Item 1. Business Special Note Regarding Forward-Looking Statements This Form 10-K contains forward-looking statements that involve risks and uncertainties. Words such as “may,” “could,” “anticipate,” “potential,” “intend,” “expect,” “believe,” “in our view,” and variations of such words and similar expressions, are intended to identify such forward-looking statements, which include, but are not limited to, statements regarding our expectations and beliefs regarding future revenue growth; gross margins; financial performance and results of operations; technological trends in, and demand for, online advertising; management’s strategy, plans and objectives for future operations; employee relations and our ability to attract highly-qualified personnel; the amount of cash utilized by operations; our intent to continue to invest significant resources in development; competition, competitors and our ability to compete; liquidity and capital resources; the outcome of any litigation to which we are a party; our accounting policies; and the sufficiency of our cash resources, cash generated from operations and investments to meet our operating and working capital requirements. Actual results may differ materially from those expressed or implied in such forward-looking statements due to various factors, including those set forth in this Business section under “Competition” and in the Risk Factors contained in Item 1A.
Item 1A. Risk Factors CURRENT AND PROSPECTIVE INVESTORS IN SOURCEFORGE SECURITIES SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE MAKING AN INVESTMENT DECISION. IN ADDITION, THESE RISKS ARE NOT THE ONLY ONES FACING OUR COMPANY. ADDITIONAL RISKS OF WHICH WE ARE NOT PRESENTLY AWARE OR THAT WE CURRENTLY BELIEVE ARE IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS OPERATIONS. OUR BUSINESS COULD BE HARMED BY ANY OF THESE RISKS. THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE DUE TO ANY OF THESE RISKS, AND INVESTORS MAY LOSE ALL OR PART OF THEIR INVESTMENT.
Risks Related to Our Online Media Business If our Online Media business fails to attract and retain users, particularly users who create and post original content on our sites, our financial results will be adversely affected. Our reliance upon user-generated content requires that we develop and maintain tools and services designed to facilitate:
• creation of user-generated content,
• participation in discussion surrounding such user-generated content,
• evaluation of user-generated content, and
• distribution of user-generated content.
If our development efforts fail to facilitate such activities on our sites, the level of user engagement and interaction will not increase and may decline. Even if we succeed in facilitating such activities on our sites, we cannot assure that such improvements will be deployed in a timely or cost-effective manner.
If we fail to increase user engagement and interaction on our sites, we will not attract and retain a loyal user base that is desirable to advertisers, which will adversely affect our Online Media business and our ability to maintain or grow our revenue.
We are expanding our offerings in international markets in which we may have limited experience or rely on business partners. We have recently signed agreements with representatives to sell our international inventory in Europe and Australia and may enter into agreements with additional firms to sell our international advertising impressions. As we expand into these new international markets, we have limited experience in marketing our products and services in such markets. We rely on the efforts and abilities of our international representatives in such markets. Certain international markets may be slower than domestic markets in the development and adoption of online advertising programs and as a result our offerings in international markets may not develop at a rate that supports our level of investment.
If our Online Media business fails to deliver innovative marketing programs, we may not be able to attract and retain advertisers, which will adversely affect our financial results. The successful development and production of marketing programs is subject to numerous uncertainties, including our ability to:
• enable advertisers to showcase products, services and/or brands to their intended audience and to generate revenue from such audiences;
• anticipate and successfully respond to emerging trends in online advertising; and
• attract and retain qualified marketing and technical personnel.
We cannot assure that our online marketing programs will enable us to attract and retain advertisers and generate revenue consistent with our estimates or sufficient to sustain operations. In addition, we cannot assure that any new marketing programs will be developed in a timely or cost-effective manner. If we are unable to deliver innovative marketing programs that allow us to expand our advertiser base, we may not be able to generate sufficient revenue to grow our Online Media business.
