
the process of evaluating the extent of such impact.
30
RISK FACTORS
You
should carefully consider the risks described below before making a decision to
invest in our common stock. The risks and uncertainties described below are not
the only ones facing Intraware. Additional risks and uncertainties not presently
known to us or that we do not currently believe are important to an investor
may also harm our business operations. If any of the events, contingencies,
circumstances or conditions described in the following risks actually occur,
our business, financial condition or our results of operations could be
seriously harmed. If that occurs, the trading price of our common stock could
decline, and you may lose part or all of your investment.
Revenues to us under our Sales and Marketing Services
arrangement with Software Spectrum are likely to decline over the long term.
Also, any termination of our relationship with Software Spectrum in the near
term, without an adequate replacement, would cause a substantial decrease in
our revenues.
Under
our June 2001 agreement with Software Spectrum, we provide Sales and
Marketing Services to Software Spectrum to assist in its resale and marketing
of Sun and Websense software licenses and maintenance. Software Spectrum shares
with us a portion of its gross profit from resales of Sun and Websense software
licenses and maintenance, and reimburses us for a substantial portion of our
cost of maintaining a team dedicated to sales and marketing of that software
and maintenance. This contract accounted for substantially all of our Alliance
and reimbursement revenues, a significant portion of our Online services and
technology revenues, and more than 10% of our total revenues in our 2005 fiscal
year. While this agreement covers resales of Sun and Websense software and
maintenance, most of the sales under the agreement are of Sun software and
maintenance. In recent years, sales and market share of those Sun
software product lines have generally declined. If this trend continues,
revenues to us under this contract are likely to decrease over the long term. In
addition, Sun may decrease the amount of gross profit it allows Software
Spectrum to retain from customer renewals of Sun software maintenance, which
would in turn reduce the amount of gross profit we would receive from such
maintenance renewals. Currently most of
our Alliance and reimbursement revenues and a portion of our Online
services and technology revenues
are derived from Sun maintenance renewals. Additionally, the term of that agreement will
expire in June 2005, is renewable for subsequent one-year terms, and may
be terminated without cause by either party on 90 days’ notice. It is possible
that Software Spectrum will terminate this agreement without cause or will
choose not to renew the agreement at any renewal point. It is also possible
that Sun and/or Websense will choose to stop permitting Software Spectrum to
resell their software. Any termination or non-renewal of our agreement with
Software Spectrum, or termination of Software Spectrum’s rights to resell Sun software,
would likely cause a substantial and immediate decrease in our revenues.
The loss of one or more of our key customers or partners
could cause our revenue growth to slow or cause our revenues to decline.
A
substantial amount of the revenues from our SubscribeNet service come from a
relatively small number of companies. These include software providers to whom
we provide our SubscribeNet service, as well as Software Spectrum, to whom we
provide both our SubscribeNet service and sales and marketing services. Our
contracts with most of these companies are subject to renewal or cancellation
annually. If any of these companies elected to cancel their agreements with us,
our revenue growth would likely slow or our revenues might decline. Either of these types
of events could reduce our sales through loss of existing customers, or reduce
our margins through increased price competition.
Mergers and acquisitions in the technology sector could harm
us by causing cancellation of customer contracts where our customers are
acquired, or by strengthening our competitors.
In
recent years, there has been an increase in mergers and acquisitions among
technology companies. This trend poses
risks for us. First, our customers are
technology companies, and any acquisitions of our customers could lead to
cancellation of our contracts with those customers by the acquiring
companies. This recently occurred when
Oracle Corporation notified us of its cancellation of our contract with our
customer PeopleSoft, Inc., after Oracle acquired PeopleSoft. (This
contract accounted for less than 3% of our total annual revenues for our 2005
fiscal year.) Second, our competitors also are technology companies. Any acquisitions of other companies by our
competitors, or acquisitions of our competitors by other companies, are likely
to result in stronger companies competing against us.
Our prospective customers may delay purchasing, and our new
customers may delay implementing, our SubscribeNet service while they assess
their internal controls in preparation for compliance with Section 404 of
the Sarbanes-Oxley Act of 2002. This may
delay our revenue growth.
Section 404
of the Sarbanes-Oxley Act of 2002 requires most publicly traded companies to
include in their annual reports an assessment by management of the companies’
internal control structures and procedures for financial reporting, and an
attestation by the companies’ independent registered public accounting
31
firms
of that management assessment. To comply with this new requirement, many public
companies are preparing detailed documentation of their information technology
(“IT”) systems supporting their internal control structures and
procedures. To minimize their risk of error, these companies may be
reluctant to add new IT systems until their Section 404 assessments are
complete and have been filed with the SEC as part of their annual
reports. As a result, prospective purchasers of our SubscribeNet service
may delay completing their purchases of the service, and new SubscribeNet
customers may delay implementing the service, while they complete the Section 404
assessments over the next several months. This could, in turn, cause
delays in new sales of our SubscribeNet service and/or delays in recognition of
revenue from recent sales of our service.
We have a history of losses and negative cash flow, and we
have yet to achieve sustained profitability or positive cash flow.
We
have incurred significant losses since we were formed in 1996, and have yet to
achieve sustained profitability or positive cash flow. As of February 28,
2005, we had an accumulated deficit of approximately $156 million. Also,
with the exception of our quarter ended November 30, 2002, we have not
achieved positive cash flow from operations since our formation in 1996. Our
operating history makes it difficult to evaluate whether or when we will be
able to achieve sustained profitability or positive cash flow in the future.
Competition from other digital delivery service providers,
and potential customers’ development of their own digital delivery systems,
could limit our revenue growth and reduce our gross margins.
The
market for selling digital delivery services is highly competitive. Some
of our competitors have longer operating histories, greater financial,
technical, marketing and other resources, broader product and service
offerings, better name recognition, and a larger installed base of customers
than we do. Some of our competitors also have well-established relationships
with our potential customers and with third-party information technology or
consulting firms that help market our competitors’ services. We expect
competition to intensify as current competitors expand and improve their
service offerings and new competitors enter the market. In addition, our
current and potential customers are primarily information technology companies
with strong software development expertise. When considering their alternatives
for implementing a system for electronic delivery of software or license keys,
these companies sometimes elect to develop such systems in-house. While we
believe our competitive position is strong against both external competitors
and in-house development, we have at times experienced reduced prices, reduced
gross margins and lost sales as a result of such competitive factors. Such
competition is likely to intensify, which could limit the growth of our
revenues or gross margins.
32
Although our subscription-based sales model for our
SubscribeNet service limits the volatility of our Online services and
technology revenue, other factors may cause our operating results, and
therefore our stock price, to fluctuate.
Our
SubscribeNet service fees, which comprise most of our Online services and
technology revenues, are recognized ratably over contract terms of generally
one year, thereby limiting the quarter-to-quarter volatility of those revenues.
Nevertheless, certain factors may cause our Online services and
technology revenues to fluctuate. In addition, our Alliance and
reimbursement revenues and overall operating results are subject to substantial
quarterly and annual fluctuation. In addition to the other risk factors
described in this section, factors that could cause such fluctuation include:
• Fluctuations in demand for the software we
resell jointly with Software Spectrum, which is the basis for most of our
Alliance and reimbursement revenue and a portion of our Online services
and technology revenue;
• Deferral of SubscribeNet revenue
recognition due to delays by customers in implementing the SubscribeNet
service, due to new sales involving extensive implementations, or due to
contract modifications adding future deliverables;
• Lengthening of the sales cycle for our
SubscribeNet service due to macroeconomic or other factors;
• Actual events, circumstances, outcomes,
and amounts differing from judgments, assumptions, and estimates used in
determining the values of certain assets (including the amounts of related
valuation allowances), liabilities and other items reflected in our
consolidated financial statements or unaudited interim consolidated financial
information; and
• Changes in accounting rules, such as
recording expenses for employee stock option grants.
As
a consequence, operating results for a particular future period are difficult
to predict, and prior results are not necessarily indicative of results to be
expected in future periods. Any of the foregoing factors, or any other factors
discussed elsewhere herein, could have a material adverse effect on our
business, results of operations, or financial condition that could adversely
affect our stock price.
If the
bid price of our stock does not close at or above $1.00 for 10 consecutive
business days before August 22, 2005, or before February 22, 2006 if
our compliance period is extended, our stock may be delisted from the Nasdaq
SmallCap Market.
On February 23, 2005,
we received a letter from The Nasdaq Stock Market indicating that, for 30
consecutive business days, the bid price of our stock had closed below the
minimum $1.00 per share requirement for continued listing on the Nasdaq
SmallCap Market and that, in accordance with NASD rules, we had 180 calendar
days to regain compliance. The letter also stated that if, at any time
before August 22, 2005, the bid price of our stock closes at $1.00 per
share or more for a minimum of 10 consecutive business days, Nasdaq will notify
us that we comply with the listing requirements. If we do not regain compliance by August 22,
2005, we may be granted an additional 180-day period (until February 22,
2006) to regain compliance if we meet The Nasdaq SmallCap Market initial
listing criteria other than the minimum bid price requirement. If we do not
regain compliance within the allotted compliance period (including any
extensions that may be granted by Nasdaq), Nasdaq staff will notify us that our
stock will be delisted from The Nasdaq SmallCap Market. At that
time, we would be entitled to appeal the staff’s determination to a
Nasdaq Listing Qualifications Panel. We are currently reviewing what
actions we should take to regain compliance with the minimum bid price rule.
If our stock were delisted,
it would become harder to buy and sell. Further, our stock could then
potentially be subject to what are known as the “penny stock”
33
rules, which place additional requirements on broker-dealers
who sell or make a market in such securities. Consequently, if we were removed
from the Nasdaq SmallCap Market, the ability or willingness of broker-dealers
to sell or make a market in our stock might decline. As a result, it could
become more difficult for our shareholders to sell their shares of our stock.
The market for our technology delivery model and hosted
digital delivery services is immature and volatile, and if it does not develop
or develops more slowly than we expect, our business will be harmed.
The
market for hosted digital delivery services is relatively new and unproven, and
it is uncertain whether these services will achieve and sustain high levels of
demand and market acceptance. Our success will depend to a substantial extent
on the willingness of software companies, large and small, to increase their
use of hosted digital delivery services. Many software companies have invested
substantial personnel and financial resources to develop their own digital
delivery systems and therefore may be reluctant or unwilling to migrate to a
remotely hosted service. In addition, some software companies have adopted
automatic update, or “phone home,” technology for delivering software updates,
whereby an end-user’s computer automatically contacts the software company’s
server to check whether updates are available and, if so, downloads and
installs those updates. This method for delivering software updates could
be viewed by our potential and existing customers as an alternative to our
digital delivery technology, and therefore any increased adoption of this automatic
update technology could hurt our business and results of operations. Further,
some software companies may be reluctant to use hosted digital delivery
services because they are concerned about the security capabilities of these
services. If software companies do not perceive the benefits of hosted digital
delivery services, then the market for these services may develop more slowly
than we expect, which would significantly adversely affect our operating
results. In addition, in this unproven market, we have limited insight into
trends that may develop and affect our business. We may make errors in
predicting and reacting to relevant business trends, which could harm our
business.
The technological and functional requirements we must meet to
stay competitive are subject to rapid change. If we are unable to quickly adapt
to these changes and meet the demands of our current and potential customers,
we will likely lose sales and market share and our revenue growth will be
limited.
We
market primarily to software providers, who generally demand that a service
like ours meet high technological and functional standards. To remain
competitive in this market and meet the demands of current and prospective
customers, we must continually adapt and upgrade our technology and
functionality. If we do not respond quickly enough to changing industry
standards or the demands of customers and potential customers, we will likely
lose sales and market share to competitors and our growth prospects will be
limited. In addition, we could incur substantial costs to modify our services
or infrastructure in order to adapt to changing standards and demands. If we
incur such costs but our sales fail to increase commensurately, we may not be able to achieve sustained
profitability and positive operating cash flow.
Defects in our SubscribeNet service could diminish demand for
the service and subject us to substantial liability.
Because
our service is complex, it may have errors or defects that users identify after
they begin using it, which could harm our reputation and our business.
Internet-based services frequently contain undetected errors when first
introduced or when new versions or enhancements are released. Despite taking
precautions to avoid errors, we have from time to time found defects in our
service and new errors in our existing service may be detected in the future.
Since our customers use our service for important aspects of their business,
any errors, defects or other performance problems with our service could hurt our
reputation and may damage our customers’ businesses. If that occurs, customers
could elect not to renew their agreements with us, could be eligible for
credits under our service level agreements, and could delay or withhold payment
to us. We could also lose future sales, or customers may make warranty
claims against us, which could result in an increase in our provision for
doubtful accounts, an increase in collection cycles for accounts receivable or
the expense and risk of litigation.
34
Interruptions or delays in service from our third-party Web
hosting facilities could impair the delivery of our service and harm our
business.
We
provide our service through computer hardware that is currently located in a
third-party Web hosting facilities in Santa Clara, California operated by
SAVVIS Communications, and in Ireland operated by Data Electronics. We do not
control the operation of these facilities, and they are subject to damage or
interruption from earthquakes, floods, fires, power loss, telecommunications
failures and similar events. While physical security measures are in place,
they are also subject to break-ins, sabotage, intentional acts of vandalism and
similar misconduct. Despite precautions taken at the facilities, the occurrence
of a natural disaster, a decision to close a facility without adequate notice
or other unanticipated problems at a facility could result in lengthy
interruptions in our service. In addition, the failure by either facility to
provide our required data communications capacity could result in interruptions
in our service. We have an agreement with SBC E-Services, an affiliate of SBC
Communications, Inc., to provide access to a geographically remote
disaster recovery facility that would provide us access to hardware, software
and Internet connectivity in the event the SAVVIS facility becomes unavailable.
Even with this disaster recovery arrangement, however, our service would be
interrupted during the transition. Any damage to, or failure of, our systems
could result in interruptions in our service. Interruptions in our service may
reduce our revenue, cause us to issue credits or pay penalties, cause customers
to terminate their subscriptions and adversely affect our renewal rates. Our
business will be harmed if our customers and potential customers believe our
service is unreliable.
Viruses may hinder acceptance of Internet-based digital
delivery, which could in turn limit our revenue growth.
The
proliferation of software viruses is a key risk that could inhibit acceptance
by information technology professionals of Web-based delivery of digital goods.
Any well-publicized transmission of a computer virus by us or another
company using digital delivery could deter information technology professionals
from using and deter software providers from outsourcing digital delivery,
thereby adversely affecting our business. Our SubscribeNet service enables our
customers to upload their software products directly onto our systems for downloading
by their end-users. Our systems automatically scan our customers’ software
products for known computer viruses on an ongoing basis while they are on our
systems. However, it is possible that, in spite of those periodic virus scans,
our system could transmit the virus to one or more end-users. Any such virus
transmission could result in disputes, litigation and negative publicity that
could adversely affect our business.
If our security measures are breached and unauthorized access
is obtained to a customer’s data, our service may be perceived as not being
secure and customers may curtail or stop using our service.
Our
service involves the storage and transmission of customers’ proprietary
information, and security breaches could expose us to a risk of loss of this
information, litigation and possible liability. If our security measures are
breached as a result of third-party action, employee error, malfeasance or
otherwise, and, as a result, someone obtains unauthorized access to one of our
customers’ data, our reputation will be damaged, our business may suffer and we
could incur significant liability. Because techniques used to obtain
unauthorized access or to sabotage systems change frequently and generally are
not recognized until launched against a target, we may be unable to anticipate
these techniques or to implement adequate preventative measures. If an actual
or perceived breach of our security occurs, the market perception of the
effectiveness of our security measures could be harmed and we could lose sales
and customers.
We may raise additional capital to fund acquisitions, product
development or general operations. Any such capital financing would dilute our
shareholders’ investments.
We
may raise additional capital in the future through private or public offerings
of stock, or through other means. The purposes of any such financing would be
to increase our cash reserves for potential use in acquiring other businesses,
product development activities, funding our operations and
35
generally
strengthening our balance sheet. Any such additional financing would likely
dilute the investments of our current shareholders.
Additional government regulations may harm demand for our
services and increase our costs of doing business.
Our
business has benefited from the tax laws of states in which purchases of
software licenses are not taxable if the software is received only
electronically. Some states currently experiencing revenue shortfalls are considering
whether to change their laws to broaden the taxability of transactions executed
over the Internet. Any new imposition of taxes on sales of software licenses,
where the software is received electronically, could substantially harm demand
for our services and thereby materially adversely affect our business,
operating results and financial condition. We have also benefited from
implementing our services in Ireland, which offers tax advantages to software
companies distributing their software from Ireland to other European countries.
Any regulatory change in Ireland or elsewhere that diminishes those advantages
could harm our business. Other changes in government regulations, in areas such
as privacy and export compliance, could also require us to implement changes in
our services or operations that increase our cost of doing business and thereby
hurt our financial performance.
Claims by third parties for intellectual property
infringement could force us to stop selling our services, force us to pay royalties,
and force us to indemnify our customers.
Our
business involves a high risk that we will be the target of intellectual
property infringement claims. These claims could take a number of forms,
including:
• Claims by other technology companies alleging
that current or future components of our digital delivery service or related
services infringe their intellectual property rights;
• Claims by our customers’ competitors
alleging that our customers’ software, which we store and electronically
deliver for our customers, infringes those competitors’ intellectual property
rights (our customers would typically be required to defend and indemnify us
against such claims, but the claims could nevertheless disrupt our business);
or
• Claims by our customers that we delivered
their software to unauthorized third parties, thereby infringing our customers’
intellectual property rights.
Industry
consolidation is increasing the risk that we will become a target of the types
of claims described in the first two bullets above. Consolidation among
companies providing digital delivery, licensing, e-commerce and related
technologies is resulting in more direct competition among the surviving
companies in that segment, heightening the risk of intellectual property infringement
claims among those companies,
including us. Similarly, consolidation in the enterprise software
industry heightens the risk of intellectual property infringement claims among
the companies remaining in that industry, including most of our customers.
These
intellectual property claims could be made for patent, copyright or trademark
infringement or for misappropriation of trade secrets. They could be made
directly against us, or indirectly through our contractual indemnification
obligations to our customers and channel partners. Any claims could
result in costly litigation and be time-consuming to defend, divert management’s
attention and resources, or cause delays in releasing new or upgrading existing
services. Royalty or licensing agreements, if required, may be available only
on onerous terms, if at all. Although we carry general liability
insurance, our insurance may not cover all potential claims or may not be
adequate to protect us from all liability that may be imposed.
We
believe we own the rights in, or have the required rights to use, our
SubscribeNet technology. However, there can be no assurance that this
technology does not infringe the rights of third parties. In addition, we
take steps to verify that end-users who download our customers’ software
through our SubscribeNet service are entitled to deploy and use that software.
However, there can be no assurance that
36
this
verification procedure will help us defend against claims by, or protect us
against liability to, our customers whose software is downloaded.
We
are aware that certain other companies are using the name “Intraware” as a
company name or as a trademark or service mark. While we have received no
notice of any claims of trademark infringement from any of those companies, we
cannot assure you that these companies may not claim superior rights to “Intraware”
or to other marks we use.
If our export compliance system fails to prevent unauthorized
exports of our customers’ software, we could be sanctioned by the U.S.
government.
Through
our SubscribeNet service we globally distribute software containing high
encryption and other features restricted by U.S. laws and regulations from
exportation to certain countries, types of recipients, and specific end-users.
Our SubscribeNet solution incorporates automated procedures to help ensure that
the software we deliver electronically is not downloaded in violation of U.S.
export laws and regulations. However, these procedures may not prevent
unauthorized exports of restricted software in every case. If an unauthorized
export of software occurs through the SubscribeNet service and the U.S.
government determines that we violated the U.S. export laws or regulations, we
could be sanctioned under those laws or regulations. Sanctions include fines,
suspension or revocation of export privileges, and imprisonment.
If our key personnel left the company, our product
development, sales, and corporate management could suffer.
Our
future success depends upon the continued service of our executive officers and
other key technology, sales, marketing and support personnel. None of our
officers or key employees is bound by an employment agreement for any specific
term. If we lost the services of one or more of our key employees, or if one or
more of our executive officers or key employees decided to join a competitor or
otherwise compete directly or indirectly with us, this could have a significant
adverse effect on our business.
Financial Accounting Standards Board (“FASB”)’s adoption of
Statement 123 (Revised 2004) will cause, and changes to existing
accounting pronouncements or taxation rules or practices may cause,
adverse revenue fluctuations and affect our reported results of operations and
how we conduct our business.
In October 2004,
FASB adopted Statement 123 (Revised 2004), “Share-Based Payment,” which will
require us to measure compensation costs for all stock based compensation
(including stock options and our employee stock purchase plan) at fair value
and take a compensation charge equal to that value. The SEC has amended the deadline to adopt SFAS
No. 123R. As a result, we will be
required to adopt the provisions of SFAS No. 123R during the first quarter of
our fiscal year ending February 28, 2007.
Also, a change in accounting pronouncements or taxation rules or
practices can have a significant effect on our reported results and may even
affect our reporting of transactions completed before the change is effective.
Other new accounting pronouncements or taxation rules and varying
interpretations of accounting pronouncements or taxation practice have occurred
and may occur in the future. This change to existing rules, future changes, if
any, or the questioning of current practices may adversely affect our reported
financial results or the way we conduct our business.
Recent legislation, especially the Sarbanes Oxley Act of
2002, requires that we evaluate our internal controls, and while we believe
that we currently have adequate internal control procedures in place, this
exercise has no precedent available by which to measure the adequacy of our
compliance, and in addition it may also cause our operating expenses to
increase.
The
Sarbanes-Oxley Act of 2002, the California Disclosure Act and newly proposed or
enacted rules and regulations of the SEC and the National Association of
Securities Dealers impose new duties on us and our executives, directors,
attorneys and independent accountants. In order to comply with the
Sarbanes-Oxley Act and such new rules and regulations, we are evaluating
our internal controls systems to allow management to report on, and our
independent registered public accounting firm to attest to, our internal
controls. We are performing the system and process evaluation and testing (and
any necessary
37
remediation)
required in an effort to comply with the management certification and independent
registered public accounting firm attestation requirements of Section 404
of the Sarbanes-Oxley Act. As a result, we are incurring additional expenses
and diversion of management’s time and we may be required to hire additional
personnel as well as to use additional outside legal, accounting and advisory
services. Any of these developments could materially increase our operating
expenses and accordingly reduce our net income or increase our net losses.
While we anticipate being able to fully implement the requirements relating to
internal controls and all other aspects of Section 404 in a timely
fashion, we cannot be certain as to the outcome of our testing and resulting
remediation actions or the impact of the same on our operations since there is
no precedent available by which to measure compliance adequacy. If we are not
able to implement the requirements of Section 404 in a timely manner or
with adequate compliance, we may be subject to sanctions or investigation by
regulatory authorities, such as the SEC or The Nasdaq Stock Market and our
reputation may be harmed. Any such action could adversely affect our financial
results and the market price of our common stock.
Moreover,
our management, including our CEO and CFO, does not expect that our disclosure
controls or our internal controls will prevent all error and all 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. Our disclosure controls or procedures can be circumvented by the
individual acts of some persons, by collusion of two or more people or by
management override of the control. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur
and not be detected.
If we acquire any companies or technologies in the future,
they could prove difficult to integrate, disrupt our business, dilute
stockholder value and adversely affect our operating results.
We
may acquire or make investments in complementary companies, services and
technologies in the future. We are considerably smaller now than we were when
we made our past acquisitions, and therefore any new acquisitions or
investments could be more disruptive to our organization than in the past.