New technologies could block our advertisements, which would harm our operating results. Technologies have been developed and are likely to continue to be developed that can block the display of our advertisements. Our Online Media revenues are derived from fees paid to us by advertisers in connection with the display of advertisements on web pages. As a result, advertisement blocking technology could reduce the number of advertisements that we are able to deliver and, in turn, our advertising revenues and operating results may also be reduced.
Decreases or delays in advertising spending due to general economic conditions could harm our ability to generate advertising revenue, which would adversely affect our financial results. Our advertiser’s spending patterns tend to be cyclical, reflecting both overall economic conditions and seasonality as well as their company-specific budgeting and buying patterns. Our advertisers are also concentrated in the technology sector and the economic conditions in this sector also impact their spending decisions. Because we derive a large part of our Online Media revenue from these advertisers, decreases in or delays of advertising spending could reduce our revenue or negatively impact our ability to grow our revenue.
The market in which SourceForge.net participates is becoming more competitive, and if we do not compete effectively, our Online Media business could be harmed. SourceForge.net hosts more than 183,000 Open Source software projects, and we derive revenue from SourceForge.net primarily through advertisements and sponsorship campaigns run on the site. Because the cost to develop and host websites has declined over time, an increasing number of companies, organizations and individuals have begun hosting Open Source code and offering Open Source software development-related services. In addition, Google Inc. (“Google”) offers Open Source code hosting capabilities that may be viewed as competitive to SourceForge.net’s offering. Because Google enjoys substantial competitive advantages in the online space generally, including powerful brand identity, established marketing relationships, larger visitor base, and greater financial, technical, and other resources, we may be unable to compete effectively with Google’s offering. Our competitors may be able to respond more quickly and effectively than we can to new or changing Open Source software opportunities, technologies, standards, or user requirements. Because of competitors’ advantages, even if our services are more effective than those of our competitors, users might accept the services of our competitors in lieu of ours. If we fail to compete effectively, our Online Media business could be negatively impacted.
We face competition from traditional media companies, and we may not be included in the advertising budgets of large advertisers, which could harm our operating results. We face competition from companies that offer traditional media advertising. Large advertisers with fixed budgets may allocate a portion of their budgets to Internet advertising. If we fail to convince these companies to spend their advertising budgets with us, or if our existing advertisers reduce the amount they spend on our programs, our operating results would be harmed.
We have made and continue to make significant investments in our web sites and services offered thereon, which may fail to become profitable endeavors. We have made and will continue to make significant investments in research, development and marketing for our web sites and services offered thereon. Investments in new technology are inherently speculative. We continue to focus on initiatives to accelerate the pace of improvements to our web sites, particularly Slashdot.org and SourceForge.net. These efforts require substantial investments of our time and resources and
may be hindered by unforeseen delays and expenses. Our efforts may not be successful in achieving our desired objective, and even if we achieve the desired objective, our audience or our advertisers may not respond positively to these improvements. Failure to grow revenue sufficiently to offset the significant investments will materially and adversely affect our business and operating results.
Unplanned system interruptions and capacity constraints and failure to effect efficient transmission of user communications and data over the Internet could harm our business and reputation. The success of our Online Media business largely depends on the efficient and uninterrupted operation of the computer and communications hardware and network systems that power our web sites. We do not currently have a formal disaster recovery plan and substantially all of our computer and communications systems are located in a single data center near Chicago, Illinois. Our systems and operations remain vulnerable to damage or interruption from fire, power loss, telecommunications failure and similar events.
During our fiscal year 2008, which ended on July 31, 2008, we experienced unplanned service interruptions with all our online sites. Service interruptions were caused by a variety of factors, including capacity constraints, single points of hardware failure, software design flaws and bugs, and third party denial of service attacks. Although we continue to work to improve the performance and uptime of our web sites, and have taken steps to mitigate these risks, we expect that service interruptions will continue to occur from time to time. If our web sites experience frequent or lengthy service interruptions, our business and reputation will be seriously harmed.