Acquisitions and investments involve numerous risks, including:
• difficulties in integrating operations,
technologies, services and personnel;
• diversion of financial and managerial
resources from existing operations;
• risk of entering new markets;
• potential write-offs of acquired assets;
• potential loss of key employees;
• inability to generate sufficient revenue
to offset acquisition or investment costs; and
• delays in customer purchases due to
uncertainty.
In
addition, if we finance acquisitions by issuing convertible debt or equity
securities, our existing stockholders may be diluted which could affect the
market price of our stock. As a result, if we fail to properly evaluate and
execute acquisitions or investments, our business and prospects may be
seriously harmed.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
At the end of fiscal year
2005, we had cash and cash equivalents of $9.5 million. We have not used
derivative financial instruments in our investment portfolio during fiscal year
2005. We place our
38
investments with high
quality issuers, by policy, in an effort to limit the amount of credit exposure
to any one issue or issuer. All of our
sales are in United States Dollars.
Our exposure to market risk
for changes in interest rates relates primarily to our cash and cash
equivalents portfolio. The effect of
changes in interest rates of +/-10% over a six-month horizon would not have a
material effect on the fair value of the portfolio. Any declines in interest rates over time will,
however, reduce our interest income.
ITEM
8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA.
Index
39
Report of
Pricewaterhouse LLP, Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
To the Board of
Directors and Stockholders
of Intraware,
Inc:
In our
opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of shareholders’ equity and of cash
flows present fairly, in all material respects, the financial position of
Intraware, Inc. and its subsidiaries at February 28, 2005 and February 29,
2004, and the results of their operations and their cash flows for each of the
three years in the period ended February 28, 2005 in conformity with accounting
principles generally accepted in the United States of America. These financial statements are the
responsibility of the Company’s management.
Our responsibility is to express an opinion on these financial
statements based on our audits. We
conducted our audits of these statements in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating
the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers
LLP
San Jose,
California
April 15, 2005
40
INTRAWARE, INC.
CONSOLIDATED
BALANCE SHEETS
(in thousands, except for per share amounts)
|
|
|
February 28,
2005
|
|
February 29,
2004
|
|
|
ASSETS
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
9,463
|
|
$
|
11,804
|
|
|
Accounts receivable, net
|
|
1,765
|
|
1,462
|
|
|
Cost of deferred revenue and prepaid
licenses and services
|
|
404
|
|
214
|
|
|
Other current assets
|
|
321
|
|
317
|
|
|
Total current assets
|
|
11,953
|
|
13,797
|
|
|
Cost of deferred revenue, less current
portion
|
|
70
|
|
43
|
|
|
Property and equipment, net
|
|
863
|
|
897
|
|
|
Other assets
|
|
80
|
|
33
|
|
|
Total assets
|
|
$
|
12,966
|
|
$
|
14,770
|
|
|
|
|
|
|
|
|
|
LIABILITIES, REDEEMABLE CONVERTIBLE
PREFERRED STOCK & STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
Notes payable
|
|
$
|
823
|
|
$
|
1,034
|
|
|
Accounts payable
|
|
464
|
|
577
|
|
|
Accrued liabilities
|
|
967
|
|
928
|
|
|
Deferred revenue
|
|
2,450
|
|
2,035
|
|
|
Related party deferred revenue
|
|
2
|
|
648
|
|
|
Total current liabilities
|
|
4,706
|
|
5,222
|
|
|
Deferred revenue, less current portion
|
|
164
|
|
295
|
|
|
Notes payable, less current portion
|
|
342
|
|
766
|
|
|
Total liabilities
|
|
5,212
|
|
6,283
|
|
|
Commitments and contingencies (Note 5)
|
|
|
|
|
|
|
Redeemable convertible preferred stock;
$0.0001 par value; 10,000 shares authorized:
|
|
|
|
|
|
|
Series A; 552 shares issued and
outstanding at February 28, 2005 and February 29, 2004, (aggregate
liquidation preference of $1,000 at February 28, 2005 and
February 29, 2004).
|
|
897
|
|
897
|
|
|
Total redeemable convertible preferred
stock
|
|
897
|
|
897
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
Common stock; $0.0001 par value; 250,000
shares authorized; 60,447 and 59,504 shares issued and outstanding at
February 28, 2005 and February 29, 2004, respectively.
|
|
6
|
|
6
|
|
|
Additional paid-in-capital
|
|
163,168
|
|
162,043
|
|
|
Accumulated deficit
|
|
(156,317
|
)
|
(154,459
|
)
|
|
Total stockholders’ equity
|
|
6,857
|
|
7,590
|
|
|
Total liabilities, redeemable convertible
preferred stock and stockholders’ equity
|
|
$
|
12,966
|
|
$
|
14,770
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
41
INTRAWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except for per share amounts)
|
|
|
For the Years Ended
|
|
|
|
|
February 28, 2005
|
|
February 29, 2004
|
|
February 28, 2003
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Online services and technology
|
|
$
|
7,816
|
|
$
|
6,768
|
|
$
|
6,872
|
|
|
Alliance and reimbursement
|
|
2,431
|
|
3,311
|
|
4,271
|
|
|
Related party online services and
technology
|
|
546
|
|
466
|
|
277
|
|
|
Software product sales
|
|
42
|
|
362
|
|
2,622
|
|
|
Total revenues
|
|
10,835
|
|
10,907
|
|
14,042
|
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
Online services and technology
|
|
3,009
|
|
2,339
|
|
2,385
|
|
|
Alliance and reimbursement
|
|
1,523
|
|
1,814
|
|
2,023
|
|
|
Software product sales
|
|
37
|
|
307
|
|
1,972
|
|
|
Total cost of revenues
|
|
4,569
|
|
4,460
|
|
6,380
|
|
|
Gross profit
|
|
6,266
|
|
6,447
|
|
7,662
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
2,892
|
|
2,616
|
|
5,430
|
|
|
Product development
|
|
1,531
|
|
2,733
|
|
6,184
|
|
|
General and administrative
|
|
3,767
|
|
3,368
|
|
3,017
|
|
|
Restructuring
|
|
(75
|
)
|
—
|
|
1,239
|
|
|
(Gain) loss on disposal of assets
|
|
47
|
|
(14
|
)
|
—
|
|
|
Amortization of intangibles
|
|
—
|
|
—
|
|
1,085
|
|
|
Impairment of assets
|
|
—
|
|
—
|
|
792
|
|
|
Loss on abandonment of assets
|
|
—
|
|
—
|
|
128
|
|
|
Total operating expenses
|
|
8,162
|
|
8,703
|
|
17,875
|
|
|
Loss from operations
|
|
(1,896
|
)
|
(2,256
|
)
|
(10,213
|
)
|
|
Interest expense
|
|
(101
|
)
|
(206
|
)
|
(2,650
|
)
|
|
Interest and other income and expenses, net
|
|
139
|
|
82
|
|
544
|
|
|
Gain on sale of Asset Management software
business
|
|
—
|
|
—
|
|
2,656
|
|
|
Net loss
|
|
$
|
(1,858
|
)
|
$
|
(2,380
|
)
|
$
|
(9,663
|
)
|
|
Basic and diluted net loss per share
|
|
$
|
(0.03
|
)
|
$
|
(0.04
|
)
|
$
|
(0.20
|
)
|
|
Weighted average shares - basic and diluted
|
|
60,127
|
|
55,910
|
|
47,722
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
42
INTRAWARE, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(in thousands)
|
|
|
|
|
|
|
Additional
Paid-In
Capital
|
|
Unearned
Stock-Based
Compensation
|
|
Accumulated
Deficit
|
|
Stockholders’
Equity
|
|
Comprehensive
Loss
|
|
|
Common Stock
|
|
Shares
|
|
Amount
|
|
Balance at February 28, 2002
|
|
40,447
|
|
$
|
4
|
|
$
|
144,140
|
|
$
|
(1,618
|
)
|
$
|
(142,416
|
)
|
$
|
110
|
|
|
|
|
Exercise of stock options and warrants, net
of repurchase of unvested common stock
|
|
399
|
|
—
|
|
389
|
|
—
|
|
—
|
|
389
|
|
|
|
|
Issuance of common stock for employee stock
purchase program
|
|
214
|
|
—
|
|
139
|
|
—
|
|
—
|
|
139
|
|
|
|
|
Deferred stock-based compensation for
forfeited options
|
|
—
|
|
—
|
|
(544
|
)
|
544
|
|
—
|
|
—
|
|
|
|
|
Issuance of common stock with warrants, net
of issuance costs of $727
|
|
8,738
|
|
1
|
|
5,840
|
|
—
|
|
—
|
|
5,841
|
|
|
|
|
Conversion of notes payable to common
stock, net of issuance costs of $210
|
|
1,300
|
|
—
|
|
1,078
|
|
—
|
|
—
|
|
1,078
|
|
|
|
|
Reclassification of warrants to equity
|
|
—
|
|
—
|
|
891
|
|
—
|
|
—
|
|
891
|
|
|
|
|
Amortization of unearned stock-based
compensation
|
|
—
|
|
—
|
|
—
|
|
1,042
|
|
—
|
|
1,042
|
|
|
|
|
Conversion of preferred stock into common
stock
|
|
1,003
|
|
—
|
|
874
|
|
—
|
|
—
|
|
874
|
|
|
|
|
Options issued for services
|
|
—
|
|
—
|
|
63
|
|
—
|
|
—
|
|
63
|
|
|
|
|
Net loss
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(9,663
|
)
|
(9,663
|
)
|
$
|
(9,663
|
)
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(9,663
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 28, 2003
|
|
52,101
|
|
5
|
|
152,870
|
|
(32
|
)
|
(152,079
|
)
|
764
|
|
|
|
|
Exercise of stock options
|
|
1,317
|
|
—
|
|
1,309
|
|
—
|
|
—
|
|
1,309
|
|
|
|
|
Issuance of common stock for employee stock
purchase program
|
|
183
|
|
—
|
|
125
|
|
—
|
|
—
|
|
125
|
|
|
|
|
Issuance of common stock, net of issuance
costs of $89
|
|
4,000
|
|
1
|
|
6,111
|
|
—
|
|
—
|
|
6,112
|
|
|
|
|
Amortization of unearned stock-based
compensation
|
|
—
|
|
—
|
|
—
|
|
28
|
|
—
|
|
28
|
|
|
|
|
Deferred stock-based compensation for
options forfeited
|
|
—
|
|
—
|
|
(4
|
)
|
4
|
|
—
|
|
—
|
|
|
|
|
Issuance of warrant to purchase common
stock in connection with note payable
|
|
—
|
|
—
|
|
46
|
|
—
|
|
—
|
|
46
|
|
|
|
|
Conversion of preferred stock and warrants
into common stock
|
|
1,903
|
|
—
|
|
1,586
|
|
—
|
|
—
|
|
1,586
|
|
|
|
|
Net loss
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(2,380
|
)
|
(2,380
|
)
|
$
|
(2,380
|
)
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(2,380
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 29, 2004
|
|
59,504
|
|
6
|
|
162,043
|
|
—
|
|
(154,459
|
)
|
7,590
|
|
|
|
|
Exercise of stock options
|
|
401
|
|
—
|
|
404
|
|
—
|
|
—
|
|
404
|
|
|
|
|
Issuance of common stock for employee stock
purchase program
|
|
195
|
|
—
|
|
230
|
|
—
|
|
—
|
|
230
|
|
|
|
|
Conversion of warrants into common stock
|
|
347
|
|
—
|
|
491
|
|
—
|
|
—
|
|
491
|
|
|
|
|
Net loss
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(1,858
|
)
|
(1,858
|
)
|
$
|
(1,858
|
)
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(1,858
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 28, 2005
|
|
60,447
|
|
$
|
6
|
|
$
|
163,168
|
|
$
|
—
|
|
$
|
(156,317
|
)
|
$
|
6,857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
43
INTRAWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
For the Years Ended
|
|
|
|
|
February 28, 2005
|
|
February 29, 2004
|
|
February 28, 2003
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,858
|
)
|
$
|
(2,380
|
)
|
$
|
(9,663
|
)
|
|
Adjustments to reconcile net loss to net
cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
591
|
|
1,580
|
|
3,830
|
|
|
Amortization of goodwill and intangibles
|
|
—
|
|
—
|
|
1,085
|
|
|
Amortization of unearned compensation
|
|
—
|
|
28
|
|
1,042
|
|
|
Provision for (reduction of) doubtful
accounts
|
|
(23
|
)
|
(73
|
)
|
28
|
|
|
Loss (gain) on sale of fixed assets
|
|
47
|
|
(14
|
)
|
(1
|
)
|
|
Gain on sale of Asset Management software
business
|
|
—
|
|
—
|
|
(2,656
|
)
|
|
Warrants adjustment to fair value
|
|
—
|
|
—
|
|
(460
|
)
|
|
Amortization of discount on note payable
|
|
21
|
|
22
|
|
1,845
|
|
|
Impairment of assets
|
|
—
|
|
—
|
|
792
|
|
|
Loss on abandonment of assets
|
|
—
|
|
—
|
|
128
|
|
|
Amortization of warrant charge offset
against revenue
|
|
—
|
|
—
|
|
936
|
|
|
Options to purchase common stock issued for
services
|
|
—
|
|
—
|
|
63
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
(280
|
)
|
132
|
|
1,168
|
|
|
Prepaid licenses, services and cost of deferred
revenue
|
|
(217
|
)
|
109
|
|
2,679
|
|
|
Other assets
|
|
(43
|
)
|
(1
|
)
|
1,595
|
|
|
Accounts payable
|
|
(205
|
)
|
(149
|
)
|
(5,247
|
)
|
|
Accrued liabilities
|
|
39
|
|
(261
|
)
|
(466
|
)
|
|
Deferred revenue
|
|
284
|
|
(348
|
)
|
(1,897
|
)
|
|
Related party deferred revenue
|
|
(646
|
)
|
(100
|
)
|
—
|
|
|
Net cash used in operating activities
|
|
(2,290
|
)
|
(1,455
|
)
|
(5,199
|
)
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
(514
|
)
|
(575
|
)
|
(554
|
)
|
|
Proceeds from sale of Asset Management
software business
|
|
—
|
|
—
|
|
9,500
|
|
|
Proceeds from sale of fixed assets
|
|
2
|
|
14
|
|
7
|
|
|
Net cash provided by (used in) investment
activities
|
|
(512
|
)
|
(561
|
)
|
8,953
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from notes and warrants, net of
issuance costs
|
|
426
|
|
2,237
|
|
—
|
|
|
Principal payments on notes payable
|
|
(1,082
|
)
|
(413
|
)
|
(5,700
|
)
|
|
Proceeds from common stock and warrants,
net of issuance costs
|
|
1,117
|
|
7,556
|
|
7,404
|
|
|
Principal payments on capital lease
obligations
|
|
—
|
|
(2,401
|
)
|
(1,596
|
)
|
|
Net cash provided by financing activities
|
|
461
|
|
6,979
|
|
108
|
|
|
Net increase (decrease) in cash and cash
equivalents
|
|
(2,341
|
)
|
4,963
|
|
3,862
|
|
|
Cash and cash equivalents at beginning of
the year
|
|
11,804
|
|
6,841
|
|
2,979
|
|
|
Cash and cash equivalents at end of the
year
|
|
$
|
9,463
|
|
$
|
11,804
|
|
$
|
6,841
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow
information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
82
|
|
$
|
177
|
|
$
|
501
|
|
|
Supplemental non-cash activity:
|
|
|
|
|
|
|
|
|
Property and equipment leases
|
|
$
|
—
|
|
$
|
—
|
|
$
|
16
|
|
|
Common stock issued for preferred stock
conversion and warrant exercises
|
|
$
|
—
|
|
$
|
1,575
|
|
$
|
874
|
|
|
Reclassification of warrants to equity
|
|
$
|
—
|
|
$
|
—
|
|
$
|
891
|
|
|
Notes payable converted to common stock and
warrants
|
|
$
|
—
|
|
$
|
—
|
|
$
|
1,078
|
|
|
Purchases of property and equipment in
accounts payable
|
|
$
|
92
|
|
$
|
43
|
|
$
|
—
|
|
|
Issuance of warrants to purchase common
stock
|
|
$
|
—
|
|
$
|
46
|
|
$
|
—
|
|
|
Shareholder receivable for common stock
purchases
|
|
$
|
8
|
|
$
|
—
|
|
$
|
—
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
44
INTRAWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS AND
SIGNIFICANT ACCOUNTING POLICIES
Overview
We were incorporated in
Delaware on August 14, 1996. We are a leading provider of ESDM solutions.
Our ESDM solutions help software publishers reduce operational and support
costs, increase customer satisfaction and retention, accelerate and strengthen
the software revenue recognition processes, and comply with U.S. export regulations.
We also offer complementary products and services, including enterprise
software sales and marketing, and global web-based content caching and
delivery.
We have incurred losses and
negative cash flows during each fiscal year since inception. For the year ended
February 28, 2005, we narrowed our net losses to approximately $1.9
million. Despite our improvements, we
continued to experience recurring losses and negative cash flows from
operations for the year ended February 28, 2005. Under our June 2001 agreement
with Software Spectrum, we provide Sales and Marketing Services to Software
Spectrum to assist in its resale and marketing of Sun and Websense software
licenses and maintenance. This contract accounted for more than 10% of our
total revenues in our 2005 fiscal year. The term of this agreement will expire
in June 2005, is renewable for subsequent one-year terms, and may be terminated
without cause by either party on 90 days’ notice. It is possible that Software
Spectrum will terminate this agreement without cause or will choose not to
renew the agreement at any renewal point. Any termination or non-renewal of our
agreement with Software Spectrum, or termination of Software Spectrum’s rights
to resell Sun software, would likely cause a substantial and immediate decrease
in our revenues. We believe that the
effects of our capital financing, strategic actions implemented to improve
revenue, and cost controls will be adequate to generate sufficient cash resources
to fund our future operations. However, if we fail to sufficiently increase our
revenues or control spending, our business could be materially adversely
affected.
Principles
of Consolidation
These consolidated financial
statements include our accounts and those of our wholly owned subsidiaries
Intraware Canada, Inc. and Intraware Europe Limited. Intraware
Canada, Inc. was dissolved effective March 5, 2003. We have
eliminated all significant inter-company balances and transactions.
Use of
Estimates
The preparation of
consolidated financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that affect the amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Cash, Cash
Equivalents and Short-Term Investments
We consider all highly
liquid investments with an original maturity of three months or less when
purchased to be cash equivalents.
We classify all of our
investments which are not cash and cash equivalents as “available-for-sale” and
carry them at fair market value. Changes in fair market value are recorded as a
component of other comprehensive income until realized. Realized gains and
losses are determined based on the specific identification method and are
reflected in interest and other income and expenses, net and any unrealized
gains and losses are reflected on the statement of stockholders’ equity as
other comprehensive income/loss.
As of February 28, 2005
and February 29, 2004, all of our investments were classified as cash
equivalents.
Concentration
of Credit Risk
Financial instruments that
potentially subject us to a concentration of credit risk consist of cash and
cash equivalents and accounts receivable. Cash and cash equivalents are
deposited with high credit
45
quality financial
institutions. Deposits in these financial institutions may exceed the amount of
insurance, if any, provided on such deposits. Our accounts receivable are
derived from revenue earned from customers located primarily in the United
States of America. We perform ongoing credit evaluations of our customers’
financial condition and, generally, require no collateral from our customers.
We maintain an allowance for doubtful accounts receivable based upon our
historical experience and the expected collectability of all accounts
receivable. We review our allowances by assessing individual accounts
receivable balances over a specific aging and/or amount, and all other balances
on an aggregate basis, based on historical collection experience.
For the years ended
February 28, 2005 and February 29, 2004, transactions with Software
Spectrum, Inc. accounted for approximately 30% and 41% of our total
revenues, respectively. For the year ended February 28, 2003, two
customers, Software Spectrum, Inc. and Sun Microsystems, Inc.
accounted for approximately 33% and 18% of our revenues, respectively. For the
years ended February 28, 2005, February 29, 2004 and
February 28, 2003, no other customers accounted for more than 10% of the
our total revenues. At February 28, 2005, two customers, Software
Spectrum, Inc. and Progress Software Corporation, accounted for 21% and
10% of our accounts receivable balance, respectively. At February 29,
2004, two customers, Software Spectrum, Inc. and Progress Software
Corporation, accounted for 39% and 15% of our accounts receivable balance,
respectively.
Fair Value
of Financial Instruments
Our financial instruments,
including cash and cash equivalents, accounts receivable, and accounts payable,
are carried at cost, which approximates their fair value because of the
short-term maturity of these instruments. The reported amounts of bank borrowings
approximate fair value due to the market value interest rate that these debts
bear.
Foreign
Currency Translation
The functional currency of
our foreign subsidiaries is the local currency. The financial statements of
these subsidiaries are translated to United States dollars using period-end
rates of exchange for assets and liabilities, and average rates of exchange for
the year for revenues and expenses. Translation gains (losses) are recorded in
accumulated other comprehensive loss as a component of stockholders’ equity and
were not significant during the periods presented. Net gains and losses
resulting from foreign exchange transactions are included in interest and other
income and expenses, net and were not significant during the periods presented.
Property
and Equipment
Property and equipment are
stated at cost less accumulated depreciation and amortization. Equipment under
capital lease is capitalized at the present value of the future minimum lease
payments. We provide for depreciation and amortization by charges to expense,
which are sufficient to recover the cost of the assets over their estimated
useful lives on a straight-line basis. Leasehold improvements and assets
acquired pursuant to capital leases are amortized over the lesser of the lease
term or the estimated useful life of the improvement. Depreciation and
amortization periods by principal classifications are as follows:
|
Furniture and office equipment
|
|
5 years
|
|
|
Computer equipment and software
|
|
3 years
|
|
|
Leasehold improvements
|
|
1-5 years
|
|
When assets are sold or
otherwise disposed of, the cost and accumulated depreciation and amortization
are removed from the asset and accumulated depreciation and amortization
accounts, respectively. Upon the disposition of property and equipment, the
accumulated depreciation and amortization is deducted from the original cost
and any gain or loss on that sale or disposal is credited or charged to
operating expenses. For the years ended
February 28, 2005 and February 29, 2004, we recognized a gain/(loss)
of ($47,000) and $14,000 on the disposal of assets, respectively.
46
Maintenance, repairs, and
minor renewals are charged to expense as incurred.
Expenditures that
substantially increase an asset’s useful life are capitalized.
Long-Lived
Assets
We account for impairments
of tangible long-lived assets in accordance with the provisions of Statement on
Financial Accounting Standards (SFAS) No. 144, “Accounting for Impairment
or Disposal of Long-Lived Assets.” An impairment review is performed whenever
events or changes in circumstances indicate that the carrying value may not be
recoverable. No such changes in circumstances have occurred to date. Factors we
consider important which could trigger an impairment review include, but are
not limited to, significant underperformance relative to historical or
projected future operating results, significant changes in the manner of use of
the acquired assets or the strategy for our overall business, significant
negative industry or economic trends, a significant decline in our stock price
for a sustained period, and our market capitalization relative to net book
value. When we determine that an impairment review is necessary based upon the
existence of one or more of the above indicators of impairment, we compare the
book value of such assets to the future undiscounted cash flows attributed to
those assets. If the book value is greater than the future undiscounted cash
flows, we measure any impairment based on a projected discounted cash flow
method using a discount rate commensurate with the risk inherent in our current
business model.
Goodwill
and Intangible Assets
Intangible assets are
carried at cost less accumulated amortization. Intangible assets are amortized
on a straight-line basis over the economic lives of the respective assets,
generally one and a half to four years.