Risks Related to Our E-commerce Business We are exposed to significant inventory risks as a result of seasonality, new product launches, rapid changes in product cycles and changes in consumer tastes with respect to our products offered at our ThinkGeek E-commerce web site. In order to be successful, we must accurately predict our customers’ tastes and avoid over-stocking or under-stocking products. Demand for products can change significantly between the time inventory is ordered and the date of sale. In addition, when we begin selling a new product, it is particularly difficult to forecast product demand accurately. The acquisition of certain types of inventory, especially inventory of custom manufactured products, or inventory from certain sources, may require significant lead-time and prepayment, and such inventory may not be returnable. We carry a broad selection and significant inventory levels of certain products and we may be unable to sell products in sufficient quantities or during the relevant selling seasons. Failure to properly assess our inventory needs will adversely affect our financial results.
We cannot predict our E-commerce customers’ preferences with certainty and such preferences may change rapidly. Our E-commerce offerings on our ThinkGeek.com web site are designed to appeal to technology professionals and enthusiasts and other consumers. Misjudging either the market for our products or our customers’ purchasing habits will cause our sales to decline, our inventories to increase and/or require us to sell our products at lower prices, all of which would have a negative effect on our gross margins and our results of operations. Failure to accurately assess and predict our E-commerce customers’ preferences will adversely impact our financial results.
We are subject to risks as a result of our reliance on foreign sources of production for certain products. In order to offer cost effective and innovative products, we are increasingly relying on manufacturers located outside of the United States, most of which are located in Asia (primarily China), to supply us with these products in sufficient quantities - based on our forecasted customer demand - and to deliver these products in a timely manner.
Our arrangements with these manufacturers are generally limited to purchase orders tied to specific lots of goods. We are subject to the risks of relying on products manufactured outside the United States, including political unrest, trade restrictions, customs and tariffs, local business practice and political issues. Additionally, significant reliance on foreign sources of productions increases the risk of issues relating to compliance with
domestic or international labor standards, compliance with domestic or international manufacturing and product safety standards, currency fluctuations, restrictions on the transfer of funds, work stoppages or slowdowns and other labor issues, economic uncertainties including inflation and government regulations, availability and costs of raw materials, potentially adverse tax consequences and other uncertainties. China, in particular, has in recent years experienced rapid social, political and economic change, and further changes may adversely affect our ability to procure our products from Chinese suppliers.
Our ability to obtain goods on a cost effective basis is also subject to our ability to maintain relationships with our suppliers and our ability to negotiate and maintain supply arrangements on favorable terms. There is increasing political pressure on China to permit the exchange rate of its currency, the Chinese Yuan (“CNY”), to float against the U.S. Dollar (“USD”). Although substantially all of our purchase orders are denominated in USD, our suppliers could attempt to renegotiate these contracts and increase costs to us if the CNY/USD exchange rate were to change in a manner adverse to the USD. In addition, because our purchases are usually on a case by case basis, we are subject to the risk of unexpected changes in pricing or supply from these suppliers. We may also be unable to develop beneficial relationships with new vendors in the future.
Increased focus on sales and use tax could subject us to liability for past sales and cause our future sales to decrease. We do not collect sales or other taxes on shipments of most of our goods into most states in the United States or internationally. The relocation of our fulfillment center or customer service centers or any future expansion of them, along with other aspects of our business, may result in additional sales and other tax obligations. We do not collect consumption tax (including value added tax, goods and services tax, and provincial sales tax) as applicable on goods and services sold that are delivered outside of the United States. One or more states or foreign countries may seek to impose sales or other tax collection obligations on out-of-jurisdiction E-commerce companies. A successful assertion by one or more states or foreign countries that we should collect sales or other taxes on the sale of merchandise or services could result in substantial tax liabilities for past sales, decrease our ability to compete with traditional retailers, and otherwise harm our business.