In accordance with Statement
of Financial Accounting Standards (“SFAS”) No. 142 “Goodwill and other
Intangible Assets,” goodwill amortization was discontinued as of March 1,
2002, and $1.2 million of intangibles relating to assembled workforce was
subsumed into goodwill. SFAS 142 requires that goodwill be tested for
impairment at the reporting unit level (operating segment or one level below an
operating segment) on an annual basis and between annual tests in certain
circumstances. The performance of the test involves a two-step process. The
first step of the impairment test involves comparing the fair value of our
reporting units with the reporting unit’s carrying amount, including goodwill.
If the carrying amount of our reporting units exceeds the reporting unit’s fair
value, we perform the second step of the goodwill impairment test to determine
the amount of impairment loss. The second step of the goodwill impairment test
involves comparing the implied fair value of our reporting unit’s goodwill with
the carrying amount of that goodwill. We completed our first phase impairment
analysis during the quarter ended May 31, 2002, and found no instances of
impairment. There were no goodwill or intangibles recorded at February 28,
2005 and February 29, 2004, due to the inclusion of the remaining goodwill
balance in the determination of the gain on sale of our Asset Management
software business during the quarter ended May 31, 2002 (see
Note 10).
The changes in the carrying
amount of goodwill during year ended February 28, 2003, were as follows
(in thousands):
|
Balance at March 1, 2002
|
|
$
|
6,979
|
|
|
Goodwill included in the determination of
the gain related to the sale of Asset Management software business
|
|
(6,979
|
)
|
|
Balance as of February 28, 2003
|
|
$
|
—
|
|
47
Revenue
Recognition
Online services and
technology revenue results primarily from three types of arrangements.
First, it results from sales of our SubscribeNet ESDM service to software
vendors and other companies that distribute software as part of their
business. Second, it results from professional services that we provide
to customize our SubscribeNet service for customers, to convert data for
customers, and to integrate our proprietary software. Third, it results
from the sale of our proprietary software licenses and related maintenance to
companies using those products internally or using those products to provide
web-based services to their customers. As a result of the sale of our Asset
Management software business in May 2002, we are not currently deriving
revenue from licenses, maintenance or integration services for our proprietary
software; however, we may recognize such revenues in the future if
opportunities arise to sell licenses for our proprietary software underlying our
SubscribeNet service and related maintenance. We sell our SubscribeNet service,
and will sell proprietary software licenses if opportunities present
themselves, primarily through our direct sales force and authorized resellers.
Alliance and reimbursement
revenue primarily relates to our alliance agreement with Software Spectrum for
sales and marketing services. This revenue consists of a percentage of the
gross profit derived from Software Spectrum’s sales of the third-party software
and maintenance for which we provide sales and marketing services, and
reimbursement for the costs of maintaining a sales team dedicated to providing
sales and marketing services to Software Spectrum for that third-party software
and maintenance. This revenue is recognized as we provide the services to
Software Spectrum.
We derive software product
revenues from our past resales of licenses and maintenance for multiple
business software product lines. As of July 1, 2001, we generally no
longer resell third-party software licenses and maintenance, though we still
resell licenses for third-party products complementary to our SubscribeNet
service. Since July 1, 2001, we have continued to recognize revenue from
our resale of third-party software licenses and related maintenance contracts
over the life of the arrangements made prior to July 1, 2001. Vendor
specific objective evidence of fair value for the maintenance element of the
resold software arrangements has been based on historical and contractual
renewal rates for maintenance. We deferred the maintenance revenue at the
outset of the arrangement and recognized it ratably over the period during
which the maintenance was to be provided. This period normally commenced
on the date the software was delivered and generally continued for 12 months,
although certain maintenance contracts continued for longer periods. At
February 28, 2005, we did not have any deferred revenue relating to
software product revenues.
We defer online services and
technology revenues related to our SubscribeNet ESDM service and generally
recognize them ratably over the term of the service arrangement. Some
SubscribeNet service implementations for new customers involve customization
essential to the functionality of the service. In those cases, we defer revenue
recognition until the service go-live date is reached and recognize the revenue
on a ratable basis over the remaining contract term. The go-live date is
the later of the date on which the essential functionality is delivered or the
point at which no additional customization is required. Our SubscribeNet
contracts with customers typically give the customer a period of time
(generally five days) to evaluate a SubscribeNet implementation after we have
completed it, and provide that the customer is deemed to have accepted the
implementation if it has not affirmatively rejected it within that
period. We typically rely on such non-rejections by customers to indicate
their acceptance of implementations. Any subsequent indications by our
customers that their implementations have not been properly completed could
have a material adverse impact on our financial condition or results of
operations.
We also sell additional
professional services related to SubscribeNet agreements. Generally,
these services do not provide stand-alone value to a customer, and accordingly,
we defer recognition of that revenue until the go-live date for the
professional services, similar to the manner in which we treat SubscribeNet
service revenues as discussed above. Such professional services revenues
are recognized ratably over the longer of the remaining estimated customer life
or the remaining contract term, commencing with the completion of the
professional services. Estimated customer life requires that we periodically
estimate the projected life of our existing customers, based on historical
information, such as
48
customer renewal rates. Since revenues generated from
additional professional services represent less than 5% of our overall revenues
for the year ended February 28, 2005, any change to our estimated customer
life is unlikely to have a material adverse impact on our financial condition
or results of operations.
We recognize revenue when
all of the following conditions are met:
• There is persuasive evidence of an arrangement;
• We have provided the service to the customer, made the software
available for customer download through our website, or shipped the software to
the customer;
• We believe that collection of these fees is reasonably assured;
and
• The amount of fees to be paid by the customer is fixed or
determinable.
Revenue from transactions
through authorized resellers has been recognized when the licenses and
maintenance have been resold or utilized by the reseller or when our related
obligations have been satisfied. Those transactions primarily consisted of
resales, through our authorized resellers, of our proprietary Asset Management
software licenses and maintenance (we sold our Asset Management software
business to Computer Associates International, Inc. during our fiscal year
ended February 28, 2003, see Note 10). For those transactions, we
based vendor specific objective evidence of fair value for the maintenance
element of the proprietary software arrangements on historical and contractual
renewal rates for maintenance. We deferred the maintenance revenue at the
outset of the arrangement and recognized it ratably over the period during
which the maintenance was to be provided (generally 12 months), which
normally commenced on the date the software was delivered.
Deferred
Revenue
Deferred revenue consists
primarily of billings or payments received in advance of revenue recognition
from the sale of ESDM services, software licenses, software maintenance, and
software research and evaluation services. Such revenue is recognized as
revenue recognition criteria are met.
Costs of
Deferred Revenue
We capitalize direct costs
of revenues related to significant implementation and professional services
contracts associated with our SubscribeNet services. Direct costs include
compensation and payroll-related fringe benefits directly related to the time
spent on significant implementation and professional services activities.
These costs are recognized over the same term as the associated revenue from
those contracts (see “Revenue Recognition” above). Any change in our revenue
recognition estimates could result in corresponding changes to our recognition
of costs of deferred revenues. At February 28, 2005, we had approximately
$0.5 million in capitalized costs of deferred revenues. We expense
customer acquisition costs, including sales commissions, as incurred.
Capitalized
Software
During fiscal year 2000, we
adopted Statement of Position (“SOP”) 98-1, “Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use,” which requires that
certain costs for the development of internal use software should be
capitalized, including the costs of coding, software configuration, upgrades
and enhancements. Product development costs include costs incurred by us to
develop, enhance and manage our website and online services.
49
In our fiscal year 2003, we
implemented a plan to sell licenses for our proprietary software underlying our
SubscribeNet service. Such development costs are being accounted for in
accordance with SFAS No. 86, “Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed,” under which certain
software development costs incurred subsequent to the establishment of
technological feasibility are capitalized and amortized over the estimated
lives of the related products. Technological feasibility is established upon
completion of a working model. Development costs incurred subsequent to the
establishment of technological feasibility have not been significant, and all
software development costs have been charged to product development expense in
the accompanying consolidated statements of operations.
Advertising
Expense
We utilize online seminars
known as “webinars,” print and online advertising, trade shows, direct mail,
online promotions and regional marketing development to expand product and
brand awareness in the information technology professional community. All
advertising costs are expensed as incurred. Advertising costs amounted to
approximately $488,000 for the year ended February 28, 2005, $188,000 for
the year ended February 29, 2004, and $357,000 for the year ended
February 28, 2003.
Stock-Based
Compensation
We account for stock-based
employee compensation arrangements in accordance with provisions of Accounting
Principles Board Opinion No. 25, “Accounting for Stock Issued to
Employees,” (“APB No. 25”) and its related interpretations and comply with
the disclosure provisions of SFAS No. 123, “Accounting for Stock-Based
Compensation” and related SFAS No. 148, “Accounting for Stock-Based
Compensation—Transition and Disclosure.” Under APB No. 25, compensation
expense is based on the difference, if any, on the date of the grant between
the fair value of our stock and the exercise price of the option. We account
for equity instruments issued to non-employees in accordance with the
provisions of SFAS No. 123 and Emerging Issues Task Force (“EITF”) 96-18, “Accounting
for Equity Instruments That Are Issued to Other Than Employees for Acquiring,
or in conjunction with Selling Goods or Services.”
The following table
illustrates the effect on net loss and net loss per share if we had applied the
fair value recognition provisions of SFAS No. 123, to stock-based employee
compensation (in thousands, except per share data).
|
|
|
For the year ended,
|
|
|
|
|
February 28,
2005
|
|
February 29,
2004
|
|
February 28,
2003
|
|
|
|
|
|
|
|
|
|
|
|
Net loss as reported
|
|
$
|
(1,858
|
)
|
$
|
(2,380
|
)
|
$
|
(9,663
|
)
|
|
Add: unearned stock-based compensation
expense included in reported net loss
|
|
—
|
|
28
|
|
1,042
|
|
|
Deduct: total stock-based employee
compensation expense determined under fair value based method for all awards
|
|
(3,154
|
)
|
(3,588
|
)
|
(4,674
|
)
|
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
$
|
(5,012
|
)
|
$
|
(5,940
|
)
|
$
|
(13,295
|
)
|
|
|
|
|
|
|
|
|
|
|
Net loss per share — basic and diluted
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
(0.03
|
)
|
$
|
(0.04
|
)
|
$
|
(0.20
|
)
|
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
$
|
(0.08
|
)
|
$
|
(0.11
|
)
|
$
|
(0.28
|
)
|
50
We calculated the fair value
and value of each option grant on the date of grant during the years ended
February 28, 2005, February 29, 2004, and February 28, 2003,
respectively, using the Black-Scholes option pricing model as prescribed by
SFAS No. 123 using the following assumptions:
|
|
|
For the year ended,
|
|
|
|
|
February 28, 2005
|
|
February 29, 2004
|
|
February 28, 2003
|
|
|
Risk-free interest rates
|
|
2.00 - 3.77
|
%
|
1.51 - 3.37
|
%
|
2.48 - 4.44
|
%
|
|
Expected lives (in years)
|
|
4
|
|
4
|
|
4
|
|
|
Dividend yield
|
|
0
|
%
|
0
|
%
|
0
|
%
|
|
Expected volatility
|
|
99
|
%
|
130
|
%
|
142
|
%
|
We calculated the fair value
of the stock issued under the employee stock purchase plan for the years ended
February 28, 2005, February 29, 2004, and February 28, 2003,
respectively, using the Black-Scholes option pricing model as prescribed by
SFAS No. 123 using the following assumptions:
|
|
|
For the year ended,
|
|
|
|
|
February 28, 2005
|
|
February 29, 2004
|
|
February 28, 2003
|
|
|
Risk-free interest rates
|
|
1.12 - 1.99
|
%
|
1.01 - 1.22
|
%
|
1.64 - 1.96
|
%
|
|
Expected lives (in months)
|
|
6
|
|
6
|
|
6
|
|
|
Dividend yield
|
|
0
|
%
|
0
|
%
|
0
|
%
|
|
Expected volatility
|
|
64 - 79
|
%
|
58 - 102
|
%
|
120 - 151
|
%
|
Income
Taxes
Income taxes are accounted
for using an asset and liability approach, which requires the recognition of
taxes payable or refundable for the current year and deferred tax liabilities
and assets for the future tax consequences of events that have been recognized
in our consolidated financial statements or tax returns. The measurement of
current and deferred tax liabilities and assets are based on provisions of the
enacted tax law; the effects of future changes in tax laws or rates are not
anticipated. The measurement of deferred tax assets is reduced by a valuation
allowance, if necessary, by the amount of any tax benefits that, based on available
evidence, are not expected to be realized.
Net Loss
Per Share
Basic net loss per common
share is computed by dividing the net loss for the period by the weighted
average number of common shares outstanding during the period excluding shares
subject to repurchase. The terms of our redeemable convertible preferred stock
include the right to participate in dividends declared to common stockholders. Our
redeemable convertible preferred stock does not have a contractual obligation
to share in the losses in any given period. As a result, this participating
security will not be allocated any losses in the periods of net losses, but
will be allocated in the periods of net income using the two-class method. The
two-class method is an earnings allocation formula that determines earnings per
share for each class of common stock and participating securities according to
dividends declared or accumulated and participation rights in undistributed
earnings. Under the two-class method,
net income is reduced by the amount of dividends declared in the current period
for each class of stock and by the contractual amounts of dividends that must
be paid for the current period. The
remaining earnings are then allocated to common stock and participating
securities to the extent that each security may share in earnings as if all of
the earnings for the period had been distributed. The total earnings allocated to each security
are determined by adding together the amounts allocated for dividends and the
amounts allocated for a participation feature.
The total earnings allocated to each security are then divided by the
number of outstanding shares of the security to which the earnings are
allocated to determine the earnings per share.
Diluted net loss per share
is computed by dividing the net loss for the period by the weighted average
number of common and potential common shares outstanding during the period if
the effect is dilutive. Potential common shares are composed of common stock
subject to repurchase rights and incremental shares of common stock issuable
upon the exercise of stock options and warrants and upon the conversion of
preferred stock. The dilutive effect of outstanding stock options and
warrants is computed using the treasury stock method.
The following table sets
forth the computation of basic and diluted net loss per share as well as
securities not included in the diluted net loss per share calculation because
to do so would be antidilutive:
51
|
|
|
For the Years Ended
|
|
|
|
|
February 28, 2005
|
|
February 29, 2004
|
|
February 28, 2003
|
|
|
|
|
(in thousands, except per share amounts)
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,858
|
)
|
$
|
(2,380
|
)
|
$
|
(9,663
|
)
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average shares
|
|
60,127
|
|
55,910
|
|
47,723
|
|
|
Weighted average unvested common shares
subject to repurchase
|
|
—
|
|
—
|
|
(1
|
)
|
|
Denominator for basic and diluted
calculation
|
|
60,127
|
|
55,910
|
|
47,722
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$
|
(0.03
|
)
|
$
|
(0.04
|
)
|
$
|
(0.20
|
)
|
|
|
|
|
|
|
|
|
|
|
Antidilutive securities not included in
weighted average shares:
|
|
|
|
|
|
|
|
|
Redeemable convertible preferred stock
|
|
552
|
|
552
|
|
1,886
|
|
|
Warrants to purchase common stock
|
|
1,592
|
|
2,215
|
|
3,556
|
|
|
Options to purchase common stock
|
|
11,335
|
|
9,340
|
|
8,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,479
|
|
12,107
|
|
13,777
|
|
Comprehensive
Loss
We comply with SFAS
No. 130, “Reporting Comprehensive Income.” SFAS No. 130 requires that
all items recognized under accounting standards as components of comprehensive
earnings be reported in an annual financial statement that is displayed with
the same prominence as other annual financial statements. Comprehensive loss
has been included in the Statement of Stockholders’ Equity for all periods
presented.
Recent
Accounting Pronouncements
52
In
December 2004, the FASB issued SFAS No. 123 (Revised 2004) “Share-Based
Payment” (“SFAS No. 123R”). SFAS No. 123R addresses all forms of
share-based payment (“SBP”) awards, including shares issued under employee
stock purchase plans, stock options, restricted stock and stock appreciation
rights. SFAS No. 123R will require us to expense SBP awards with
compensation cost for SBP transactions measured at fair value. The FASB
originally stated a preference for a lattice model because it believed that a
lattice model more fully captures the unique characteristics of employee stock
options in the estimate of fair value, as compared to the Black-Scholes model
which we currently use for our footnote disclosure. The FASB decided to remove
its explicit preference for a lattice model and not require a specific
valuation methodology. The Securities and Exchange Commission (“SEC”) has
amended the deadline to adopt SFAS No. 123R. As a result, we will be required to adopt the
new accounting provisions beginning in our first quarter of our fiscal year
ending February 28, 2007. In addition, the SEC, in March 2005, issued
Staff Accounting Bulletin No. 107 (“SAB 107”). SAB 107 provides guidance regarding the
interaction between SFAS No. 123R and SEC rules and regulations. We expect the adoption of SFAS No. 123R and
SAB 107 will have a material adverse impact on our results of operations and
loss per share. We are currently in the process of evaluating the extent of
such impact.
Reclassification
Certain prior year amounts
have been reclassified to conform to the current year presentation. These
reclassifications did not change previously reported net loss, stockholders’
equity or cash flow.
NOTE 2. ALLIANCES
Provision of Sales
and Marketing Services to Software Spectrum for Resale of Third-Party Software
Prior to June 2001, we
resold Sun Microsystems, Inc. (“Sun”) Internet-related application
software (marketed under the brands “Sun/Netscape Alliance” and “iPlanet”) and related
maintenance services to end-users in North America under an agreement between
us and Sun. In June 2001, we signed an agreement with Software
Spectrum under which we transferred to Software Spectrum our Sun software
resale business, including our agreement with Sun for resale of Sun software
and maintenance services. Software Spectrum assumed primary
responsibility for resale of Sun software and related maintenance under its
agreement with Sun (which has since been replaced by an agreement between Software
Spectrum and Sun’s distributor). We continue to assist Software Spectrum
in its sales and marketing of the Sun software currently marketed under the
brands “Sun ONE” and “Java Enterprise System,” as well as related maintenance,
and also provide our SubscribeNet service to Software Spectrum to enable it to
deliver that Sun software to its customers electronically. As part of this
arrangement, Software Spectrum pays us a percentage of the gross profit derived
from its sales of Sun software licenses and maintenance services, and
reimburses us for up to a set amount of our costs in maintaining a team
dedicated to sales of Sun software licenses and maintenance (included in the
Alliance and reimbursement revenue line on our consolidated statements of operations).
The June 2001 agreement with Software Spectrum was part of our transition
out of the business of generally reselling third-party software. At the time we
announced this agreement, we also ceased reselling all third-party software except
a limited number of products that were complementary to our SubscribeNet
service.
53
In December 2003, we
amended our June 2001 agreement with Software Spectrum to add Websense
software to the set of products that Software Spectrum and Intraware jointly
resell under that agreement. Under these arrangements, Software Spectrum pays
us a percentage of the gross profit derived from our joint sales of Websense
software licenses and maintenance services (included in the Alliance and
reimbursement revenue line on our consolidated statements of operations).
The current term of this
agreement with Software Spectrum runs until June 30, 2005. Either
party may terminate the agreement without cause on 90 days’ prior written notice.
Any termination of our relationship with Software Spectrum without an adequate
replacement would cause a substantial and immediate decrease in our revenues.
Resale of
SubscribeNet Service by Zomax Incorporated
On August 12, 2002, we
entered into a strategic alliance agreement (the “Strategic Alliance Agreement”)
with Zomax Incorporated (“Zomax”), an international outsource provider of
process management services. The Strategic Alliance Agreement provided
for Zomax’ marketing and resale of our SubscribeNet ESDM service to its global
customer base. Under the Strategic Alliance Agreement, Zomax was required
to pay a minimum license fee totaling $15 million to us over 10 years, subject
to some conditions, including Zomax’ right to cancel the agreement at any time
with one year’s notice. The annual minimum license fee was based on a
graduated scale, beginning with $0.5 million in the first year of the agreement
and escalating to $2.2 million in the final year of the agreement. The
agreement also provided for Zomax’ payment to us of non-refundable quarterly
service fees, based on sales of the SubscribeNet service by Zomax, over the
term of the agreement. Under the agreement, our SubscribeNet service was
the only electronic software delivery solution Zomax was
permitted to sell and Zomax was the only supply chain management outsourcing
industry company we could authorize to resell our SubscribeNet service.
In accordance with the agreement, Zomax made a $1 million prepayment to us on
September 3, 2002, to be applied against future fees. The Strategic
Alliance Agreement also provided for Zomax’ payment to us of fees for any
referrals by us to Zomax of potential customers for Zomax’ services which
resulted in completed sales. Lastly, we reimbursed Zomax for one-half of
the base salary of a product sales manager, up to a maximum amount.
On the day we entered into
the Strategic Alliance Agreement, we also completed a private placement of
approximately 6.1 million shares of our common stock to Zomax for gross
proceeds of approximately $5.0 million. Upon completion of that private
placement, Zomax held approximately 12% of our outstanding common stock.
On September 18, 2003, we filed an amended registration statement to
register the resale of the common stock issued to Zomax. The SEC declared
that registration statement effective on September 25, 2003.
On August 29, 2003,
Intraware and Zomax amended the Strategic Alliance Agreement to: (1) allow
Zomax to terminate the agreement as of August 12, 2004, or as of any date
thereafter, with or without cause, by delivery of 30 days prior written notice;
(2) accelerate the due date of the payment of $0.4 million by Zomax to us
for the second year of the agreement; and (3) reduce the minimum license
fee for the third year of the agreement, which was to begin August 12,
2004, from $1.0 million to $0.6 million if Zomax had not terminated the
agreement before then. During the three months ended November 30,
2003, and in accordance with that amendment, we received $0.4 million from
Zomax, all of which was recorded as deferred revenue at February 29, 2004,
and was to be applied to future services.
On April 30, 2004,
Zomax and Intraware mutually terminated the Strategic Alliance Agreement and
entered into a new reseller agreement (the “Zomax Reseller Agreement”). The
Zomax Reseller Agreement allows Zomax to resell our SubscribeNet service. Zomax
will pay us fees, to be determined on a case-by-case basis, for each resale of
the SubscribeNet service. Under the Zomax Reseller Agreement, Zomax does
not pay minimum annual license fees to us. The term of the Zomax Reseller
Agreement is one year, subject to automatic annual renewal for one-year
periods. Each party has the right to terminate the Zomax Reseller Agreement
without cause upon 60 days’ notice.
54
As part of the termination
of the Strategic Alliance Agreement, Zomax and Intraware are not subject to
exclusivity requirements or restrictions on sales to other companies. In addition,
in consideration for Zomax’ termination of the Strategic Alliance Agreement in
May 2004, we refunded approximately $0.1 million of the $0.4 million
prepayment for future services paid by Zomax to us during the three months
ended November 30, 2003. The remaining deferred revenue balance of
approximately $0.4 million at April 30, 2004, was recognized as revenue
during the three months ended May 31, 2004, given that we no longer had
any obligations under the Strategic Alliance Agreement.
During the years
ended February 28, 2005, February 29, 2004, and February 28, 2003, we
recognized $0.5 million, $0.5 million, and $0.3 million of revenue,
respectively, in connection with this arrangement. These amounts are classified as Related party
online services and technology revenue.