Currently, U.S. Supreme Court decisions restrict the imposition of obligations to collect state and local sales and use taxes with respect to sales made over the Internet. However, a number of states, as well as the U.S. Congress, have been considering initiatives that could limit or supersede the Supreme Court’s position regarding sales and use taxes on Internet sales. If any of these initiatives are successful, we could be required to collect sales and use taxes in additional states. The imposition by state and local governments of various taxes upon Internet commerce could create administrative burdens for us, put us at a competitive disadvantage if they do not impose similar obligations on all of our online competitors and decrease our future sales.
We may be subject to product liability claims if people or property are harmed by the products we sell on our E-commerce web sites, which could be costly to defend and subject us to significant damage claims. Some of the products we offer for sale on our E-commerce web sites, such as consumer electronics, toys, computers and peripherals, toiletries, beverages, food items and clothing, may expose us to product liability claims relating to personal injury, death or property damage caused by such products, and may require us to take actions such as product recalls. Although we maintain liability insurance, we cannot be certain that our coverage will be adequate for liabilities actually incurred or that insurance will continue to be available to us on economically reasonable terms, or at all. In addition, some of our vendor agreements with our suppliers do not indemnify us from product liability, and even if some agreements provide for indemnification, it may be prohibitively costly to avail ourselves of the benefits of the protection.
If we do not maintain sufficient E-commerce inventory levels, or if we are unable to deliver our E-commerce products to our customers in sufficient quantities, our E-commerce business operating results will be adversely affected. We must be able to deliver our merchandise in sufficient quantities to meet the demands of our customers and deliver this merchandise to customers in a timely manner. We must be able to maintain sufficient inventory levels, particularly during the peak holiday selling seasons. If we fail to achieve these goals, we may be unable to meet customer demand, and our financial results will be adversely affected.
Our ThinkGeek E-commerce web site is dependent upon a single third party fulfillment and warehouse provider. The satisfaction of our E-commerce customers is highly dependent upon fulfillment of orders in a professional and timely manner, so any decrease in the quality of service offered by our fulfillment and warehouse provider will adversely affect our reputation and the growth of our E-commerce business. Our ThinkGeek E-commerce web site’s ability to receive inbound inventory and ship completed orders efficiently to our customers is substantially dependent on a third-party contract fulfillment and warehouse provider. We currently utilize the services of Dotcom Distribution, Inc. (“Dotcom Distribution”), located in Edison, New Jersey. If Dotcom Distribution fails to meet our future distribution and fulfillment needs, our relationship with and reputation among our E-commerce customers will suffer and this will adversely affect our E-commerce growth. Additionally, if Dotcom Distribution cannot meet our distribution and fulfillment needs, particularly during the peak holiday selling seasons, or our contract with Dotcom Distribution terminates, we may fail to secure a suitable replacement or second-source distribution and fulfillment provider on comparable terms, which would adversely affect our E-commerce financial results.
Unplanned system interruptions and capacity constraints could harm our revenue and reputation. Our E-commerce business is dependent on the uninterrupted and highly available operation of our web site. During fiscal 2008, we experienced service interruptions with our E-commerce web site. Service interruptions may be caused by a variety of factors, including capacity constraints, software design flaws and bugs, and third party denial of service attacks. If we fail to provide customers with such access to our web site at the speed and performance which they require, our E-commerce sales would be adversely affected and our business reputation may be seriously harmed.
We do not currently have a formal disaster recovery plan and our E-commerce related computer and communications systems are located in a single data center near Chicago, Illinois. Our systems and operations remain vulnerable to damage or interruption from fire, power loss, telecommunications failure and similar events. If our ThinkGeek.com web site experience frequent or lengthy service interruptions, our business and reputation will be seriously harmed.
Risks Related to Our Financial Results Certain factors specific to our businesses over which we have limited or no control may nonetheless adversely impact our total revenue and financial results. The primary factors over which we have limited or no control that may adversely impact our total revenue and financial results include the following:
• specific economic conditions relating to online advertising and/or E-commerce spending;
• the discretionary nature of our online media customers’ purchase and budget cycles;
• the size and timing of online media customer orders;
• long online media sales cycles;
• our ability to retain skilled engineering, marketing and sales personnel;
• our ability to demonstrate and maintain attractive online user demographics;
• the addition or loss of specific online advertisers or sponsors, and the size and timing of advertising or sponsorship purchases by individual customers; and
• our ability to keep our web sites operational at a reasonable cost.
If our revenue and operating results fall below our expectations, the expectations of securities analysts or the expectations of investors, the trading price of our common stock will likely be materially and adversely affected. You should not rely on the results of our business in any past periods as an indication of our future financial performance.
Disruptions and liquidity issues in the credit market may unfavorably impact our financial condition and results of operations. We invest excess funds in specific instruments and issuers approved for inclusion in our cash and short-term investments accounts pursuant to a written investment policy established by our Board of Directors and overseen by the Audit Committee of our Board of Directors. Our investment criteria are to invest only in top tier quality investments or federally sponsored investments. Top tier quality investments are determined by our investment advisors in conjunction with ratings of those investments provided by outside ratings agencies as well as our investment advisors’ internal credit specialists. Our cash is invested in overnight instruments and instruments that will mature within ninety days after the end of our fiscal reporting period. Our investment portfolio consists of instruments that mature between ninety-one days and 37 years after the end of our fiscal reporting period.
Based upon recent events in the credit market, we may be impacted by the following risks:
• our investment portfolio contains auction rate securities, which have recently experienced liquidity issues due to the failure of auctions;
• our investment portfolio contains a security issued by an entity in the mortgage lending business which has recently experienced declines in value resulting from the uncertainties in the United States mortgage and home equity market;
• we have experienced and may continue to experience temporary or permanent declines in the value of certain instruments which would be reflected in our financial statements;
• we have recently experienced and may continue to experience rating agency downgrades of instruments we currently own which may degrade our portfolio quality and cause us to take impairment charges; and
• we may not be able to reasonably value or assess our investments if there is not a liquid resale market for those instruments.
We report changes in the market value of investments as unrealized gains or losses. During the year ended July 31, 2008 we experienced a realized loss on one investment of $0.5 million. In the event any investments do not mature as scheduled, we may be required to recognize additional realized losses on the investment and our results of operations would be adversely affected. Recently, we have experienced liquidity issues relating to our investment in $10.8 million of auction rate securities, and may be unable to liquidate these investments prior to their contractual maturities which range from 20 to 37 years.
Future changes in financial accounting standards, including pronouncements and interpretations of accounting pronouncements on revenue recognition, share-based payments, fair value measurements and financial instruments, may cause adverse unexpected revenue fluctuations and/or affect our reported results of operations. From time to time, the American Institute of Certified Public Accountants (“AICPA”) and the SEC may issue accounting pronouncements, guidelines and interpretations regarding accounting pronouncements. A change in an accounting policy can have a significant effect on our reported results and may even affect our reporting of transactions completed before a change is announced. Accounting policies affecting our business, including rules relating to fair value accounting, revenue recognition, share-based payments and financial instruments have recently been revised or are under review. In particular, new accounting pronouncements and varying interpretations of existing pronouncements on fair value accounting, revenue recognition, share-based payments and financial instruments have occurred with frequency, may occur in the future and could impact our revenue and results of operations. The SEC has recently announced that they will issue a proposed a roadmap regarding the potential use of financial statements prepared in accordance with International Financial Reporting Standards (IFRS). IFRS is a comprehensive series of accounting standards published by the International Accounting Standards Board (IASB). Under the proposed roadmap, we could be required in fiscal 2014 to prepare financial statements in accordance with IFRS, and the SEC will make a determination in 2011 regarding the mandatory adoption of IFRS. Required changes in our application of accounting pronouncements could cause changes in our reported results of operations and our financial condition.