Resale of
SubscribeNet Service by Hewlett-Packard Company
In September 2004, we
entered into an agreement with Hewlett-Packard Company (“HP”) for its resale of
our SubscribeNet service through HP’s Software Publisher Services division (the
“HP Reseller Agreement”). Under the HP Reseller Agreement, HP pays us
service fees based on its resales of the SubscribeNet service. The term
of the HP Reseller Agreement is one year, subject to automatic annual renewal
for one-year periods. Each party has the right to terminate the HP Reseller
Agreement without cause upon 120 days’ notice. To date, no revenue has
been recognized under the HP Reseller Agreement.
NOTE 3. BALANCE SHEET COMPONENTS
|
|
|
February 28, 2005
|
|
February 29, 2004
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net:
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
1,778
|
|
$
|
1,498
|
|
|
Allowance for doubtful accounts
|
|
(13
|
)
|
(36
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
1,765
|
|
$
|
1,462
|
|
For the years ended
February 28, 2005, February 29, 2004 and February 28, 2003, we
provided for an increase/(decrease) in allowance for doubtful accounts of
approximately ($23,000), $9,000, ($53,000), respectively, and wrote-off
accounts receivable against the allowance for doubtful accounts of
approximately zero, $1,000, and $80,000, respectively. In addition, at
February 28, 2005 we had one large unbilled accounts receivable balance related
to our Software Spectrum agreement (see Note 2) of approximately $0.4 million.
|
|
|
February 28, 2005
|
|
February 29, 2004
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net:
|
|
|
|
|
|
|
Computer equipment and software
|
|
$
|
6,016
|
|
$
|
8,637
|
|
|
Furniture and office equipment
|
|
930
|
|
974
|
|
|
Leasehold improvements
|
|
69
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
7,015
|
|
9,666
|
|
|
Less: accumulated depreciation and
amortization
|
|
(6,152
|
)
|
(8,769
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
863
|
|
$
|
897
|
|
|
|
|
|
|
|
|
|
Accrued liabilities:
|
|
|
|
|
|
|
Accrued compensation and benefits
|
|
$
|
548
|
|
$
|
553
|
|
|
Accrued professional services
|
|
253
|
|
133
|
|
|
Customer deposits
|
|
—
|
|
27
|
|
|
Other
|
|
166
|
|
215
|
|
|
|
|
|
|
|
|
|
|
|
$
|
967
|
|
$
|
928
|
|
For the years
ended February 28, 2005, February 29, 2004, and February 28, 2003, depreciation
and amortization expense of property and equipment was $0.6 million, $1.6
million, and $3.8 million, respectively.
Total assets acquired under capital lease at February 28, 2005, February
29, 2004, and February 28, 2003, totaled zero, zero, and $4.3 million,
respectively. Accumulated depreciation
under capital leases totaled zero, zero, and $3.7 million, for the years ended
February 28, 2005, February 29, 2004, and February 28, 2003, respectively.
Substantially
all of our assets are collateralized by our Bank Notes Payable and Equipment
Advance Agreements (See
Note 8).
55
NOTE 4. INCOME TAXES
As of February 28, 2005, we had approximately $88
million of federal and $47 million of state net operating loss carryforwards
available to offset future taxable income, which expire in varying amounts
between fiscal year 2006 and 2025. The Tax Reform Act of 1986 limits the use of
net operating losses and tax credit carryforwards in certain circumstances
where changes occur in the stock ownership of a company. Because of
cumulative ownership changes in the past, the federal and state loss
carryforwards have been reduced by the amount of the net operating loss
carryforwards that will expire. Because of these cumulative ownership changes,
federal loss carry forwards totaling approximately $44 million and state loss
carry forwards totaling approximately $22 million are subject to limitation. At
February 28, 2005, $44 million and $25 million of federal and state net
operating losses, respectively, are available without limitation to offset
future taxable income. Should there be a change of ownership in the future, the
available net operating losses may be further limited.
As of February 28, 2005, we had approximately $957,000
and $751,000 of federal and state research and development credit
carryforwards, respectively. These federal credits will expire in various years
through fiscal year 2022 if not utilized. The California credits can be carried
forward indefinitely.
Based upon our limited operating history and losses
incurred to date, management does not believe the realization of the related
deferred tax assets meets the recognition criteria required by generally
accepted accounting principles, and accordingly, a full valuation allowance has
been recorded to reduce the carrying value of the deferred tax assets to zero.
Changes in our valuation allowance for the fiscal years 2005 and 2004 were
approximately $1 million. Approximately
$4.2 million of the valuation allowance relates to stock option deductions
that, if recognized, will be recorded as a credit to shareholders’ equity.
Net deferred assets are
composed of the following (in thousands):
|
|
|
February 28, 2005
|
|
February 29, 2004
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
32,571
|
|
$
|
31,748
|
|
|
Fixed asset basis difference
|
|
191
|
|
321
|
|
|
Research and development credits
|
|
1,453
|
|
1,453
|
|
|
Accruals and reserves
|
|
332
|
|
236
|
|
|
Total deferred tax assets
|
|
34,547
|
|
33,758
|
|
|
Valuation allowance
|
|
(34,547
|
)
|
(33,758
|
)
|
|
Total deferred tax assets
|
|
$
|
—
|
|
$
|
—
|
|
The provision for income
taxes is different than the amount computed using the applicable statutory
federal income tax rate with the difference for the year summarized below:
|
|
|
February 28, 2005
|
|
February 29, 2004
|
|
February 28, 2003
|
|
|
Provision computed at federal statutory
rate
|
|
-34.00
|
%
|
-34.00
|
%
|
-34.00
|
%
|
|
State taxes, net of federal benefit
|
|
0.00
|
%
|
0.00
|
%
|
0.00
|
%
|
|
Amortization of goodwill
|
|
0.00
|
%
|
0.00
|
%
|
3.85
|
%
|
|
Impairment of goodwill
|
|
0.00
|
%
|
0.00
|
%
|
26.50
|
%
|
|
Amortization of deferred compensation
|
|
0.00
|
%
|
0.40
|
%
|
3.69
|
%
|
|
Other
|
|
0.00
|
%
|
0.87
|
%
|
-1.39
|
%
|
|
Change in valuation allowance
|
|
34.00
|
%
|
32.73
|
%
|
1.35
|
%
|
|
Provision for income taxes
|
|
0.00
|
%
|
0.00
|
%
|
0.00
|
%
|
56
NOTE 5. COMMITMENTS AND CONTINGENCIES
Operating Leases
and Noncancelable Debt
We lease our office
facilities and certain equipment under noncancelable operating lease agreements,
which expire at various dates through our fiscal year ending 2006. The leases
require that we pay all costs of maintenance, utilities, insurance and taxes.
Rent expense under these leases totaled
57
approximately
$0.5 million, $0.5 million, and $0.9 million during the years
ended February 28, 2005 and February 29, 2004 and February 28,
2003, respectively.
In addition, we sublease a
portion of our facilities in Orinda, California. As a result, we received
approximately $63,000 in sublease payments during the year ended
February 28, 2005, which has been offset against rent expense.
Future minimum payments
under all noncancelable debt and operating leases at February 28, 2005,
are as follows (in thousands):
|
Year Ending February 28,
|
|
Long-term
Debt
|
|
Operating
Leases
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
$
|
857
|
|
$
|
287
|
|
$
|
1,144
|
|
|
2007
|
|
263
|
|
2
|
|
265
|
|
|
2008
|
|
95
|
|
1
|
|
96
|
|
|
Total
minimum payments
|
|
1,215
|
|
$
|
290
|
|
$
|
1,505
|
|
|
Less: amounts representing interest
|
|
(47
|
)
|
|
|
|
|
|
Total principal balance
|
|
$
|
1,168
|
|
|
|
|
|
|
|
The operating leases on the
table above do not include approximately $281,000, $569,000, $579,000,
$597,000, and $300,000 per year for the periods of 2006 through 2010, which
would become due and payable if we do not exercise our right to exit our
operating lease for our Orinda office.
Indemnifications
In
the course of our business, we have given indemnities and made commitments and
guarantees under which we may be required to make payments. These indemnities
include:
• Intellectual Property Indemnities to Customers and Resellers. Our customer and reseller agreements for our
SubscribeNet service typically contain provisions that indemnify our customers
or resellers for damages and costs resulting from claims alleging that our
services infringe the intellectual property rights of a third party. We have
also entered into software license agreements indemnifying the licensees for
damages and costs resulting from claims alleging that the software infringes third-party
intellectual property rights. The duration of these indemnities is typically
unlimited. Our potential payments under these indemnities are in some cases
limited (e.g., to the fees paid to us under the contract or to another amount)
and are in other cases unlimited. Where we have given such indemnities for
third-party software licenses that we resold, we have typically received
similar indemnities from the software publishers. We plan to continue to enter
into SubscribeNet service agreements with customers and resellers, to continue
to license software, and to continue to provide industry-standard indemnities
to our service customers, resellers and licensees.
• Intellectual
Property Indemnity to Acquiror of Asset Management Business. In the May 2002 sale of our Asset
Management software business to Computer Associates International, Inc.,
we agreed to indemnify Computer Associates for damages and costs incurred by it
in connection with claims alleging that the software and technology we sold to
them infringes the intellectual property rights of third parties. This
indemnity will remain in effect until May 2007. Our maximum potential
payment under this indemnity is $9.5 million.
• Indemnities
to Private Investors. In
our private placements of stock, we have made representations and warranties to
the investors and placement agents, and have agreed to
58
indemnify
them for any damages and costs they incur as a result of our breach of those
representations and warranties. We also have signed registration rights
agreements with private investors under which we indemnify them for damages
they incur as a result of any material misstatements or omissions in our
registration statements, and pay penalties in the event we fail to maintain the
effectiveness of registration statements. The duration of our indemnities to
our investors under the respective stock and warrant purchase agreements ranges
from one to two years from the respective closing dates, other than the
purchase agreements for our June 2000 warrants and our January 2001
Series A Preferred Stock, which provide for indemnities of unlimited
duration. Our indemnities to our investors under the respective registration
rights agreements expire upon termination of our registration obligations,
which is typically the date the securities may be sold under Rule 144(k)
under the Securities Act of 1933. Our potential payments under these
indemnities are unlimited.
• Indemnities
to Directors and Officers. We indemnify our directors and officers for damages and costs incurred
in the performance of their duties, to the extent permitted by Delaware law.
The duration of, and our potential payments under, these indemnities are
unlimited, subject to Delaware law.
We
have historically received only a very limited number of requests for
indemnification under these agreements and have not been required to make
material payments under them. Accordingly, we believe that the fair value of
each of these indemnification agreements is minimal and therefore have not
recorded a liability related to these indemnification provisions.
Legal Proceedings
In re Intraware, Inc. Initial Public Offering
Securities Litigation
In
October 2001, we were served with a summons and complaint in a purported
securities class action lawsuit. On or about April 19, 2002, we were
served with an amended complaint in this action, which is now titled In re Intraware, Inc. Initial Public Offering
Securities Litigation, Civ. No. 01-9349 (SAS) (S.D.N.Y.), related
to In re Initial Public Offering Securities
Litigation, 21 MC 92 (SAS) (S.D.N.Y.). The amended complaint is
brought purportedly on behalf of all persons who purchased our common stock
from February 25, 1999 (the date of our initial public offering) through
December 6, 2000. It names as defendants Intraware, three of our present
and former officers and directors, and several investment banking firms that
served as underwriters of our initial public offering. The complaint alleges
liability under Sections 11 and 15 of the Securities Act of 1933 and Sections
10(b) and 20(a) of the Securities Exchange Act of 1934, on the
grounds that the registration statement for the offerings did not disclose
that: (1) the underwriters had agreed to allow certain customers to
purchase shares in the offerings in exchange for excess commissions paid to the
underwriters; and (2) the underwriters had arranged for certain customers
to purchase additional shares in the aftermarket at predetermined prices. The
amended complaint also alleges that the underwriters misused their securities
analysts to manipulate the price of our stock. No specific damages are claimed.
Lawsuits
containing similar allegations have been filed in the Southern District of New
York challenging over 300 other initial public offerings and secondary
offerings conducted in 1999 and 2000. All of these lawsuits have been
consolidated for pretrial purposes before United States District Court Judge
Shira Scheindlin of the Southern District of New York. On July 15, 2002,
an omnibus motion to dismiss was filed in the coordinated litigation on behalf
of the issuer defendants, of which Intraware and its three named current and
former officers and directors are a part, on common pleadings issues. On or
about October 9, 2002, the Court entered and ordered a Stipulation of
Dismissal, which dismissed the three named current and former officers and
directors from the litigation without prejudice. On February 19, 2003, the
Court entered an order denying in part the issuer defendants’ omnibus motion to
dismiss, including those portions of the motion to dismiss relating to
Intraware. No discovery has been served on us to date.
In
June 2004, a stipulation of settlement for the claims against the issuer
defendants, including us, was submitted to the Court. The underwriter-defendants in the In re Initial Public Offering Securities
59
Litigation (collectively, the “underwriter-defendants”), including the
underwriters of our initial public offering, are not parties to the stipulation
of settlement.
The
settlement provides that, in exchange for a release of claims against the
settling issuer-defendants, the insurers of all of the settling
issuer-defendants will provide a surety undertaking to guarantee plaintiffs a
$1 billion recovery from the non-settling defendants, including the
underwriter-defendants. The amount our
insurers would be required to pay to the plaintiffs could range from zero to
approximately $3.5 million, depending on plaintiffs’ recovery from the
underwriter-defendants and from other non-settling parties. If the plaintiffs
recover at least $1 billion from the underwriter-defendants, our insurers
would have no liability for settlement payments under the terms of the settlement.
If the plaintiffs recover less than $1 billion, we believe our insurance
will likely cover our share of any payments towards satisfying plaintiffs’
$1 billion recovery deficit. Management estimates that its range of
loss relative to this matter is zero to $3.5 million. Presently there is
no more likely point estimate of loss within this range. As a consequence of
the uncertainties described above regarding the amount we will ultimately be
required to pay, if any, as of February 28, 2005, we have not accrued a
liability for this matter. There is no
guarantee the settlement will become final, as it is subject to a number of
conditions, including the final approval of the Court.
Leon Segen v. ComVest Venture Partners, LP, et al.
In
July 2004, a complaint was filed in the United States District Court for
the District of Delaware, Civ. No. 04-822, against ComVest Venture
Partners, LP; ComVest Management, LLC; Commonwealth Associates Management
Company, Inc.; Commonwealth Associates, LP; RMC Capital, LLC; Michael S.
Falk; Robert Priddy; Travis L. Provow; Keith Rosenbloom; and Intraware. The
complaint describes Intraware as a nominal defendant. The complaint alleges
that, between August 2001 and January 2002, all of the defendants
other than Intraware were members of a group, and therefore should be treated
as a single “person,” for purposes of Sections 13(d)(3) and 16(b) of
the Securities Exchange Act of 1934 (the “1934 Act”). The complaint
further alleges that ComVest Venture Partners, LP and Mr. Priddy, while
they and the other alleged group members collectively owned more than 10% of a
class of our equity securities, bought and sold our equity securities within a
6-month period and failed to disgorge to us the profits allegedly realized in
those trades, thereby violating Section 16(b) of the 1934 Act.
Mr. Falk was a member of our Board of Directors from April 2001 to
May 2002 and Mr. Provow was a member of our Board of Directors from
October 2001 to May 2002. The complaint demands that ComVest
Venture Partners, LP and Mr. Priddy pay over to Intraware the profits they
allegedly realized and retained in violation of Section 16(b) of the
1934 Act, together with interest and legal costs. According to the complaint,
the amount of those alleged profits is unknown to the plaintiff, however, the
information alleged in the complaint
suggests that amount may be approximately $1.3 million. The complaint does
not seek damages against us. After the complaint was filed, the plaintiff
and Intraware signed a stipulation acknowledging that Intraware takes no
position with respect to the claims in the action, and providing that Intraware
accepts service of the complaint, that Intraware is not required to file an
answer or other response to the complaint, and that Intraware will otherwise
have the rights and responsibilities of a party to the action.
We
are also subject to legal proceedings, claims and litigation arising in the
ordinary course of business. We do not expect that the ultimate costs to
resolve these matters will have a material adverse effect on our consolidated
financial position, results of operations, or cash flows.
NOTE 6. REDEEMABLE CONVERTIBLE PREFERRED
STOCK
We are authorized, subject
to limitations prescribed by Delaware law, to provide for the issuance of
preferred stock in one or more series, to establish from time to time the
number of shares included within each series, to fix the rights, preferences
and privileges of the shares of each wholly unissued series and any
qualifications, limitations or restrictions thereon, and to increase or
decrease the number of shares of any such series (but not below the number of
shares of such series then outstanding) without any further vote or action by
the stockholders. Redeemable Convertible Preferred Stock (Preferred Stock)
activity was as follows (in thousands):
60
|
|
|
Preferred Stock
|
|
|
|
|
Shares
|
|
Amount
|
|
|
Balance at February 28, 2002
|
|
1,658
|
|
$
|
3,347
|
|
|
Conversion of Series A Preferred Stock into
common stock
|
|
(248
|
)
|
(404
|
)
|
|
Conversion of Series B-1 Preferred Stock
into common stock
|
|
(63
|
)
|
(470
|
)
|
|
Balance at February 28, 2003
|
|
1,347
|
|
2,473
|
|
|
Conversion of Series A Preferred Stock into
common stock
|
|
(746
|
)
|
(1,212
|
)
|
|
Conversion of Series B-1 Preferred Stock
into common stock
|
|
(49
|
)
|
(364
|
)
|
|
Balance at February 29, 2004
|
|
552
|
|
897
|
|
|
No activity
|
|
—
|
|
—
|
|
|
Balance at February 28, 2005
|
|
552
|
|
$
|
897
|
|
Series A
On January 16, 2001, we
raised $5.2 million in financing through the sale of a new class of
Series A Preferred Stock and warrants to investors. Under the terms of
this financing, we issued an aggregate of 2,872,922 shares of Series A Preferred
Stock at a per share price of $1.81 and warrants to purchase 287,284 shares of
common stock at an exercise price of $1.99, or 110% of the purchase price of
the Series A Preferred Stock. The warrants expired January 16, 2005, which
was four years from the issuance date. The purchase price for the Series A
Preferred Stock was the average closing price of our common stock during the
ten trading-day period ending January 11, 2001, plus a 15% premium. Each
share of Series A Preferred Stock is convertible into one share of common
stock at the election of the holder and entitles the holder to a liquidation
preference equal to the amount of the original investment, in the event of
liquidation, winding-up or our dissolution. The Series A Preferred Stock
does not have a dividend; however, the stockholders do participate in dividends
declared to common stockholders. No common dividends have been declared during
the years ended February 28, 2005 and February 29, 2004 and February 28,
2003. The Series A Preferred Stock is not subject to adjustments to the
conversion ratio, except for proportional adjustments in the event of a split
or combination of the common stock. The holders of the Series A Preferred
Stock vote together with other classes, with each share of Series A
Preferred Stock having the number of votes equal to the number of shares of
common stock into which the Series A Preferred Stock could be converted.
Proceeds from this financing were allocated based on relative fair values of
the Series A Preferred Stock and warrants issued.
As part of our agreement
with the Series A Preferred Stock purchasers, we filed with the SEC a
registration statement to register the resale of the common stock issuable upon
conversion of the Series A Preferred Stock and upon exercise of the
warrants. The SEC declared that
registration statement effective on October 4, 2002.
At February 28, 2005,
552,000 shares of Series A Preferred Stock remained outstanding.
Series B-1
On April 2, 2001, we
entered into an agreement to sell a new class of Series B Preferred Stock and
warrants to institutional and individual investors. Under the terms of this
financing, we issued an aggregate of 360,000 shares of Series B Preferred Stock
for aggregate gross proceeds of $3.6 million and net proceeds of
$3.2 million, after fees and expenses. We also issued warrants to purchase
720,000 shares of our common stock with an exercise price of $1.125 per share,
which was the closing bid price of our common stock on the trading day prior to
the closing of the financing. The warrants provided for their expiration seven
years from the issuance date. Each share of Series B Preferred Stock was
convertible into ten shares of common stock at the
61
election of the holder and entitled the holder to a liquidation
preference equal to the amount of the original investment, in the event of a
liquidation, winding-up or our dissolution. The Preferred Stock carried
anti-dilution protection requiring a full adjustment of the conversion price to
any lower price at which we sold stock to investors during the three months
following the closing, and carried a weighted-average adjustment of the
conversion price based on any sale of stock by us to investors during the
subsequent nine-month period. The Preferred Stock did not carry a dividend;
however the stockholders were entitled to participate in dividends declared to common
stockholders. No dividends were declared during the years ended February 28, 2005
and February 29, 2004 and February 28, 2003. The new class of Series B
Preferred Stock entitled its holders to elect a member of our Board of
Directors. The holders of the Series B Preferred Stock voted together with
other classes with each share of Series B Preferred Stock having the
number of votes equal to the number of shares of common stock into which the
Series B Preferred Stock could be converted.
Proceeds from this financing
were allocated to the Series B Preferred Stock and warrants issued based on
their relative fair values. Since the Series B Preferred Stock was immediately
convertible upon issuance we recognized a deemed dividend for the discount of Series
B Preferred Stock created by a beneficial conversion feature amounting to
$1.1 million upon the issuance of the Series B Preferred Stock. This
amount was calculated based on the difference between the accounting conversion
price of the Series B Preferred Stock and the fair market value of the common
stock at the time of commitment to purchase the Series B Preferred Stock.
In connection with the debt
financing that we completed on September 20, 2001, all of the Series B
Preferred Stock was exchanged for a new class of Series B-1 Preferred Stock,
and the Series B Preferred Stock was eliminated as a class. The new Series B-1
Preferred Stock carried substantially the same rights, privileges and
preferences as the eliminated Series B Preferred Stock. The exchange was effected
primarily to enable us to issue debt as part of the debt financing that we
closed on August 31, 2001 and September 20, 2001 (see Note 8).
The terms of the Series B Preferred Stock prohibited us from issuing debt, but
the terms of the Series B-1 Preferred Stock permitted us to issue debt with the
consent of the holders of a majority of the Series B-1 Preferred Stock.
We recognized an additional
deemed dividend of approximately $687,000 on August 31, 2001, based on the
adjustment of the conversion price of the Series B-1 Preferred Stock under its
anti-dilution protections. This deemed dividend was related to the initial
closing of our debt financing, with a commitment to issue warrants, on
August 31, 2001 (see Note 8). As a result of the anti-dilution
protections, the Series B-1 Preferred Stock was adjusted to be convertible into
4.2 million shares of our common stock, and the associated common stock
warrants were adjusted to be exercisable for 849,322 shares of our common stock
at an exercise price of $0.95 per share.
On September 20, 2001,
we recognized another deemed dividend of approximately $880,000. This deemed
dividend is related to the second closing of our debt financing on
September 20, 2001 (see Note 8). As a result of the anti-dilution
protections, the Series B-1 Preferred Stock was adjusted to be convertible into
4.3 million shares of our common stock, and the associated warrants were
adjusted to be exercisable for 866,879 shares of our common stock at an
exercise price of $0.93 per share.
As part of our agreement
with the Series B-1 Preferred Stock purchasers, we filed with the SEC a
registration statement to register the resale of the common stock issuable upon
conversion of the Series B-1 Preferred Stock and upon exercise of the
warrants. The SEC declared that
registration statement effective on October 4, 2002.
At February 28, 2005 and
February 29, 2004, all shares of the Series B-1 Preferred Stock had been
converted.
62
NOTE 7. COMMON STOCK
Our Certificate of
Incorporation, as amended, authorizes us to issue 250 million shares of
$0.0001 par value common stock. In
addition, our Board of Directors may, at its discretion, declare dividends to
stockholders. To date, we have not
declared or paid dividends on our common stock. Our Board of Directors presently intends to
retain all earnings for use in our business and therefore does not anticipate
declaring or paying any cash dividends in the foreseeable future.