If we fail to adequately monitor and minimize our use of existing cash, we may need additional capital to fund continued operations beyond the next 12 months. Although we generated cash from continuing operations during the past three fiscal years, which ended July 31, 2008, July 31, 2007 and July 31, 2006, we have historically experienced annual cash shortfalls. Unless we monitor and minimize the level of use of our existing cash, cash equivalents and marketable securities, we may require additional capital to fund continued operations beyond the next 12 months. In addition, our existing marketable securities may not provide us with adequate liquidity when needed. While we believe we will not require additional capital to fund continued operations for the next 12 months, we may require additional funding within this time frame, and this additional funding, if needed, may not be available on terms acceptable to us, or at all. A slowdown in online advertising and/or E-commerce spending, as well as other factors that may arise, could affect our future capital requirements and the adequacy of our available funds. As a result, we may be required to raise additional funds through private or public financing facilities, strategic relationships or other arrangements. Any additional equity financing would likely be dilutive to our stockholders. Debt financing, if available, may involve restrictive covenants on our operations and financial condition. Our inability to raise capital when needed could seriously harm our business.
We have a history of losses and may incur net losses in the foreseeable future. Failure to attain consistent profitability may materially and adversely affect the market price of our common stock and our ability to raise capital and continue operations. We generated a net loss of $4.3 million during fiscal year 2008 which ended on July 31, 2008 and we have an accumulated deficit of $736.7 million as of July 31, 2008. We may incur net losses in the future. Failure to attain profitability on a sustained basis may materially and adversely affect the market price of our common stock and our ability to raise capital and continue operations beyond the next 12 months.
Risks Related to Competition Our competition is intense. Our failure to compete successfully could adversely affect our revenue and financial results. The market for Internet content and services is intensely competitive and rapidly evolving. It is not difficult to enter this market and current and new competitors can launch new Internet sites at relatively low cost. We compete with various media businesses for advertising revenue, including newspaper, radio, magazine and Internet media companies.
We also derive revenue from E-commerce, for which we compete with other E-commerce companies as well as traditional, “brick and mortar” retailers. Recent increases in shipping costs and taxation of Internet commerce may make our products uncompetitive when compared with traditional “brick and mortar” retailers. We may fail to compete successfully with current or future competitors. Moreover, increased competition could result in price reductions, reduced margins or loss of market share, any of which could have a material adverse effect on our future revenue and financial results. If we do not compete successfully for new users and advertisers, our financial results may be materially and adversely affected.
Risks Related to Intellectual Property We are vulnerable to claims that our web sites infringe third-party intellectual property rights. Any resulting claims against us could be costly to defend or subject us to significant damages. We expect that our web sites will increasingly be subject to infringement claims as the number of competitors in our industry segment grows and the functionality of web sites in different Internet industry segments overlap. The scope of United States patent protection for software is not well defined and will evolve as the United States Patent and Trademark Office grants additional patents. Because patent applications in the United States are not publicly disclosed until the patent is issued, applications may have been filed that would relate to our products. In addition, we may receive patent infringement claims as companies increasingly seek to patent their software. Our developers may fail to perform patent searches and may therefore unwittingly infringe on third-party patent rights. We cannot prevent current or future patent holders or other owners of intellectual property from suing us and others seeking monetary damages or an injunction
against our web site offerings. A patent holder may deny us a license or force us to pay royalties. In either event, our operating results could be seriously harmed. In addition, employees hired from competitors might utilize proprietary and trade secret information from their former employers without our knowledge, even though our employment agreements and policies clearly prohibit such practices.
Any litigation regarding our intellectual property, with or without merit, could be costly and time consuming to defend, divert the attention of our management and key personnel from our business operations and cause interruption in our web site offerings. Claims of intellectual property infringement may require us to enter into royalty and licensing agreements that may not be available on terms acceptable to us, or at all. In addition, parties making claims against us may be able to obtain injunctive or other equitable relief that could effectively block our ability to offer one or more of our web sites, or services thereon in the United States and abroad and could result in an award of substantial damages against us. Defense of any lawsuit or failure to obtain any required license could delay release of our products and increase our costs. If a successful claim is made against us and we fail to develop or license a substitute technology, our business, results of operations, financial condition or cash flows could be immediately and materially adversely affected.