On May 24, 2002, we
completed a private placement of our common stock and warrants to purchase our
common stock to institutional and individual investors. Under the terms of the
financing, we issued an aggregate of 3,940,000 shares of common stock, and
warrants to purchase 788,000 shares of our common stock with an exercise price
of $1.19 per share, for aggregate gross proceeds of $3.9 million,
including $2.6 million in cash and $1.3 million in cancelled
indebtedness. The $1.19 per share exercise price of the warrants was the
average closing sale price of our common stock on the five trading days
preceding the closing date. The warrants issued to the investors expire four
years from the issuance date. In addition to paying the placement agent a cash
fee of $231,400 and reimbursing it for approximately $70,000 in expenses, we
also issued to the placement agent and its designee warrants to purchase an
aggregate of 310,200 shares of common stock at an exercise price of $1.00 per
share, and warrants to purchase an aggregate of 62,040 shares of common stock
at an exercise price of $1.19 per share. These warrants were valued at a fair
value of $421,000 at May 24, 2002 and were accounted for as issuance
costs. The warrants issued to the placement agent and its designee expire five
years from the issuance date. All $1.19 warrants carry anti-dilution protection
requiring a weighted-average adjustment of the exercise price and of the number
of shares issuable upon exercise of the warrants for certain sales of stock by
us at less than $1.19 per share during the 12 months following the
closing; however, in accordance with NASD Marketplace Rules, we committed not
to sell shares of our stock that would lead to an anti-dilution adjustment
requiring us to issue a number of shares exceeding 19.9% of our then-current
total common shares outstanding, without obtaining stockholder approval. As
part of this transaction, we incurred approximately $126,000 in legal,
accounting and other costs.
As part of our agreement
with the investors, we filed with the SEC a registration statement to register
the resale of the common stock we issued in the private placement and the
common stock issuable upon exercise of the warrants. The SEC declared that registration statement
effective on June 26, 2002.
Cash proceeds from this
financing were allocated first to the fair value of the warrants associated
with the transaction in the amount of $1.3 million and the remaining
balance, net of issuance costs, of $0.9 million to the common stock.
Proceeds related to the cancelled indebtedness were accounted for as an
effective conversion and were converted to common stock at their carrying value
of $1.1 million.
The warrants were classified
as a liability during the time that the associated underlying common stock was
unregistered, as we were obligated to register that common stock as well as the
common stock issuable upon exercise of the warrants, and our ability to perform
that obligation was assumed to be outside our control. During each accounting
period that the warrants were classified as liabilities, the warrants were
adjusted to their fair value. On June 26, 2002, as described above, the
registration statement was declared effective and at that time the warrants,
with a value of approximately $891,000, were reclassified as permanent equity.
During the year ended
February 28, 2003, we recorded a net credit of approximately $378,000, to interest
and other income and expenses, net to adjust the carrying amount of the
warrants issued on May 24, 2002, to fair value.
The May 24, 2002,
common stock financing resulted in anti-dilution adjustments to the warrants
issued in connection with our issuance of redeemable convertible preferred
stock on June 30, 2000. The exercise price of the warrants issued in
connection with our preferred stock on June 30, 2000, was adjusted from
$1.54 to $1.50.
On August 12, 2002, we
completed a private placement of common stock to Zomax Incorporated. Under the
terms of the financing, we issued an aggregate of approximately
6.1 million shares of common stock for aggregate gross proceeds of
approximately $5.0 million. As part of this transaction, we incurred
approximately $89,000 in legal, accounting and other costs. Concurrent with
that agreement, we entered
63
into a strategic alliance agreement with Zomax (see Note 2). As of
February 28, 2005, Zomax held approximately 5% of our outstanding common stock.
As part of the agreement
with Zomax, we filed with the SEC a registration statement to register the
resale of the common stock issued to Zomax.
The SEC declared that registration statement effective on September 23,
2003.
The August 12, 2002,
common stock financing resulted in anti-dilution adjustments to the warrants
issued in connection with our issuance of redeemable convertible preferred
stock on June 30, 2000. The exercise price of the warrants issued in
connection with our preferred stock on June 30, 2000, was adjusted from
$1.50 to $1.43.
In addition, the
August 12, 2002 common stock financing resulted in an anti-dilution
adjustment to the exercise price of the warrants issued in connection with our
May 24, 2002 common stock financing and an increase in the number of
shares of common stock issuable upon exercise of those warrants. The exercise
price of the warrants was adjusted from $1.19 to $1.07. The number of shares issuable
upon exercise of the warrants increased from 850,040 to 944,565.
On September 9, 2003,
we completed a private placement of common stock to investment funds and
accounts managed by Apex Capital, LLC. Under the terms of the financing, we
issued 4.0 million shares of common stock at a price of $1.55 per share
for gross proceeds of $6.2 million. This purchase price represents
approximately a 24% discount from the closing price of our common stock on
September 9, 2003. As part of this transaction, we incurred and expect to
incur approximately $89,000 in legal, accounting, and other costs. Including
shares previously acquired on the open market, as of September 9, 2003,
investment funds and accounts managed by Apex Capital, LLC held approximately
9% of our outstanding common stock.
As part of the agreement
with Zomax, we agreed to file with the SEC a registration statement to register
the resale of the common stock issued to the investors. The SEC declared that registration statement
effective on November 3, 2003.
The September 9, 2003,
common stock financing resulted in anti-dilution adjustments to the warrants
issued in connection with our issuance of redeemable convertible preferred
stock on June 30, 2000. The exercise price of the warrants issued in connection
with our preferred stock on June 30, 2000, was adjusted from $1.43 to
$1.41.
As of February 28, 2005 and
February 29, 2004, there were no shares of outstanding common stock
subject to repurchase.
As of February 28, 2005, the
following table summarizes the terms of our outstanding warrants to purchase
common stock (in thousands, except per share amounts):
|
Issuance Date
|
|
Number of Shares
|
|
Exercise Price
|
|
Expiration Date
|
|
|
May 21, 2001
|
|
800
|
|
$
|
1.71
|
|
May 21, 2011
|
|
|
May 24, 2002
|
|
676
|
|
1.00
|
|
May 24, 2006
|
|
|
May 24, 2002
|
|
74
|
|
1.07
|
|
May 24, 2006
|
|
|
August 1,
2003
|
|
42
|
|
1.19
|
|
August 1, 2010
|
|
|
|
|
1,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 8. NOTES PAYABLE
Investor
Notes Payable
On August 31, 2001, we
issued promissory notes and committed to issue warrants in a private
64
placement to a group of institutional and individual investors, for
aggregate gross proceeds of $6.15 million. Our net receipts from the
financing were approximately $5.6 million after fees to the placement agent,
Commonwealth Associates, L.P. (“Commonwealth”), of $307,500 and expenses of
approximately $223,000. The promissory notes bore annual interest of 8%,
payable quarterly beginning six months after issuance, and were secured by a
senior security interest in substantially all of our assets. The promissory
notes restricted us from issuing common stock dividends. The promissory notes
were convertible, at the option of the note holder, into the type of securities
offered in our next private round of equity financing, at that round’s price.
This could have resulted in the recognition of a contingent beneficial
conversion feature. The notes were due in full on August 31, 2002. The
note holders also received warrants to purchase 6.15 million shares of our
common stock at an exercise price of $0.01 per share. In accordance with NASD
Marketplace Rule 4350(i)(1)(D), warrants exceeding an aggregate of
5,600,000 shares of our common stock (approximately 19.7% of our outstanding
common stock) were not exercisable until we received stockholder approval. We
received stockholder approval on November 27, 2001. In addition, we issued
common stock warrants to Commonwealth equal in number to 10% of the warrants
issued to the investors. We entered into binding agreements on August 31,
2001, to issue these warrants to the note holders and Commonwealth. We issued
these warrants on September 24, 2001, in accordance with Nasdaq’s
application of NASD Marketplace Rules as described below.
Michael Falk, who was a
member of our Board of Directors from April 2001 until May 9, 2002,
was Chairman and Chief Executive Officer of Commonwealth Associates Group
Holdings, L.L.C. Commonwealth Associates Group Holdings, L.L.C. wholly owned
Commonwealth Management, L.L.C., the general partner of Commonwealth
Associates, L.P.
Commonwealth Associates
Group Holdings, L.L.C. wholly owned ComVest Management, LLC, which was the
general partner of ComVest Venture Partners, L.P. Michael Falk was a manager of
ComVest Management, L.L.C. ComVest Venture Partners purchased 250,000 shares of
our common stock and a warrant for 50,000 shares of our common stock for
$250,000 in our May 2002 financing.
We allocated the proceeds
from the August 31, 2001 financing based on the relative fair values of
the promissory notes and warrants issued. The warrants were classified as a
liability as they contain registration rights, which are assumed to be outside
our control. Warrants classified as liabilities were adjusted to their fair
value each accounting period.
On September 20, 2001,
we issued additional promissory notes and committed to issue additional
warrants to another group of institutional and individual investors for
aggregate gross proceeds of $850,000. Our net receipts from the financing were
approximately $779,500 after fees to Commonwealth of $42,500 and expenses of
approximately $28,000. The note holders also received warrants to purchase
850,000 shares of our common stock at an exercise price of $0.01 per share. In
addition, we issued common stock warrants to Commonwealth equal in number to
10% of the warrants issued to the investors. These notes carried the same terms
as the promissory notes referred to above. We entered into binding agreements
on September 20, 2001, to issue these additional warrants to the note
holders and Commonwealth. We issued these warrants on September 24, 2001,
in accordance with Nasdaq’s application of NASD Marketplace Rules as described
below.
During the year ended
February 28, 2002, we recorded a net charge of approximately $4.0 million
to other expense to adjust the carrying amount of the warrants issued on
August 31 and September 20, 2001, to fair value.
We agreed to file with the
SEC a registration statement for the resale of the common stock issuable upon
exercise of the warrants, and if the notes are ultimately converted into or
exchanged for equity, any common stock issuable as a result of such conversion
or exchange. That registration statement was declared effective by the SEC on
June 14, 2002.
The notes were repayable by
us at any time and would have matured early if we were acquired or underwent a
change of control.
65
On November 27, 2001,
as part of the financings, we held a special stockholder meeting and obtained
stockholder approval for the exercise of warrants exceeding an aggregate of
5.6 million shares of our common stock (approximately 19.7% of our
outstanding common stock). In addition we obtained stockholder approval for the
potential conversion of the notes into the same type of securities issued by us
in our next capital-raising private placement of equity securities.
In connection with this debt
financing, our Board of Directors created a new seat on the Board and appointed
to that seat Harold Blue, who was designated by Commonwealth. Michael S. Falk,
who is an officer of Commonwealth, was also a member of the Board of Directors
during the 2002 fiscal year. Mr. Falk is also indirectly affiliated with
one of the purchasers of notes and warrants in the financings. Because of these
relationships, as well as the quantity of warrants issued and the price of the
warrants, Nasdaq’s application of NASD Marketplace Rules would have required us
to obtain stockholder approval before issuing the warrants. However, Nasdaq
granted us an exception from the stockholder approval rule. In keeping with
Nasdaq’s determination, we gave our stockholders 10 days prior written
notice of this exception before issuing the warrants. We gave this notice on
September 14, 2001, and issued the warrants on September 24, 2001.
During the year ended
February 28, 2002, warrants associated with the issuance of the promissory
notes were exercised for 7.5 million shares of our common stock, with an
aggregate market value of approximately $7.2 million at the exercise date.
Approximately 7.4 million shares of our common stock were issued pursuant
to these warrant exercises, after deducting shares withheld as payment of the
exercise price. During the year ended February 28, 2003, warrants associated
with the issuance of the promissory notes were exercised for 200,000 shares of
our common stock, with an aggregate market value of approximately $267,000 at
the exercise date. Approximately 200,000 shares of our common stock were issued
pursuant to these warrant exercises.
In May 2002, following
the asset sale and private placement described in Notes 7 and 10, we repaid
$5.7 million of the $7.0 million principal amount of the promissory
notes that we had issued in August and September 2001. As part of this
repayment, we were required to accrete the portion of carrying amount of the
promissory notes relating to the repayment to its full value. This resulted in
a charge of approximately $973,000, which is included in interest and other
income and expenses, net. The remaining $1.3 million in principal amount
of those promissory notes was effectively converted into the private placement
of common stock and warrants described in Note 7.
Bank Notes
Payable and Equipment Advance Agreements
In August 2003, we
issued a note payable to Silicon Valley Bank for proceeds of approximately $2.0
million. The note bears an annual interest rate of the greater of 5.25%
or 1.00% above the bank’s prime rate (5.50% at February 28, 2005). The
interest rate on the note payable at February 28, 2005, was 6.50%. The
note is payable in fixed monthly principal installments plus interest through
September 2005. In connection with the note payable, we issued a
warrant to purchase 41,730 shares of our common stock at an exercise price of
$1.19 per share. The warrant was immediately exercisable and expires in
August 2010. We estimated the allocated fair value of such warrant
at approximately $46,000, using the Black-Scholes valuation model with the
following assumptions: expected volatility of 136%, risk-free interest rate of
4.01%, expected life of seven years and no dividends. The value of the
warrant was recorded as a debt discount and is being amortized as interest
expense using the effective interest method over the life of the note payable.
For the year ended February 28, 2005, interest expense related to such
warrant amounted to approximately $21,000. The unamortized balance of
approximately $3,000 at February 28, 2005, is presented as a discount against
the principal balance of the note payable outstanding. As of February 28,
2005, the warrants had not been exercised.
In August 2003, we also
entered into an equipment advance agreement with Silicon Valley Bank. The
equipment advance bears annual interest at the greater of 5.50% or 1.00% above
the bank’s prime rate. The agreement provided for borrowings of up to
$500,000 through August 2004 and was limited to equipment purchases.
As of February 28, 2005, we had borrowed approximately $363,000 under this
agreement and the interest rate at that date was 6.50%. Monthly payments
of interest only were payable
66
through August 1, 2004, after which fixed monthly principal
installments plus interest will be made through August 2006.
In September 2004, we
entered into another equipment advance agreement with Silicon Valley
Bank. This new equipment advance bears annual interest at the greater of
5.50% or 1.00% above the bank’s prime rate. This equipment advance allows
us to borrow up to $500,000 through August 1, 2005, solely to finance
equipment purchases. As of February 28, 2005, we had borrowed
approximately $317,000 under this agreement and the interest rate at that date
was 6.50%. Monthly payments of interest only are payable through August 2005,
after which fixed monthly principal installments plus interest will be made
through August 2007.
All of this debt is
collateralized by a senior security interest in substantially all of our
assets. We are also required to maintain compliance with certain
financial covenants, with all of which we were in compliance at February 28,
2005.
Scheduled maturities of debt
at February 28, 2005 are as follows (in thousands):
|
Years ending:
|
|
|
|
|
February 28, 2006
|
|
$
|
826
|
|
|
February 28, 2007
|
|
249
|
|
|
February 28, 2008
|
|
93
|
|
|
|
|
$
|
1,168
|
|
NOTE 9. EMPLOYEE BENEFIT PLANS
401(k) Savings
Plan
We have a savings plan (the “Savings
Plan”) that qualifies as a defined contribution arrangement under
Section 401(a), 401(k) and 501(a) of the Internal Revenue Code. Under the
Savings Plan, participating employees may defer a percentage (not to exceed
20%) of their eligible pretax earnings up to the Internal Revenue Service’s
annual contribution limit. All of our employees on the United States payroll
are eligible to participate in the Plan. We will determine our contributions,
if any, to the Savings Plan based on our current profits and/or retained
earnings, however, we have not made any contributions to the Savings Plan since
its inception.
1996 Stock
Option Plan
In October 1996, we
adopted the 1996 Stock Option Plan (the “1996 Plan”). The 1996 Plan provides
for the granting of stock options to our employees and consultants. Options
granted under the 1996 Plan may be either incentive stock options or
nonqualified stock options. Incentive stock options (that is, options intended
to qualify as incentive stock options under the Internal Revenue Code, or “ISOs”)
may be granted only to our employees (including directors who are also
employees). Nonstatutory stock options (that is, options not intended to
qualify as incentive stock options under the Internal Revenue Code, or “NSOs”)
may be granted to our employees and consultants. At February 28, 2005, we had
reserved approximately 3.4 million shares of common stock for issuance
under the 1996 Plan. The shares reserved are subject to annual increases equal
to the lesser of (a) 3,000,000 shares, (b) 6% of the outstanding
shares on such date, or (c) a lesser amount determined by the Board.
The 1996 Plan provides that
the options shall be exercisable over a period not to exceed ten years from the
date of the grant; however, in the case of an ISO granted to a person owning
more than 10% of the combined voting power of all classes of our stock, the
term of the option will be five years from the date of the grant. The initial
grant by us to an employee under this plan generally vests as to 25% of the
shares one year after the date of the grant, and as to the remaining shares in
equal monthly installments over the following 36 months. Subsequent
grants by us to that employee under this plan generally vest as to 12.5% of the
shares 6 months after the date of the grant, and as to the remaining
shares in equal monthly
67
installments over the following 42 months.
Under the 1996 Plan, the
exercise price of an option may not be less than 100% of the fair market value
of the shares on the date of grant as determined by the Board of Directors;
however, the exercise price of an ISO or NSO granted to a 10% shareholder may
not be less than 110% of the fair market value of the shares on the date of
grant.
The 1996 Plan expires in
October 2006.
1998
Director Option Plan
In December 1998, we
adopted the 1998 Director Option Plan (the “Director Plan”), which became
effective in February 1999. The Director Plan provides for the granting of
stock options to Board members who are not employees of Intraware. We have
reserved approximately 208,000 shares of common stock for issuance under the
Director Plan at February 28, 2005. The option grants under the Director Plan
are automatic and nondiscretionary, and the exercise price of the options must
be 100% of the fair market value of the common stock on the date of grant. We
determine fair market value by the closing price of the common stock on Nasdaq
on the grant date. Each eligible Board member is granted an option to purchase
15,000 shares (“First Option”) on the date such person first becomes a
director. Immediately following each annual meeting of stockholders, each
eligible Board member is automatically granted an additional option to purchase
7,500 shares (“Subsequent Option”) if such director has served continuously as
a member of the Board for at least the preceding six months. The Director Plan
provides that the options shall be exercisable over a period not to exceed ten
years from the date of the grant; however, the options terminate 3 months
following the date the director ceases to be a member of the Board
(12 months if the director ceased to be a Board member because of death or
disability). First Options vest as to 12.5% of the shares 6 months after
the grant date and as to remaining shares in equal installments over the next
42 months provided the optionee continues as a member of the Board. Subsequent
Options vest as to 25% of the shares 6 months after the grant date and as
to the remaining shares in equal installments over the next 18 months.
The 1998 Director Plan
expires in December 2008.
1999
Non-Qualified Acquisition Stock Option Plan
In October 1999, we
adopted the Non-Qualified Acquisition Stock Option Plan (the “1999 Plan”). The
1999 Plan provides for the granting of NSOs to our employees and consultants.
Officers may only receive grants under the 1999 Plan in connection with their initial
service to us, and Board members may not receive any grants under the 1999
Plan. We reserved 3,500,000 shares of common stock for issuance under the 1999
Plan at the time of its adoption. The standard form of Stock Option Agreement
used under the 1999 Plan provides that the options are exercisable over a
period not to exceed ten years from the date of the grant. Options granted
under the 1999 Plan generally vest as to 25% of the shares one year after the
date of grant and as to the remaining options in equal monthly installments
over the next 36 months. The exercise price of all options granted under
the 1999 Plan has been the fair market value of our common stock on the grant
date, as determined by the closing price of the common stock on Nasdaq on that
date. During the year ended February 28, 2003, we ceased issuing options
from this plan. All remaining options available for grant were removed from the
plan at that time.
The 1999 Plan expires in
October 2009.
Employee
Stock Purchase Plan
In December 1998, the
Board adopted the 1998 Employee Stock Purchase Plan (the “Purchase Plan”),
which became effective February 1999. The Purchase Plan reserves 600,000
shares of common stock for issuance thereunder. On each March 1 beginning
in 2000, the aggregate number of shares reserved for issuance under the
Purchase Plan is increased automatically to the lesser of 400,000 shares, 1% of
the outstanding shares on such date, or a lesser amount determined by the Board
of Directors. Employees
68
generally are eligible to participate in the Purchase Plan if they are
customarily employed by us for more than 20 hours per week and more than
five months in a calendar year and are not (and would not become as a result of
being granted an option under the Purchase Plan) 5% stockholders. Under the
Purchase Plan, eligible employees select a rate of payroll deduction up to 15%
of their W-2 cash compensation subject to certain maximum purchase limitations.
Each offering period has a maximum duration of two years and consists of four
six-month purchase periods. Depending on the effective date, the first purchase
period is approximately six months long. Offering Periods and purchase periods
thereafter begin on April 15 and October 15. The price at which the
common stock is purchased under the Purchase Plan is 85% of the lesser of the
fair market value of our common stock on the first day of the applicable
offering period or on the last day of that purchase period.
Selected
Information Regarding all Stock Option Plans
The following table
summarizes all stock option activity (in thousands, except per share amounts):
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
Options
|
|
|
|
Average
|
|
|
|
|
Available
|
|
Number of
|
|
Exercise
|
|
|
|
|
For Grant
|
|
Options
|
|
Price
|
|
|
Balance at February 28, 2002
|
|
1,357
|
|
9,298
|
|
$
|
7.84
|
|
|
Shares authorized
|
|
2,427
|
|
—
|
|
—
|
|
|
Plan shares expired
|
|
(2,172
|
)
|
—
|
|
—
|
|
|
Options granted at fair value
|
|
(2,603
|
)
|
2,603
|
|
0.83
|
|
|
Options exercised
|
|
—
|
|
(199
|
)
|
0.60
|
|
|
Options canceled
|
|
3,367
|
|
(3,367
|
)
|
6.21
|
|
|
Balance at February 28, 2003
|
|
2,376
|
|
8,335
|
|
2.57
|
|
|
Shares authorized
|
|
3,000
|
|
—
|
|
—
|
|
|
Plan shares expired
|
|
(49
|
)
|
—
|
|
—
|
|
|
Options granted at fair value
|
|
(3,760
|
)
|
3,760
|
|
1.37
|
|
|
Options exercised
|
|
—
|
|
(1,317
|
)
|
0.99
|
|
|
Options canceled
|
|
1,438
|
|
(1,438
|
)
|
3.20
|
|
|
Balance at February 29, 2004
|
|
3,005
|
|
9,340
|
|
2.21
|
|
|
Shares authorized
|
|
3,000
|
|
—
|
|
—
|
|
|
Plan shares expired
|
|
(33
|
)
|
—
|
|
—
|
|
|
Options granted at fair value
|
|
(2,950
|
)
|
2,950
|
|
1.39
|
|
|
Options exercised
|
|
—
|
|
(401
|
)
|
1.01
|
|
|
Options canceled
|
|
554
|
|
(554
|
)
|
3.29
|
|
|
Balance at February 28, 2005
|
|
3,576
|
|
11,335
|
|
1.98
|
|
|
|
|
|
|
|
|
|
|
At February 28, 2005,
February 29, 2004 and February 28, 2003, approximately 6.2 million,
4.2 million, and 3.5 million options were exercisable at a weighted
average exercise price per share of $2.56, $3.33, and $2.57, respectively.
The following table
summarizes the information about all stock options outstanding and exercisable
as of February 28, 2005 (in thousands, except per share amounts and years):
69
|
|
|
Options Outstanding at February 28, 2005
|
|
Options Vested
|
|
|
|
|
|
|
Weighted
|
|
|
|
and Exercisable at
|
|
|
|
|
|
|
Average
|
|
|
|
February 28, 2005
|
|
|
|
|
|
|
Remaining
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
Number
|
|
Contractual
|
|
Average
|
|
Number
|
|
Average
|
|
|
Range of
Exercise Prices
|
|
Outstanding
|
|
Life
|
|
Exercise
Price
|
|
Outstanding
|
|
Exercise
Price
|
|
|
$ 0.01
- 0.77
|
|
|
2,500
|
|
7.04
|
|
$
|
0.66
|
|
1,689
|
|
$
|
0.62
|
|
|
0.80 - 1.12
|
|
|
1,830
|
|
7.56
|
|
0.89
|
|
1,375
|
|
0.90
|
|
|
1.16 - 1.39
|
|
|
1,844
|
|
8.50
|
|
1.16
|
|
681
|
|
1.16
|
|
|
1.41 - 1.41
|
|
|
2,337
|
|
9.43
|
|
1.41
|
|
296
|
|
1.41
|
|
|
1.45 - 2.11
|
|
|
1,387
|
|
6.01
|
|
1.79
|
|
1,156
|
|
1.78
|
|
|
2.19 - 73.00
|
|
|
1,437
|
|
7.33
|
|
7.85
|
|
1,011
|
|
10.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,335
|
|
7.77
|
|
1.98
|
|
6,208
|
|
2.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of February 28, 2005, we
had change of control severance agreements with six of our employees, five of
whom were executive officers. The agreements provide that if we experience a
change of control, and the employee is involuntarily terminated without cause
within twelve months following the change of control or the announcement of
such change of control, we will provide additional vesting of unvested stock
options, in addition to any vesting acceleration provided under the 1996 Stock
Option Plan. Two of the agreements
provide for one year of additional vesting of unvested stock options and four
of the agreements provide for immediate vesting of all of the employee’s
unvested stock options.
These agreements were
modifications to the terms of the original grants, and create a new measurement
date for the shares affected. Any additional compensation charge will be taken
when and if the officers achieve a benefit from the change (i.e., if a change
in control or termination occurs). Under these agreements, approximately
1.3 million shares were modified, resulting in a contingent additional
maximum compensation charge of approximately $1.2 million at February 28, 2005.
The recognition of the compensation charge, if any, depends on whether the
employee ultimately retains an option award that would have been otherwise
forfeited under the option or award’s original vesting terms.
In January 2002, we
issued options to purchase 150,000 shares of common stock, at an exercise price
of $1.99 per share, to a consultant in consideration for services rendered. The
options vested monthly over 12 months and expire in 5 years. The
options were valued using the Black-Scholes option pricing model. The monthly
Black-Scholes valuation was based on a volatility between 144% and 156%,
risk-free interest rates between 2.76% and 4.34%, a 5 year life, and a
zero dividend yield. The fair value of the options totaled approximately
$169,000 over their vesting period and was recorded in general and
administrative expense.
Unearned Stock-Based
Compensation
In connection with our
acquisition of Janus Technologies, Inc. during the year ended
February 28, 2001, we recognized unearned compensation totaling
$1.5 million, which was being amortized over the vesting periods of the
related options. Amortization expense related to all stock-based compensation
recognized during the years ended February 28, 2005, February 29, 2004 and
February 28, 2003, totaled approximately zero, $28,000, and
$1.0 million, respectively.
NOTE 10. ASSET SALE
In May 2002, we sold
substantially all of the assets related to our Asset Management software
business to Computer Associates International, Inc. for approximately
$9.5 million in cash. In connection
70
with this sale, our July 2001 agreement with Computer Associates
for its resale of our Argis suite of software products was terminated. In
addition, as part of that asset sale, we assigned to Computer Associates our
May 2001 agreement with Corporate Software (now Software Spectrum) for its
resale of our Argis suite of software products. Because of the asset sale,
Software Spectrum has the right to terminate that agreement. If it does so, all
of the shares subject to the warrant that we issued to Corporate Software in
May 2001 will immediately become exercisable. The fair value of the
warrant had been recorded as prepaid distribution costs and was being
recognized as a reduction of revenue over the lesser of a ratable charge over
the 24-month term of the agreement with Corporate Software or the period it
took Corporate Software to generate revenue to Intraware of $1.6 million
from Corporate Software’s resale of our asset management software. As no
additional revenue would be generated for us under this distribution agreement,
the remaining unamortized prepaid distribution costs of $936,000 were recorded
as a reduction to revenue during the year ended February 28, 2003.
The total proceeds from the
sale of $9.5 million, less the book value of transferred equipment,
intangible assets including goodwill, deferred revenue, and transaction costs,
based on their respective carrying values at the sale date, were recorded as a
gain on sale of assets in the year ended February 28, 2003.
We determined
the calculation of the gain on sale as follows (in thousands):
|
Total Consideration
|
|
$
|
9,500
|
|
|
Net book value of equipment, intangible
assets and deferred revenue
|
|
(6,536
|
)
|
|
Transaction costs
|
|
(308
|
)
|
|
Gain on sale
|
|
$
|
2,656
|
|
In connection with our
disposition of the Asset Management software business, we announced a
restructuring and workforce reduction to reduce our operating expenses.
We recorded a charge of
$1.8 million relating to this restructuring and the impairment of assets
during the three months ended May 31, 2002.
The impairment of assets
includes the write-off of approximately $403,000 in prepaid licenses that were
held for resale. The restructuring charge consisted of approximately $345,000
for severance and benefits relating to the involuntary termination of 14
employees who were not hired by Computer Associates. We terminated an
additional 33 employees, all of whom were based in North America. These 33
terminated employees were all hired by Computer Associates and therefore
received no severance payments. Of the 47 terminated employees, 22 were in Sales
and Marketing, 10 were in Product Development and 15 were directly involved in
our product support. We also closed our Pittsburgh, Pennsylvania office and
various satellite offices.
We accrued for lease and
related costs of approximately $983,000, principally pertaining to the
estimated future obligations of non-cancelable lease payments for excess
facilities that were vacated due to our reductions in work force. We also
recognized $63,000 relating to other restructuring expenses. Due to changes in
management’s estimates relating to the restructuring during the three months
ended August 31, 2002, we recognized an additional expense of $106,000
pertaining to the estimated future obligations of non-cancelable lease payments
for excess facilities that were vacated due to our reductions in work force. In
addition, we did not incur projected severance and benefits of $106,000 and
reduced the reserve accordingly. During the three months ended
February 28, 2003, we terminated our Pittsburgh, Pennsylvania lease and
realized a savings of approximately $152,000 in rent that would otherwise have
been payable, and which was included in the restructuring line item on the
consolidated statement of operations.
In our December 2000
restructuring, we closed our Fremont, California office and assigned our lease
to a new tenant while acting as guarantor for that tenant. In May 2002,
the new tenant defaulted on its lease. During the three months ended
November 30, 2002, we made a cash payment of approximately
71
$214,000 to terminate this lease.
The following table sets
forth an analysis of the components of the restructuring and impairment of
assets charges recorded in our year ended February 29, 2004, and subsequent
adjustments and payments made against the reserve (in thousands):
|
|
|
Severance and
benefits
|
|
Excess lease and
related costs
|
|
Impairment of
assets
|
|
Other costs
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 23, 2002 restructuring
|
|
$
|
345
|
|
$
|
983
|
|
$
|
403
|
|
$
|
63
|
|
$
|
1,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid
|
|
(239
|
)
|
(858
|
)
|
—
|
|
—
|
|
(1,097
|
)
|
|
Non-cash charges
|
|
—
|
|
(69
|
)
|
(403
|
)
|
(63
|
)
|
(535
|
)
|
|
Provision adjustment
|
|
(106
|
)
|
(46
|
)
|
—
|
|
—
|
|
(152
|
)
|
|
Reserve balance at February 28, 2003
|
|
—
|
|
10
|
|
—
|
|
—
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid
|
|
—
|
|
(10
|
)
|
—
|
|
—
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve balance at February 29, 2004
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
As of February 28, 2005, we
have settled all liabilities associated with the May 2002 restructuring
and the sale of the Asset Management software business, subject to the ongoing
indemnification obligation discussed in Note 5.
NOTE 11. RESTRUCTURING
During the year ended
February 28, 2005 we realized a payroll tax refund for overpaid payroll taxes
of approximately $75,000. These overpaid payroll taxes related to
supplemental unemployment compensation benefits for involuntarily terminated
employees during our restructuring events in December 2000,
August 2001 and May 2002. As of February 28, 2005 we believe all
transactions relating to past restructuring events have been recognized.
NOTE 12. SEGMENT AND GEOGRAPHIC INFORMATION
During the years ended February 28, 2005, February 29, 2004 and
February 28, 2003, we operated in a single business segment providing online
purchasing and delivery services for business software. The geographic distributions of our revenues were
as follows (in thousands):
|
|
|
For the Year Ended
|
|
|
|
|
February 28, 2005
|
|
February 29, 2004
|
|
February 28, 2003
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
9,602
|
|
$
|
10,212
|
|
$
|
13,607
|
|
|
Europe
|
|
1,233
|
|
695
|
|
435
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,835
|
|
$
|
10,907
|
|
$
|
14,042
|
|
Our assets are
primarily located in the United States of America and not allocated to any
specific region. We do not produce
reports for, or measure the performance of, our geographic regions on any
asset-based metrics. However, the
geographic revenues listed above have been categorized in accordance with the
region in which the customer is based.
Total revenue for North America, primarily relates to revenue within the
United States.
72
SUPPLEMENTARY
DATA
The following table sets
forth selected unaudited quarterly information for our last eight fiscal
quarters (in thousands, except per share amounts). We believe all necessary
adjustments (which consisted only of normal recurring adjustments) have been
included in the amounts stated below to state fairly the results of such
periods when read in conjunction with the consolidated financial statements and
related notes included elsewhere herein.
|
|
|
For the quarter ended
|
|
|
|
|
Feb. 28
2005
|
|
Nov. 30,
2004
|
|
Aug. 31,
2004
|
|
May 31,
2004
|
|
|
Revenue
|
|
$
|
2,865
|
|
$
|
2,529
|
|
$
|
2,594
|
|
$
|
2,847
|
|
|
Gross profit
|
|
1,562
|
|
1,378
|
|
1,474
|
|
1,852
|
|
|
Loss from operations
|
|
(352
|
)
|
(793
|
)
|
(659
|
)
|
(92
|
)
|
|
Net loss
|
|
(327
|
)
|
(767
|
)
|
(659
|
)
|
(105
|
)
|
|
Basic and diluted net loss per share
|
|
$
|
(0.01
|
)
|
$
|
(0.01
|
)
|
$
|
(0.01
|
)
|
$
|
(0.00
|
)
|
|
Weighted average shares - basic and fully
diluted
|
|
60,420
|
|
60,361
|
|
60,119
|
|
59,617
|
|
|
|
|
For the quarter ended
|
|
|
|
|
Feb. 29
2004
|
|
Nov. 30,
2003
|
|
Aug. 31,
2003
|
|
May 31,
2003
|
|
|
Revenue
|
|
$
|
3,043
|
|
$
|
2,526
|
|
$
|
2,525
|
|
$
|
2,813
|
|
|
Gross profit
|
|
1,948
|
|
1,499
|
|
1,400
|
|
1,600
|
|
|
Income (loss) from operations
|
|
20
|
|
(479
|
)
|
(943
|
)
|
(854
|
)
|
|
Net income (loss)
|
|
19
|
|
(498
|
)
|
(992
|
)
|
(909
|
)
|
|
Basic and diluted (earnings) net loss per
share
|
|
$
|
0.00
|
|
$
|
(0.01
|
)
|
$
|
(0.02
|
)
|
$
|
(0.02
|
)
|
|
Weighted average shares - basic
|
|
59,489
|
|
58,491
|
|
53,526
|
|
52,202
|
|
|
Weighted average shares - fully diluted
|
|
64,499
|
|
58,491
|
|
53,526
|
|
52,202
|
|
The quarter ended February 29,
2004 includes the application of a credit from a vendor relating to internet
expenses of approximately $0.1 million. The credit was issued in
relationship to a renegotiation and correction of fees charged to us during our
fiscal year 2004 and was recorded as a reduction to cost of revenues and
operating expenses.
|
ITEM 9.
|
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
|
None.
(a) Evaluation of Disclosure
Controls and Procedures. Our
principal executive officer and principal financial officer, after evaluating
the effectiveness of our disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934
(the “Exchange Act”)) as of February 28, 2005, have concluded that our
disclosure controls and procedures are effective based on their evaluation of
the controls and procedures required by paragraph (b) of the Exchange Act
Rules 13a-15 or 15d-15.
Since we are not yet an
accelerated filer, we are not currently required to comply with Section 404 (Management Assessment of Internal Controls) of the
Sarbanes-Oxley Act of 2002. We are in
the process of implementing what we believe will be sufficient internal control
structures and procedures for our financial reporting such that our management
can provide the required certifications as to these structures
73
and procedures in our Annual Report on Form 10-K for our fiscal year
ending February 28, 2006.
(b) Changes in Internal
Controls over Financial Reporting. No changes in our internal control over financial reporting
identified in connection with the evaluation required by paragraph (d) of
Exchange Act Rules 13a-15 or 15d-15 occurred during our last fiscal quarter
that have materially affected or are reasonably likely to materially affect,
our internal control over financial reporting.
ITEM 9B. OTHER
INFORMATION.
Not applicable.
74
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
Our
Board of Directors currently has six members, who are divided among three
classes with overlapping three year terms. Our Board also currently has one
vacancy. Below is information on our
directors, as of April 15, 2005.
|
|
|
|
|
|
|
Year Current
|
|
Independent/
|
|
Chair and Committee
|
|
|
Name
|
|
Age
|
|
Class
|
|
Term Ends
|
|
Not Independent†
|
|
Assignments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Peter H. Jackson
|
|
46
|
|
III
|
|
2007
|
|
Not Independent
|
|
Chairman of
the Board.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark B. Hoffman
|
|
58
|
|
III
|
|
2007
|
|
Independent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brendan A. McLoughlin
|
|
66
|
|
II
|
|
2006
|
|
Independent
|
|
Chairman,
Compensation Committee. Member, Audit, Nominating and Corporate Governance,
and Special Litigation committees.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Raymond L. Ocampo Jr.
|
|
52
|
|
II
|
|
2006
|
|
Independent
|
|
Chairman,
Nominating and Corporate Governance and Special Litigation committees.
Member, Compensation Committee.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Peter F. Pervere
|
|
58
|
|
I
|
|
2005
|
|
Independent
|
|
Chairman,
Audit Committee. Member, Compensation Committee.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bradley M. Shuster
|
|
50
|
|
I
|
|
2005
|
|
Independent
|
|
Member,
Audit Committee.
|
|
† Independence is determined in accordance with the applicable rules of
The Nasdaq Stock Market and the Securities and Exchange Commission.
Peter H. Jackson co-founded Intraware in August 1996 as
President, Chief Executive Officer and a member of the Board of Directors. While continuing as a member of the Board of
Directors, he assumed the title of Chief Executive Officer in December 2000;
President and Chief Executive Officer in September 2002; and Chairman, Chief
Executive Officer and President in November 2003. Prior to joining Intraware, he served as
founder and President of Granite Computer Products, Inc., a corporate computer
hardware reseller and services provider; President and Chief Operating Officer
of Dataflex Corporation, a value-added reseller of computer hardware and
services; and Vice President of Vanstar Corporation, a computer hardware and
services company. Mr. Jackson holds
an A.B. in History from the University of California, Berkeley.
Mark B. Hoffman has served as a member of our Board of
Directors since August 1996. He was Chairman of our Board until
November 2003. From September 1996 until October 2004,
Mr. Hoffman served as Chairman of the Board of Directors and Chief
Executive Officer of Commerce One, Inc., an e-commerce procurement and
supplier-management solutions company. Commerce One, Inc. filed a voluntary
petition for relief under Chapter 11 of the United States Bankruptcy Code in
October 2004. Prior to joining Commerce
One, Mr. Hoffman served as Chief Executive Officer and President of
Sybase, Inc., a
75
company he co-founded in 1984. Prior to Sybase, Mr. Hoffman’s
experience includes management positions at Britton Lee, a manufacturer of
database machines, and at Amdahl Corporation. Mr. Hoffman holds an M.B.A.
from the University of Arizona and a B.S. in Engineering from the U.S. Military
Academy.
Brendan A. McLoughlin has served as a member of our Board of
Directors since July 2002. He is a member of the Audit Committee, the
Nominating and Corporate Governance Committee and the Special Litigation
Committee, and is the Chairman of the Compensation Committee. From
September 1998 to April 2001, Mr. McLoughlin served as Senior
Vice President of Sales at Navigation Technologies Corporation, a database
software company. From August 1997 to June 1998 he served as Senior
Vice President of Sales for Fujitsu Personal Computer Company, and from
September 1996 to July 1997 he served as Senior Vice President of
World-Wide Sales at Vision Tek Corporation, a 3D graphic accelerator company.
From May 1993 to August 1996, he served as Senior Vice President of
World-Wide Sales at Dataflex Corporation, a value-added reseller of computer
hardware and services. From 1983 to 1993, Mr. McLoughlin held various
management positions at Compaq Computer Corporation, including Vice President
of North American Corporate Sales. From 1968 to 1983, he held various positions
at IBM Corporation. Mr. McLoughlin holds a B.A. in Business Administration
from Belmont Abbey College and has completed executive management courses at
Harvard University Business School and the University of Pennsylvania Wharton
School of Business.
Raymond L. Ocampo Jr. has served as a member of our Board of
Directors since November 2003. He is a member of the Compensation
Committee, and is the Chairman of the Nominating and Corporate Governance
Committee and of the Special Litigation Committee. He has been a member of the
board of directors of the Berkeley Center for Law & Technology since
January 2000 and served as Executive Director from August 1997
through December 1999. Mr. Ocampo has been since April 2004 the
President and Chief Executive Officer of Samurai Surfer LLC, a consulting and
investment company. Mr. Ocampo was Senior Vice President, General Counsel
and Secretary at Oracle Corporation from September 1990 until his retirement
in November 1996. He held other senior positions in Oracle’s Legal
Department between July 1986 and September 1990. Mr. Ocampo is a
member of the board of directors of CytoGenix, Inc., Keynote
Systems, Inc., The PMI Group, Inc. and VitalStream Holdings, Inc.,
and previously served on the board of directors of Vantive Corporation. He
holds a B.A. from the University of California, Los Angeles and a J.D. from
Boalt Hall School of Law at the University of California, Berkeley.
Peter F. Pervere has served as a member of our Board of
Directors since March 2003. He is the Chairman of the Audit Committee and
is a member of the Compensation Committee. From April 1997 until
February 2000, Mr. Pervere served as Vice President and Chief
Financial Officer and from February 2000 to May 2002 he served as
Senior Vice President and Chief Financial Officer of Commerce One, Inc.
From 1987 to April 1997, Mr. Pervere was at Sybase, Inc.,
serving as Vice President and Corporate Controller from 1991 to 1997. Prior to
joining Sybase, Mr. Pervere served for five years on the auditing staff,
including three years as an audit manager, at the accounting firm of
Ernst & Young LLP. He is a member of the Board of Directors of Digital
Impact, Inc., a provider of integrated digital marketing solutions for
enterprises. Mr. Pervere holds a B.A. degree in History from Stanford
University.
Bradley M. Shuster has served as a member of our Board of
Directors since May 2004. He is a member of the Audit Committee. Since
January 1, 2003, Mr. Shuster has served as President, International
and Strategic Investments of The PMI Group and President and Chief Executive
Officer of PMI Capital Corporation. From February 1999 to
December 2002, he served as Executive Vice President Corporate Development
of The PMI Group and PMI Mortgage Insurance Co. From 1995 to
February 1999, he served as Senior Vice President, Treasurer and Chief
Investment Officer of the PMI Group and PMI Mortgage Insurance Co. Prior to
joining PMI, he was an audit partner with the accounting firm of
Deloitte & Touche LLP, where he was employed from January 1978 to
July 1995. Mr. Shuster holds a B.S. degree from the University of
California, Berkeley and an M.B.A. from the University of California, Los
Angeles.
The
Board has a standing Audit Committee established in accordance with the Securities
Exchange Act of 1934, the members of which are identified above. The Board has determined that Mr.
76
Pervere
is an audit committee financial expert for purposes of applicable SEC rules,
and that Mr. Pervere meets the independence standards for audit
committee members under applicable SEC and Nasdaq Stock Market rules.
Executive
Officers
As
of April 15, 2005, our executive officers were:
|
Name
|
|
Age
|
|
Position
|
|
Peter
H. Jackson
|
|
46
|
|
Chairman,
Chief Executive Officer and President.
|
|
|
|
|
|
|
|
Richard
J. Northing
|
|
40
|
|
Executive
Vice President and Chief Operating Officer.
|
|
|
|
|
|
|
|
Wendy
A. Nieto
|
|
40
|
|
Executive
Vice President and Chief Financial Officer.
|
|
|
|
|
|
|
|
John
J. Moss
|
|
42
|
|
Senior
Vice President and General Counsel.
|
Peter H. Jackson co-founded Intraware in August 1996 as
President, Chief Executive Officer and a member of the Board of Directors. While continuing as a member of the Board of
Directors, he assumed the title of Chief Executive Officer in December 2000;
President and Chief Executive Officer in September 2002; and Chairman, Chief
Executive Officer and President in November 2003. Prior to joining Intraware, he served as
founder and President of Granite Computer Products, Inc., a corporate computer
hardware reseller and services provider; President and Chief Operating Officer
of Dataflex Corporation, a value-added reseller of computer hardware and
services; and Vice President of Vanstar Corporation, a computer hardware and
services company. Mr. Jackson holds
an A.B. in History from the University of California, Berkeley.
Richard J. Northing joined us as Project Manager in
May 1999. He became Director of Project Management in October 1999,
Senior Director of Project Management in May 2000, Vice President of
Technology and Operations in March 2001, Senior Vice President of
Technology and Operations in February 2005, and Executive Vice President and Chief
Operating Officer in March 2005. Prior
to joining Intraware, he held senior consulting positions at Accenture and at
Electronic Data Systems Corporation. Dr. Northing holds a B.Sc. from the
University of Liverpool, U.K., and a D.Phil from Oxford University, U.K.
Wendy A. Nieto joined us in April of 2000 as Controller.
She became Vice President of Finance in August 2001, Chief Financial
Officer and Senior Vice President of Finance in April 2002, Chief
Financial Officer and Executive Vice President of Technology and Operations in
August 2003, and Executive Vice President and Chief Financial Officer in March
2005. Prior to joining Intraware, she was Director of Finance at Chiron
Corporation, a biotechnology company. A Certified Public Accountant,
Mrs. Nieto was also employed by various accounting firms. Mrs. Nieto
holds a B.S. from California State University, Hayward and an M.B.A. from St.
Mary’s University.
John J. Moss joined us as General Counsel in
October 1999. He became Vice
President and General Counsel in August 2001, and Senior Vice President and
General Counsel in February 2005. Prior
to joining Intraware, he served as Deputy General Counsel of Barra, Inc.,
Corporate Counsel of Oracle Corporation, and an associate at the law firm of
Graham & James. Mr. Moss holds a J.D. from Stanford University,
an M.A. in International Economics from the Johns Hopkins School of Advanced
International Studies, and a B.A. from Sarah Lawrence College.
77
Code of
Ethics
Our
website (www.intraware.com/company/corp_governance/index.html) contains
Intraware’s Code of Ethics, which applies to our directors, executive officers
and employees. Any amendment to the Code of Ethics that applies to our
directors or executive officers will be disclosed on our website, and any
waiver of the Code of Ethics for directors or executive officers may be made
only by our Board of Directors or the Audit Committee and will be disclosed on
our website.
Section
16(a) Beneficial Ownership Reporting Compliance
Section 16(a)
of the Securities and Exchange Act of 1934, as amended, requires our directors
and executive officers, and persons who own more than 10% of our common stock,
to file reports with the SEC regarding their ownership and changes in ownership
of our securities. Based solely on our review of those filed reports, we
believe that all of those persons complied with the applicable filing
requirements with respect to our fiscal year ended February 28, 2005, except as
follows:
On
February 4, 2004, Passport Management LLC (“Passport”) became a holder of 10%
of our common stock. Passport reported
this event in a Form 3 filed with the SEC on June 28, 2004. Between February 4 and June 22, 2004,
Passport made 69 purchases for an aggregate of 1,946,773 shares of our common
stock, and 25 sales for an aggregate of 1,093,142 shares of our common stock,
in transactions that were reported on Forms 4 filed with the SEC on July 7 and
8, 2004. Between October 19 and December
31, 2004, Passport made 12 sales for an aggregate of 495,700 shares of our
common stock in transactions that were reported on a Form 5 filed with the SEC
on February 15, 2005.
On
March 12, 2004, John J. Moss received an employee stock option grant for 10,000
shares of our common stock, in a transaction that was reported on a Form 4
filed with the SEC on March 30, 2004.
On
April 14, 2004, Peter H. Jackson purchased 5,000 shares of our common stock
pursuant to our Employee Stock Purchase Plan, in a transaction that was
reported on a Form 4 filed with the SEC on April 22, 2004.
ITEM 11. EXECUTIVE COMPENSATION
Summary
Compensation Table
The
following table shows for the fiscal years ended February 28, 2005, February
29, 2004, and February 28, 2003 the compensation of our Chief Executive
Officer, our four other most highly compensated executive officers for the most
recent fiscal year, and two other individuals who would have been among the
four most highly compensated if they had been officers as of February 28, 2005.
78
|
|
|
|
|
|
|
|
|
|
|
Long-term
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards
|
|
|
|
|
|
|
Annual Compensation
|
|
Securities
|
|
|
|
|
|
|
|
|
|
|
Other Annual
|
|
Underlying
|
|
|
Name and Principal Position
|
|
Year
|
|
Salary
|
|
Bonus
|
|
Compensation
|
|
Options (#)
|
|
|
Peter H. Jackson
|
|
2005
|
|
$
|
300,200
|
|
$
|
—
|
|
$
|
—
|
|
500,000
|
|
|
Chairman, Chief Executive Officer, and
|
|
2004
|
|
$
|
300,400
|
|
$
|
—
|
|
$
|
—
|
|
1,750,000
|
|
|
President
|
|
2003
|
|
$
|
289,147
|
|
$
|
15,000
|
|
$
|
—
|
|
200,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard J. Northing
|
|
2005
|
|
$
|
170,000
|
|
$
|
15,500
|
(1)
|
$
|
—
|
|
250,000
|
|
|
Executive Vice President and
|
|
2004
|
|
$
|
165,000
|
|
$
|
200
|
|
$
|
—
|
|
95,000
|
|
|
Chief Operating Officer (2)
|
|
2003
|
|
$
|
162,938
|
|
$
|
3,750
|
|
$
|
—
|
|
60,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wendy A. Nieto
|
|
2005
|
|
$
|
180,000
|
|
$
|
—
|
|
$
|
—
|
|
250,000
|
|
|
Executive Vice President and
|
|
2004
|
|
$
|
150,000
|
|
$
|
1,147
|
|
$
|
—
|
|
250,000
|
|
|
Chief Financial Officer (3)
|
|
2003
|
|
$
|
144,325
|
|
$
|
2,500
|
|
$
|
—
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John J. Moss
|
|
2005
|
|
$
|
170,000
|
|
$
|
11,250
|
(4)
|
$
|
—
|
|
185,000
|
|
|
Senior Vice President and General
|
|
2004
|
|
$
|
156,000
|
|
$
|
1,147
|
|
$
|
—
|
|
95,000
|
|
|
Counsel (5)
|
|
2003
|
|
$
|
154,050
|
|
$
|
5,063
|
|
$
|
—
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Justin M. Benson
|
|
2005
|
|
$
|
262,296
|
(6)
|
$
|
—
|
|
$
|
4,422
|
|
60,000
|
|
|
Vice President of Sales and
|
|
2004
|
|
$
|
146,364
|
(6)
|
$
|
—
|
|
$
|
—
|
|
160,000
|
|
|
Marketing (7)
|
|
2003
|
|
$
|
185,926
|
(6)
|
$
|
—
|
|
$
|
—
|
|
40,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael A. Price
|
|
2005
|
|
$
|
193,896
|
(6)
|
$
|
—
|
|
$
|
—
|
|
59,000
|
|
|
Senior Director of Business
|
|
2004
|
|
$
|
159,763
|
(6)
|
$
|
—
|
|
$
|
—
|
|
60,000
|
|
|
Development
|
|
2003
|
|
$
|
143,275
|
(6)
|
$
|
—
|
|
$
|
—
|
|
40,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David L. Dunlap (8)
|
|
2005
|
|
$
|
212,859
|
(6)
|
$
|
—
|
|
$
|
—
|
|
250,000
|
|
|
Sales Advisor
|
|
2004
|
|
$
|
161,147
|
(6)
|
$
|
—
|
|
$
|
—
|
|
250,000
|
|
|
|
|
2003
|
|
$
|
173,000
|
(6)
|
$
|
—
|
|
$
|
—
|
|
150,000
|
|
(1) Includes
$7,500 in bonus earned in fiscal year 2005 and paid in fiscal year 2006.
(2) Dr.
Northing was Vice President of Technology and Operations at the end of our last
fiscal year and became Chief Operating Officer on March 30, 2005.
(3) Mrs.
Nieto was Chief Financial Officer and Executive Vice President of Technology
and Operations at the end of our last fiscal year and became Executive Vice
President and Chief Financial Officer on March 30, 2005.
(4) Includes
$11,250 in bonus earned in fiscal year 2005 and paid in fiscal year 2006.
(5) Mr. Moss
was Vice President and General Counsel at the end of our last fiscal year and
became Senior Vice President and General Counsel on March 3, 2005.
(6) Includes
sales commissions.
(7) Mr.
Benson was Regional Vice President of Sales at the end of our last fiscal year
and became Vice President of Sales and Marketing on March 30, 2005.
79
(8) Mr.
Dunlap was Executive Vice President of Sales and Marketing at the end of our
last fiscal year and became Senior Sales Advisor on March 30, 2005.
Options
Granted During the Last Fiscal Year
The following table sets
forth information regarding stock options granted during our last fiscal year,
including the potential realizable value over the ten-year term of the options,
based on assumed rates of stock appreciation of 5% and 10% compounded annually,
for the people named in the Summary Compensation Table above. These assumed
rates of appreciation comply with applicable SEC rules and do not represent or
estimate our future stock price. Actual gains, if any, on stock option
exercises will depend on the future prices of our common stock.
|
|
|
Individual Grants
|
|
|
|
|
Number of
Securities
Underlying
Options
|
|
Percent of
Total Options
Granted to
Employees In
Last
|
|
Exercise
Price
|
|
Expiration
|
|
Potential Realizable Value at
Assumed Annual Rates of Stock
Price Appreciation for Option
Term
|
|
|
Name
|
|
Granted (#)
|
|
Fiscal Year
|
|
($/share)
|
|
Date
|
|
5%
|
|
10%
|
|
|
Peter H. Jackson
|
|
500,000
|
|
16.94
|
%
|
$
|
1.41
|
|
8/3/2014
|
|
$
|
443,371
|
|
$
|
1,123,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard J. Northing
|
|
100,000
|
|
3.39
|
%
|
$
|
1.41
|
|
8/3/2014
|
|
$
|
88,674
|
|
$
|
224,718
|
|
|
|
|
150,000
|
|
5.08
|
%
|
$
|
0.86
|
|
2/24/2015
|
|
$
|
81,127
|
|
$
|
205,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wendy A. Nieto
|
|
250,000
|
|
8.47
|
%
|
$
|
1.41
|
|
8/3/2014
|
|
$
|
221,685
|
|
$
|
561,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John J. Moss
|
|
10,000
|
|
0.34
|
%
|
$
|
1.85
|
|
3/11/2014
|
|
$
|
11,635
|
|
$
|
29,484
|
|
|
|
|
100,000
|
|
3.39
|
%
|
$
|
1.41
|
|
8/3/2014
|
|
$
|
88,674
|
|
$
|
224,718
|
|
|
|
|
75,000
|
|
2.54
|
%
|
$
|
0.86
|
|
2/24/2015
|
|
$
|
40,564
|
|
$
|
102,796
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Justin M. Benson
|
|
60,000
|
|
2.03
|
%
|
$
|
1.41
|
|
8/3/2014
|
|
$
|
53,204
|
|
$
|
134,831
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael A. Price
|
|
10,000
|
|
0.34
|
%
|
$
|
1.85
|
|
3/11/2014
|
|
$
|
11,635
|
|
$
|
29,484
|
|
|
|
|
45,000
|
|
1.52
|
%
|
$
|
1.41
|
|
8/3/2014
|
|
$
|
39,903
|
|
$
|
101,123
|
|
|
|
|
2,000
|
|
0.07
|
%
|
$
|
1.12
|
|
11/14/2014
|
|
$
|
1,409
|
|
$
|
3,570
|
|
|
|
|
2,000
|
|
0.07
|
%
|
$
|
1.16
|
|
11/29/2014
|
|
$
|
1,459
|
|
$
|
3,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David L. Dunlap
|
|
250,000
|
|
8.47
|
%
|
$
|
1.41
|
|
8/3/2014
|
|
$
|
221,685
|
|
$
|
561,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate
Option Exercises During Last Fiscal Year and Fiscal Year End Option Values
The following table sets
forth information regarding option exercises for the fiscal year ended February
28, 2005, and exercisable and unexercisable options held as of February 28,
2005, for the people named in the Summary Compensation Table. The “Value of
Unexercised In-the-Money Options at February 28, 2005” is based on a value of
$0.86 per share (the closing price of our common stock on February 28, 2005,
the last trading day of our fiscal year), less the per share exercise price of
the option, multiplied by the number of shares issued upon exercise of the
option. All options were granted under our 1996 Stock Option Plan. Initial grants under that plan vest as to 25%
of the shares one year after the grant date and as to remaining shares ratably
over the next 36 months. Subsequent grants generally vest as to
80
12.5% of the shares 6 months
after the grant date and as to the remaining shares ratably over the next 42
months.
|
|
|
Shares
|
|
|
|
Number of Securities
Underlying
Unexercised Options at
|
|
Value of Unexercised
In-the-Money Options at
|
|
|
|
|
Acquired on
|
|
Value
|
|
February 28, 2005 (#)
|
|
February 28, 2005
|
|
|
Name
|
|
Exercise
|
|
Realized
|
|
Exercisable
|
|
Unexercisable
|
|
Exercisable
|
|
Unexercisable
|
|
|
Peter H. Jackson
|
|
—
|
|
—
|
|
2,449,998
|
|
1,250,002
|
|
$
|
212,050
|
|
$
|
47,150
|
|
|
Richard J. Northing
|
|
10,500
|
|
$
|
11,215
|
|
151,375
|
|
324,375
|
|
$
|
3,930
|
|
$
|
2,325
|
|
|
Wendy A. Nieto
|
|
—
|
|
—
|
|
351,455
|
|
442,920
|
|
$
|
11,937
|
|
$
|
5,763
|
|
|
John J. Moss
|
|
5,000
|
|
$
|
6,150
|
|
337,496
|
|
297,504
|
|
$
|
11,487
|
|
$
|
5,763
|
|
|
Michael A. Price
|
|
—
|
|
—
|
|
108,749
|
|
107,751
|
|
$
|
3,200
|
|
$
|
1,600
|
|
|
Justin M. Benson
|
|
—
|
|
—
|
|
138,159
|
|
180,483
|
|
$
|
2,500
|
|
$
|
1,550
|
|
|
David L. Dunlap
|
|
60,000
|
|
$
|
54,921
|
|
387,080
|
|
442,920
|
|
$
|
9,012
|
|
$
|
5,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
of Directors
Our
non-employee directors receive the following cash compensation:
• For Board membership:
• The Chairman receives an annual retainer
of $7,500 if he or she is a non-employee director.
• Each other non-employee director receives
an annual retainer of $5,000.
• Each non-employee director receives a $500
fee per Board meeting attended, up to a maximum of $4,000 in total Board
meeting fees per fiscal year.
• For Audit Committee membership:
• The Chairman receives an annual retainer
of $6,000.
• Each other Committee member receives an
annual retainer of $4,000.
• Each Committee member receives a $500 fee
per Committee meeting attended, up to a maximum of $3,000 in total Audit
Committee meeting fees per fiscal year.
• For membership on each other standing
Board committee (excluding special or temporary committees):
• The chairman receives an annual retainer
of $4,500.
• Each other committee member receives an
annual retainer of $3,000.
• Each committee member receives a $500 fee
per committee meeting attended, up to a maximum of $2,000 in total committee
meeting fees per fiscal year.
In
addition, we reimburse non-employee directors for their reasonable
out-of-pocket expenses incurred in attending Board and committee meetings.
Non-employee
directors also receive automatic, nondiscretionary stock option grants at the
time they become directors and annually thereafter, under our 1998 Director
Option Plan. Under this plan, a director receives an option grant for 15,000
shares on the date of election to the Board, and receives an option grant for
7,500 shares each year thereafter on the date of the annual meeting of
stockholders if the director has served on the Board for six months before the
annual meeting. The initial grant vests over four
81
years, 12.5% of the shares vesting six months after the grant date and
the balance vesting monthly in equal installments thereafter. Each subsequent
grant vests over two years, 25% of the shares vesting six months after the
grant date and the balance vesting monthly in equal installments thereafter.
The exercise price of each grant is the fair market value of the stock on the
date of the grant. A copy of this plan is attached as an exhibit to our
Registration Statement on Form S-8 filed with the SEC on January 18,
2001.
Our
employee directors receive no compensation for their service as directors.
Employment Contracts and Termination of Employment
and Change-in-Control Arrangements
We
have also entered into a change of control severance agreement with each of our
executive officers. The agreements provide that if there is a change of control
of Intraware, and any of the executive officers is terminated without cause
within twelve months following the change of control or the announcement of
such change of control, Intraware will provide to the terminated executive
officer:
• a cash payment equal to 50% of his or her
annual salary plus a pro rata portion of his or her annual target bonus;
• 100% of his or her health, dental and life
insurance, including benefits paid to any dependents, through the earlier of
six months from the date of his or her termination or the date he or she first
becomes covered by another employer’s group health, dental or life insurance
plans providing comparable benefits and coverage; and
• full vesting of all unvested stock
options.
Compensation Committee Interlocks and Insider Participation
The
following members of our Board of Directors served on the Compensation
Committee of the Board during our last fiscal year: Brendan A. McLoughlin, Chairman; Raymond L.
Ocampo Jr.; and Peter F. Pervere. No
members of our Compensation Committee serves or has served on the board of
directors or compensation committee of another entity that has one or more
members serving on our Board of Directors or Compensation Committee.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners
The
table below contains information about beneficial ownership of our common stock
and our Series A Preferred Stock as of April 15, 2005 (except as otherwise
noted) by each person or entity who is known by us to own beneficially more
than 5% percent of that class of our stock. This table is based on information
provided to us or filed with the SEC by these stockholders. Beneficial
ownership is determined in accordance with the rules of the SEC. Except as
otherwise indicated, and subject to applicable community property laws, the
persons named in the table have sole voting and investment power with respect
to all shares shown as beneficially owned. Applicable percentage ownership in
the following table is based on 60,454,872 shares of our common stock and
552,486 shares of our Series A Preferred Stock (which is convertible into
the same number of shares of our common stock) outstanding as of April 15, 2005.
82
|
Title of Class
|
|
Name and Address
|
|
Number of Shares
Beneficially Owned
|
|
Nature of
Beneficial
Ownership
|
|
Percent of
Class
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
John H.
Burbank III(1)
402 Jackson Street, San Francisco, CA 94111
|
|
6,828,818
|
|
Indirect(1)
|
|
11.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
Passport
Capital, LLC(1)
402 Jackson Street, San Francisco, CA 94111
|
|
6,828,818
|
|
Indirect(1)
|
|
11.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
Passport
Holdings, LLC(1)
402 Jackson Street, San Francisco, CA 94111
|
|
6,828,818
|
|
Indirect(1)
|
|
11.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
Passport
Management, LLC(1)
402 Jackson Street, San Francisco, CA 94111
|
|
6,828,818
|
|
Indirect(1)
|
|
11.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
WM Advisors,
Inc.(2)
1201 Third Avenue, 22nd Floor, Seattle, WA 98101
|
|
6,511,013
|
|
Direct
|
|
10.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
Sanford J.
Colen(3)
c/o Apex Capital, LLC, 25 Orinda Way, Orinda, CA 94563
|
|
5,845,000
|
|
Indirect(3)
|
|
9.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
Apex Capital,
LLC(3)
25 Orinda Way, Orinda, CA 94563
|
|
5,775,000
|
|
Indirect(3)
|
|
9.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
Passport
Master Fund, LP(1)
402 Jackson Street, San Francisco, CA 94111
|
|
3,989,558
|
|
Direct
|
|
7.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
Zomax
Incorporated(4)
5353 Nathan Lane, Plymouth, MN 55442
|
|
3,097,561
|
|
Direct
|
|
5.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A Preferred
|
|
Mark B.
Hoffman(5)
c/o Intraware, Inc., 25 Orinda Way, Orinda, CA 94563
|
|
276,243
|
|
Direct
|
|
50.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A Preferred
|
|
George M.
Drysdale(6)
c/o Drysdale Enterprises, 177 Bovet Road, Suite 600, San Mateo, CA 94402
|
|
276,243
|
|
Direct
|
|
50.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A Preferred
|
|
Drysdale
Partners
c/o Drysdale Enterprises, 177 Bovet Road, Suite 600, San Mateo, CA 94402
|
|
138,121
|
|
Direct
|
|
25.0
|
|
(1) John H.
Burbank III is the sole managing member of Passport Capital, LLC; Passport
Capital, LLC is the sole managing member of Passport Holdings, LLC and Passport
Management, LLC. Passport Holdings, LLC
is the general partner of Passport Master Fund, LP and Passport Master Fund II,
LP. Passport Management, LLC is the
investment manager to Passport Master Fund, LP and Passport Master Fund II,
LP. As a result, each of Passport
Management, LLC, Passport Holdings, LLC, Passport Capital, LLC and Mr. Burbank
may be considered to share the power to vote or direct the vote of, and the
power to dispose or direct the disposition of, the shares owned of record by Passport
Master Fund, LP and Passport Master Fund II, LP. The information herein regarding Mr. Burbank,
Passport Capital, LLC, Passport Holdings, LLC, Passport Management, LLC, and
Passport Master Fund, LP is based on a Schedule 13G/A filed by them and
Passport Master Fund II, LP with the SEC on February 15, 2005.
83
(2) The
information herein regarding WM Advisors, Inc. is based on a Schedule 13G filed
by it with the SEC on March 4, 2005.
(3) Apex
Capital, LLC is a registered investment adviser whose clients have the right to
receive or the power to direct the receipt of dividends from, or the proceeds
from the sale of, the shares. Sanford J. Colen is the manager of Apex Capital,
LLC. The information herein regarding Apex Capital, LLC and Mr. Colen is
based on a Schedule 13G filed by them with the SEC on February 17,
2004.
(4) The information herein regarding Zomax
Incorporated is based on an amendment to Schedule 13D filed by Zomax
Incorporated with the SEC on May 21, 2004.
(5) Mr. Hoffman is a member of our Board of
Directors.
(6) Includes 138,121 shares of Series A
Preferred Stock held directly by Mr. Drysdale, and 138,121 shares of
Series A Preferred Stock held by Drysdale Partners, of which
Mr. Drysdale is a beneficial owner.
Security Ownership of Management
The
table below contains information about beneficial ownership of our common stock
and our Series A Preferred Stock (which is convertible into our common
stock on a one-for-one basis) as of April 15, 2005 (except as otherwise noted)
by (i) each of our directors, (ii) our Chief Executive Officer, our
other four executive officers as of the end of our last fiscal year, and two
other employees who would have been among the four most highly compensated
executive officers if they had been executive officers as of February 28, 2005,
and (iii) all of our directors and executive officers as a group. This
table is based on information provided to us or filed with the SEC by our
directors and executive officers. Except as otherwise indicated, and subject to
applicable community property laws, the persons named in the table have sole
voting and investment power with respect to all shares shown as beneficially
owned. Applicable percentage ownership in the following table is based on 60,454,872
shares of our common stock and 552,486 shares of our Series A Preferred
Stock (which is convertible into the same number of shares of our common stock)
outstanding as of April 15, 2005.
|
|
|
Class of Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Both Classes Combined (1)
|
|
|
|
|
Common
|
|
Series A Preferred
|
|
Aggregate
|
|
Percent
|
|
|
Name(2)
|
|
No. of Shares
Beneficially
Owned(3)
|
|
Percent
of
Class
|
|
No. of Shares
Beneficially
Owned(3)
|
|
Percent
of
Class
|
|
No. of Shares
Beneficially
Owned(3)
|
|
of Both
Classes
Combined
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Peter H. Jackson
|
|
3,167,090
|
(4)
|
5.2
|
%
|
—
|
|
*
|
|
3,052,090
|
|
5.2
|
%
|
|
Mark B. Hoffman
|
|
822,574
|
(5)
|
1.4
|
|
276,243
|
|
50.0
|
%
|
1,129,067
|
|
1.8
|
|
|
David L. Dunlap
|
|
421,038
|
(6)
|
|
*
|
—
|
|
|
*
|
421,038
|
|
|
*
|
|
Wendy A. Nieto
|
|
388,301
|
(7)
|
|
*
|
—
|
|
|
*
|
388,301
|
|
|
*
|
|
John J. Moss
|
|
374,939
|
(8)
|
|
*
|
—
|
|
|
*
|
374,939
|
|
|
*
|
|
Michael A. Price
|
|
189,969
|
(9)
|
|
*
|
—
|
|
|
*
|
189,969
|
|
|
*
|
|
Richard J. Northing
|
|
179,813
|
(10)
|
|
*
|
—
|
|
|
*
|
179,813
|
|
|
*
|
|
Justin M. Benson
|
|
156,343
|
(11)
|
|
*
|
—
|
|
|
*
|
156,343
|
|
|
*
|
|
Raymond L. Ocampo Jr.
|
|
46,246
|
(12)
|
|
*
|
—
|
|
|
*
|
46,246
|
|
|
*
|
|
Brendan A. McLoughlin
|
|
20,732
|
(13)
|
|
*
|
—
|
|
|
*
|
20,732
|
|
|
*
|
|
Peter F. Pervere
|
|
18,125
|
(14)
|
|
*
|
—
|
|
|
*
|
18,125
|
|
|
*
|
|
Bradley M. Shuster
|
|
9,062
|
(15)
|
|
*
|
—
|
|
|
*
|
9,062
|
|
|
*
|
|
All directors and officers as a group (10
Persons)
|
|
5,447,920
|
(16)
|
9.0
|
|
276,243
|
|
50
|
|
5,724,163
|
|
9.4
|
|
84
* Less than 1% of the outstanding shares of the
class or classes of stock.
(1) “Aggregate No. of Shares Beneficially Owned”
is the aggregate number of shares of our common stock and Series A
Preferred Stock beneficially owned by the named director or officer or by the
group. “Percent of Both Classes Combined” is the percentage of all outstanding
shares of our common stock and Series A Preferred Stock beneficially owned
by the named director or officer or by the group.
(2) The address for each beneficial owner is c/o
Intraware, Inc., 25 Orinda Way, Orinda, CA 94563.
(3) The nature of all beneficial ownership is
direct except as otherwise indicated in a footnote.
(4) Includes 511,950 shares of common stock held
directly by Mr. Jackson and 2,644,790 shares of common stock issuable to
Mr. Jackson upon exercise of stock options exercisable within 60 days
of April 15, 2005. Also includes 2,100 shares of common stock held as custodian
and 75 shares of common stock held as guardian by Mr. Jackson for Drew
Jackson, 1,800 shares of common stock held as custodian and 200 shares of
common stock held as guardian by Mr. Jackson for Connor Jackson, 3,000
shares of common stock held as custodian and 75 shares of common stock held as
guardian by Mr. Jackson for Lindsey Jackson, and 2,700 shares of common
stock held as custodian and 400 shares of common stock held as guardian by
Mr. Jackson for Brett Jackson.
(5) Includes 705,387 shares of common stock held
by Mr. Hoffman, and 117,187 shares of common stock issuable to
Mr. Hoffman upon exercise of stock options exercisable within 60 days
of April 15, 2005.
(6) Includes 421,038 shares of common stock
issuable to Mr. Dunlap upon exercise of stock options exercisable within
60 days of April 15, 2005.
(7) Includes
2,888 shares of common stock held by Mrs. Nieto, and 385,413 shares of
common stock issuable to Mrs. Nieto upon exercise of stock options
exercisable within 60 days of April 15, 2005.
(8) Includes
4,007 shares of common stock held by Mr. Moss, and 370,932 shares of
common stock issuable to Mr. Moss upon exercise of stock options
exercisable within 60 days of April 15, 2005.
(9) Includes
66,971 shares of common stock held by Mr. Price, and 122,998 shares of
common stock issuable to Mr. Price upon exercise of stock options
exercisable within 60 days of April 15, 2005.
(10) Includes 6,668 shares of common stock held by
Dr. Northing, and 173,145 shares of common stock issuable to
Dr. Northing upon exercise of stock options exercisable within
60 days of April 15, 2005.
(11) Includes
2,000 shares of common stock held by Mr. Benson, and 154,343 shares of
common stock issuable to Mr. Benson upon exercise of stock options
exercisable within 60 days of April 15, 2005.
(12) Includes
37,184 shares of common stock held by Mr. Ocampo, and 9,062 shares of common
stock issuable to Mr. Ocampo upon exercise of stock options exercisable
within 60 days of April 15, 2005.
(13) Includes
420 shares of common stock held by Mr. McLoughlin, and 20,312 shares of
common stock issuable to Mr. McLoughlin upon exercise of stock options
exercisable within 60 days of April 15, 2005.
(14) Includes 18,125 shares of common stock
issuable to Mr. Pervere upon exercise of stock options exercisable within
60 days of April 15, 2005.
(15) Includes
5,000 shares of common stock held by Mr. Shuster, and 4,062 shares of
common stock issuable to Mr. Shuster upon exercise of stock options
exercisable within 60 days of April 15, 2005.
85
(16) Includes
an aggregate of 1,273,504 shares of common stock held directly and 10,350
shares of common stock held indirectly by our directors and executive officers
as of April 15, 2005. Also includes an aggregate of 4,164,066 shares of common
stock issuable to our directors and officers upon exercise of stock options
exercisable within 60 days of April 15, 2005. This group does not include Mr. Benson or Mr.
Price, neither of whom was a director or executive officer as of the end of our
last fiscal year.
See
the information contained under the heading “Equity Compensation Plan
Information” in Item 5 above regarding shares authorized for issuance under
equity compensation plans approved by stockholders and not approved by
stockholders. For descriptions of our equity compensation plans, including the
1999 Non-Qualified Acquisition Stock Option Plan, which has not been approved
by stockholders, see “Equity Compensation Plan Information” in Item 5 above and
“Note 9: Employee Benefit Plans” in the “Notes to Consolidated Financial
Statements” in Item 8 above.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On April 30, 2004, Intraware
and Zomax Incorporated terminated our August 12, 2002 Strategic Alliance
Agreement and entered into a Reseller Agreement. The Reseller Agreement allows
Zomax to resell our SubscribeNet electronic software delivery and management
service, for fees to be determined on a case-by-case basis. Unlike the
Strategic Alliance Agreement, the Reseller Agreement does not require Zomax to
pay minimum annual license fees to us. The term of the Reseller Agreement is
one year, subject to automatic annual renewal for one-year periods and a mutual
right to terminate the agreement without cause upon 60 days’ notice. As part of
the termination of the Strategic Alliance Agreement, Zomax and Intraware are no
longer subject to exclusivity requirements or restrictions on sales to other
companies, and Zomax no longer has the right to designate a member of or
observer to our Board of Directors, or to participate in future Intraware
common stock placements. In consideration for Zomax’ termination of the Strategic
Alliance Agreement, we agreed to refund $115,000 of a $400,000 prepayment made
by Zomax to us in October 2003. At the time the Strategic Alliance Agreement
was terminated and the Reseller Agreement was entered into, Zomax held between
11% and 12% of our outstanding common stock.
ITEM 14. PRINCIPAL
ACCOUNTING FEES AND SERVICES
The following table sets
forth the fees paid or accrued for services provided by PricewaterhouseCoopers,
LLP, our independent registered public accounting firm, for each of our last
two fiscal years:
|
|
|
For the Year Ended
|
|
|
|
|
February 28, 2005
|
|
February 29, 2004
|
|
|
Audit Fees (1)
|
|
$
|
329,000
|
|
$
|
307,135
|
|
|
Audit Related Fees (2)
|
|
—
|
|
30,000
|
|
|
Tax Fees (3)
|
|
—
|
|
9,369
|
|
|
All Other Fees (4)
|
|
—
|
|
2,800
|
|
|
Total
|
|
$
|
329,000
|
|
$
|
349,304
|
|
(1) “Audit Fees” consisted of fees billed by
PricewaterhouseCoopers for the audit of our annual financial statements, for
review of financial statements included in our Forms 10-Q, for review of our
Forms S-3 and 8-K, and other services that are normally provided by independent
accountants in connection with statutory and regulatory filings.
86
(2) “Audit-Related Fees” consisted of fees billed
by PricewaterhouseCoopers for research, consultation and advice regarding
accounting treatment for corporate and commercial transactions in accordance
with applicable financial accounting and reporting standards, and consultation
and advice regarding SEC staff comments on our reports under the Securities
Exchange Act of 1934, as amended.
(3) “Tax Fees” consisted of fees billed by
PricewaterhouseCoopers for consultation concerning sales and international tax
matters related to electronic software delivery, and for preparation and filing
of annual returns for our non-operating subsidiary in the United Kingdom.
(4) “All Other Fees” consisted of fees billed by
PricewaterhouseCoopers for our subscription to PricewaterhouseCoopers’ online
library of accounting and assurance literature.
The Charter for the Audit
Committee of our Board provides that the committee is responsible for
pre-approving audit and non-audit services provided to Intraware by our
independent registered public accounting firm, or subsequently approving
non-audit services in those circumstances where a subsequent approval is
necessary and permissible.
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES
(a) 1. Financial
Statements
The following financial
statements are filed as a part of this report:
2. Financial Statement Schedules
All Schedules are omitted as
the required information is inapplicable or the information is presented in the
Consolidated Financial Statements or Notes to Consolidated Financial Statements
under Item 8 of this Annual Report on Form 10-K.
3. Exhibits
|
Exhibit Number
|
|
|
|
|
|
|
|
2
|
(1)
|
Asset
Purchase Agreement dated as of May 15, 2002 by and between Intraware, Inc.
and Computer Associates International, Inc. (the Registrant agrees to furnish
a copy of any omitted schedule to the Commission upon request).
|
|
|
|
|
|
3(i).1
|
(2)
|
Amended
and Restated Certificate of Incorporation of Intraware, Inc.
|
|
|
|
|
|
3(i).2
|
(2)
|
Certificate
of Designations, Preferences and Rights of Series A Convertible Preferred
Stock.
|
87
|
3(ii)
|
(4)
|
Amended
and Restated Bylaws of Intraware, Inc.
|
|
|
|
|
|
4.1
|
(5)
|
Specimen
Common Stock Certificate.
|
|
|
|
|
|
4.2
|
(6)
|
Form
of Warrant issued in connection with the June 2000 sale of Series A, B and C
Convertible Preferred Stock.
|
|
|
|
|
|
4.3
|
(7)
|
Form
of Warrant issued in connection with the January 2001 sale of Series A
Convertible Preferred Stock.
|
|
|
|
|
|
4.4
|
(8)
|
Warrant
issued to CorpSoft, Inc. in May 2001.
|
|
|
|
|
|
4.5
|
(9)
|
Warrant
Agreement dated May 24, 2002 between Intraware, Inc. and Commonwealth
Associates, L.P. and Form of Investor Warrant Certificate.
|
|
|
|
|
|
4.6
|
(9)
|
Form
of Placement Agent Warrant with $1.00 exercise price.
|
|
|
|
|
|
4.7
|
(9)
|
Form
of Placement Agent Warrant with $1.19 exercise price.
|
|
|
|
|
|
4.8
|
(19)
|
Warrant
to Purchase Common Stock dated August 1, 2003, issued to Silicon Valley Bank.
|
|
|
|
|
|
10.1
|
(10)*
|
Form
of Indemnification Agreement between Intraware and each of its directors and
executive officers.
|
|
|
|
|
|
10.2
|
(11)*
|
1996
Stock Option Plan, as amended, and form of agreements thereunder.
|
|
|
|
|
|
10.3
|
(12)*
|
1998
Employee Stock Purchase Plan and form of agreements thereunder.
|
|
|
|
|
|
10.4
|
(11)*
|
1998
Director Option Plan and form of agreements thereunder.
|
|
|
|
|
|
10.5
|
(13)
|
1999
Non-Qualified Acquisition Stock Option Plan and form of agreements
thereunder.
|
|
|
|
|
|
10.6
|
(10)
|
Sleepy
Hollow Investment Company Office Lease made August 23, 1996 between Sleepy
Hollow Investment Company and Intraware.
|
|
|
|
|
|
10.7
|
(10)
|
First
Amendment to the Lease for Intraware entered into as of May 5, 1997 by and
between Intraware and Sleepy Hollow Investment Company I.
|
|
|
|
|
|
10.8
|
(10)
|
Second
Amendment to the Lease for Intraware entered into as of March 31, 1998 by and
between Intraware and Sleepy Hollow Investment Company I.
|
|
|
|
|
|
10.9
|
(6)
|
Securities
Purchase Agreement dated as of June 29, 2000 by and among Intraware and the
investors listed on the Schedule of Buyers.
|
|
|
|
|
|
10.10
|
(14)
|
Form
of Redemption and Amendment Agreement, dated as of January 10, 2001, by and
among Intraware and the investors set forth therein.
|
|
|
|
|
|
10.11
|
(14)
|
Registration
Rights Agreement dated as of January 10, 2001, by and among Intraware and the
investors set forth therein.
|
|
|
|
|
|
10.12
|
(7)
|
Preferred
Stock and Warrant Purchase Agreement, dated January 12, 2001, by and among
Intraware and the investors set forth therein.
|
|
|
|
|
|
10.13
|
(7)
|
Registration
Rights Agreement, dated January 12, 2001, by and among Intraware and the
investors set forth therein.
|
88
|
10.14
|
(15)*
|
Form
of Change of Control Severance Agreement between Intraware, Inc. and each
executive officer of Intraware.
|
|
|
|
|
|
10.15
|
(4)+
|
Sales
Alliance Agreement dated June 28, 2001 between CorpSoft, Inc. and Intraware,
Inc.
|
|
|
|
|
|
10.16
|
(9)
|
Form
of Subscription Agreement, dated May 24, 2002 by and among Intraware, Inc.
and the investors named therein.
|
|
|
|
|
|
10.17
|
(9)
|
Form
of Registration Rights Agreement, dated May 24, 2002 by and among Intraware,
Inc., Commonwealth Associates, L.P. and the investors named therein.
|
|
|
|
|
|
10.18
|
(9)
|
Placement
Agency Agreement, dated May 10, 2002 by and between Intraware, Inc. and
Commonwealth Associates, L.P.
|
|
|
|
|
|
10.19
|
(16)
|
Form
of Registration Rights Agreement, dated August 12, 2002, by and between
Intraware, Inc. and Zomax Incorporated.
|
|
|
|
|
|
10.20
|
(16)
|
Form
of Common Stock Purchase Agreement, dated August 12, 2002, by and between
Intraware, Inc. and Zomax Incorporated.
|
|
|
|
|
|
10.21
|
(17)+
|
Amendment
One to Sales Alliance Agreement dated June 28, 2001 between Intraware, Inc.
and Software Spectrum, Inc. (as successor-in-interest to CorpSoft, Inc.).
|
|
|
|
|
|
10.22
|
(18)
|
Loan
and Security Agreement dated August 1, 2003 between Silicon Valley Bank and
Intraware, Inc.
|
|
|
|
|
|
10.23
|
(18)
|
Negative
Pledge Agreement dated August 1, 2003 between Silicon Valley Bank and
Intraware, Inc.
|
|
|
|
|
|
10.24
|
(19)
|
Form
of Registration Rights Agreement, dated September 9, 2003, by and among
Intraware, Inc. and the investors set forth therein.
|
|
|
|
|
|
10.25
|
(19)
|
Form
of Common Stock Purchase Agreement, dated September 9, 2003, by and among
Intraware, Inc. and the investors set forth therein.
|
|
|
|
|
|
10.26
|
(20)
|
Amendment
Two to Sales Alliance Agreement dated June 28, 2001 between Intraware, Inc.
and Software Spectrum, Inc. (as successor-in-interest CorpSoft, Inc.).
|
|
|
|
|
|
10.27
|
(21)
|
Amendment
Three to Sales Alliance Agreement dated June 28, 2001 between Intraware, Inc.
and Software Spectrum, Inc. (as successor-in-interest CorpSoft, Inc.).
|
|
|
|
|
|
10.28
|
(22)
|
Loan
Modification Agreement dated September 20, 2004 between Silicon Valley Bank
and Intraware, Inc.
|
|
|
|
|
|
10.29
|
(22)
|
Form of Stock Option Agreement under 1996 Stock
Option Plan (Initial Grant)
|
|
|
|
|
|
10.30
|
(22)
|
Form of Stock Option Agreement under 1996 Stock
Option Plan (Subsequent Grant)
|
|
|
|
|
|
10.31
|
(22)
|
Form of Stock Option Agreement under 1998 Director
Option Plan (Initial Grant)
|
|
|
|
|
|
10.32
|
(22)
|
Form of Stock Option Agreement under 1998 Director
Option Plan (Subsequent Grant)
|
|
|
|
|
|
10.33
|
(23)
|
Loan Modification Agreement dated February 28, 2005
between Silicon Valley Bank and Intraware, Inc.
|
89
|
10.34
|
*
|
Letter
Regarding Bonus for John J. Moss for Completion of Sarbanes-Oxley Section 404
Milestones
|
|
|
|
|
|
10.35
|
*
|
Letter
Regarding Bonus for Richard J. Northing for Completion of Sarbanes-Oxley
Section 404 Milestones
|
|
|
|
|
|
10.36
|
*
|
Form
of Amendment One to Change of Control Severance Agreement between Intraware,
Inc. and each executive officer of Intraware.
|
|
|
|
|
|
10.37
|
*+
|
Compensation Agreement dated March 30, 2005 between Intraware, Inc.
and Richard J. Northing
|
|
|
|
|
|
10.38
|
*
|
Employment Agreement dated April 20, 2005 between Intraware, Inc. and
David L. Dunlap
|
|
|
|
|
|
11
|
|
Statement
Setting Forth the Computation of Per Share Earnings. See Note 1 to our “Notes
to Consolidated Financial Statements” in Item 8.
|
|
|
|
|
|
23.1
|
|
Consent
of Independent Registered Public Accounting Firm.
|
|
|
|
|
|
24
|
|
Power
of Attorney (see page 96).
|
|
|
|
|
|
31.1
|
|
Certification
pursuant to Section 302 of the Sarbanes-Oxley Act-Peter H. Jackson.
|
|
|
|
|
|
31.2
|
|
Certification
pursuant to Section 302 of the Sarbanes-Oxley Act-Wendy A. Nieto.
|
|
|
|
|
|
32.1
|
|
Certification
pursuant to Section 906 of the Sarbanes-Oxley Act.
|
* Indicates management contract or compensatory
plan or arrangement.
+ Confidential treatment has been requested for
certain portions of this exhibit.
(1) Incorporated by reference to Intraware’s
Current Report on Form 8-K dated May 23, 2002 (File
No. 000-25249) and filed with the Securities and Exchange Commission on
May 31, 2002.
(2) Incorporated by reference to Intraware’s
Current Report on Form 8-K dated April 2, 2001 (File
No. 000-25249) and filed with the SEC on April 13, 2001.
(3) Incorporated by reference to Intraware’s
Current Report on Form 8-K dated August 31, 2001 (File
No. 000-25249) and filed with the SEC on September 21, 2001.
(4) Incorporated by reference to Intraware’s
Quarterly Report on Form 10-Q for the Quarter ended August 31, 2004
(File No. 000-25249), filed with the SEC on October 15, 2004.
(5) Incorporated by reference to Amendment
No. 2 to Intraware’s Registration Statement on Form S-1 (File
No. 333-69261), filed with the SEC on January 29, 1999.
(6) Incorporated by reference to Intraware’s
Current Report on Form 8-K dated June 29, 2000 (File
No. 000-25249), filed with the SEC on July 3, 2000.
(7) Incorporated by reference to Intraware’s
Current Report on Form 8-K dated January 12, 2001 (File
No. 000-25249), filed with the SEC on January 23, 2001.
(8) Incorporated by reference to Intraware’s
Annual Report on Form 10-K for the Year ended February 28, 2002 (File
No. 000-25249), filed with the SEC on May 29, 2002.
(9) Incorporated
by reference to Intraware’s Registration Statement on Form S-3 (File
No. 333-90442), filed with the SEC on June 13, 2002.
(10) Incorporated by reference to Intraware’s
Registration Statement on Form S-1 (333-69261), filed with the SEC on
December 18, 1998.
(11) Incorporated by reference to Intraware’s
Registration Statement on Form S-8 (File No. 333-53902), filed with
the SEC on January 18, 2001.
90
(12) Incorporated by reference to Intraware’s
Registration Statement on Form S-8 (File No. 333-74209), filed with
the SEC on March 10, 1999.
(13) Incorporated by reference to Intraware’s
Registration Statement on Form S-8 (File No. 333-93823), filed with
the SEC on December 30, 1999.
(14) Incorporated by reference to Intraware’s
Current Report on Form 8-K dated January 12, 2001 (File
No. 000-25249) and filed with the SEC on January 16, 2001.
(15) Incorporated by reference to Intraware’s
Quarterly Report on Form 10-Q for the Quarter ended May 31, 2001
(File No. 000-25249), filed with the SEC on July 13, 2001.
(16) Incorporated by reference to Intraware’s
Current Report on Form 8-K dated August 12, 2002 (File
No. 000-25249), filed with the SEC on September 11, 2002.
(17) Incorporated by reference to Intraware’s
Quarterly Report on Form 10-Q for the Quarter ended May 31, 2003
(File No. 000-25249), filed with the SEC on July 15, 2003.
(18) Incorporated by reference to Intraware’s
Quarterly Report on Form 10-Q for the Quarter ended August 31, 2003
(File No. 000-25249), filed with the SEC on October 15, 2003.
(19) Incorporated by reference to Intraware’s
Current Report on Form 8-K dated September 9, 2003 (File
No. 000-25249), filed with the SEC on September 12, 2003.
(20) Incorporated
by reference to Intraware’s Annual Report on Form 10-K for the Year ended
February 29, 2004 (File No. 000-25249), filed with the SEC on May 5, 2004,
as amended by Amendment No. 1 on Form 10-K/A filed with the SEC on October 4,
2004.
(21) Incorporated
by reference to Intraware’s Quarterly Report on Form 10-Q for the Quarter
ended August 31, 2004 (File No. 000-25249), filed with the SEC on
October 15, 2004.
(22) Incorporated
by reference to Intraware’s Quarterly Report on Form 10-Q for the Quarter
ended November 30, 2004 (File No. 000-25249), filed with the SEC on
January 14, 2005.
(23) Incorporated
by reference to Intraware’s Current Report on Form 8-K dated February 28,
2005 (File No. 000-25249), filed with the SEC on March 4, 2005.
91
SIGNATURES
Pursuant to the requirements
of Section 13 or 15(d) of the Securities Act of 1933, as amended, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
|
|
INTRAWARE, INC.
|
|
|
|
|
|
By:
|
/s/ PETER H. JACKSON
|
|
|
Dated:
April 22, 2005
|
|
|
|
|
|
|
Peter H. Jackson
Chairman, Chief Executive Officer and
President
|
|
KNOW ALL PERSONS BY THESE
PRESENT, that each person whose signature appears below constitutes and
appoints Peter H. Jackson and Wendy A. Nieto, his or her attorney-in-fact, each
with the power of substitution, for him or her in any and all capacities, to
sign any amendments to this annual report on Form 10-K, and to file the same,
with exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and conforming all that
said attorney-in-fact, or his substitute or substitutes, may do or cause to be
done by virtue hereof.
Pursuant to the requirements
of the Securities Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
|
Signature
|
|
Capacity in Which Signed
|
|
Date
|
|
|
|
|
|
|
|
/s/ PETER H. JACKSON
|
|
Chairman,
Chief Executive Officer and
|
|
April 22, 2005
|
|
(Peter H. Jackson)
|
|
President
(Principal Executive Officer)
|
|
|
|
|
|
|
|
|
|
/s/ WENDY A. NIETO
|
|
Executive Vice President and Chief Financial Officer
|
|
April 22, 2005
|
|
(Wendy A. Nieto)
|
|
(Principal
Financial and Accounting Officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ MARK B. HOFFMAN
|
|
Director
|
|
April 22, 2005
|
|
(Mark B. Hoffman)
|
|
|
|
|
|
|
|
|
|
|
|
/s/ BRENDAN A. MCLOUGHLIN
|
|
Director
|
|
April 22, 2005
|
|
(Brendan A. McLoughlin)
|
|
|
|
|
|
|
|
|
|
|
|
/s/ RAYMOND L. OCAMPO JR.
|
|
Director
|
|
April 22, 2005
|
|
(Raymond L. Ocampo Jr.)
|
|
|
|
|
|
|
|
|
|
|
|
/s/ PETER F. PERVERE
|
|
Director
|
|
April 22, 2005
|
|
(Peter F. Pervere)
|
|
|
|
|
|
|
|
|
|
|
|
/s/ BRADLEY M. SHUSTER
|
|
Director
|
|
April 22, 2005
|
|
(Bradley M. Shuster)
|
|
|
|
|
92