If we fail to adequately protect our intellectual property rights, competitors may use our technology and trademarks, which could weaken our competitive position, reduce our revenue, and increase our costs. We rely on a combination of copyright, trademark and trade secret laws, employee and third-party nondisclosure agreements, and other arrangements to protect our proprietary rights. Despite these precautions, it may be possible for unauthorized third parties to copy our web sites, or services thereon or obtain and use information that we regard as proprietary to create sites that compete against ours. Some license provisions protecting against unauthorized use, copying, transfer, and disclosure of our licensed programs may be unenforceable under the laws of certain jurisdictions and foreign countries.
In addition, the laws of some countries do not protect proprietary rights to the same extent as do the laws of the United States. To the extent that we increase our international activities, our exposure to unauthorized copying and use of our web sites and proprietary information will increase.
Our collection of trademarks is important to our business. The protective steps we take or have taken may be inadequate to deter misappropriation of our trademark rights. We have filed applications for registration of and registered some of our trademarks in the United States and internationally. Effective trademark protection may not be available in every country in which we offer or intend to offer our products and services. Failure to protect our trademark rights adequately could damage our brand identity and impair our ability to compete effectively. Furthermore, defending or enforcing our trademark rights could result in the expenditure of significant financial and managerial resources.
Our success depends significantly upon our proprietary technology and information. Despite our efforts to protect our proprietary technology and information, it may be possible for unauthorized third parties to copy certain portions of our offerings or to reverse engineer or otherwise obtain and use our proprietary technology or information. In our E-commerce business, we periodically discover products that are counterfeit reproductions of our products or designs, or that otherwise infringe our intellectual property rights. The actions we take to establish and protect our intellectual property rights may not be adequate to prevent imitation of our offerings by others or prevent others from seeking to block sales of our offerings as violations of proprietary rights. Existing copyright laws afford only limited protection, and the laws of certain foreign countries may not protect intellectual property rights to the same extent as do United States laws. Litigation may be necessary to protect our proprietary technology and information. Such litigation may be costly and time-consuming and if we are unsuccessful in challenging a party on the basis of intellectual property infringement, our sales and intellectual property rights could adversely be affected and result in a shift of customer preference away from our offerings.
In addition, we cannot be certain that others will not develop substantially equivalent or superseding proprietary technology, or that equivalent offerings will not be marketed in competition with our offerings, thereby substantially reducing the value of our proprietary rights. Currently, we do not have any software, utility, or design patents and we cannot assure that we will develop proprietary offerings or technologies that are patentable, that any patent, if issued, would provide us with any competitive advantages or would not be challenged by third parties, or that the patents of others will not adversely affect our ability to do business.
Other Risks Related to Our Overall Business We may be subject to claims as a result of information published on, posted on or accessible from our Internet sites, which could be costly to defend and subject us to significant damage claims. We may be subject to claims of defamation, negligence, copyright or trademark infringement (including contributory infringement) or other claims relating to the information contained on our Internet sites, whether written by third parties or us.
Claims of defamation have been brought against online services in the past and can be costly to defend regardless of the merit of the lawsuit. Although federal legislation protects online services from some claims when third parties write the material, this protection is limited. Furthermore, the law in this area remains in flux and varies from state to state. We receive notification from time to time of potential claims, but have not been named as a party to litigation involving such claims. While no formal defamation complaints have been filed against us to date, our business could be seriously harmed if one were asserted.
Claims of infringement or other violations of intellectual property rights are common among Internet, media and technology companies because such companies often own large numbers of patents, copyrights, trademarks and trade secrets. Such claims often result in litigation, which is time consuming and can be costly to litigate, regardless of the merits of the claim or the eventual outcome of the claim. In addition, any time one of our online services links to or hosts material in which others allegedly own copyrights, we face the risk of being sued for copyright infringement or related claims. Because hosting of third party content comprises the majority of the online services that we offer, the risk of harm from such lawsuits could be substantial. Intellectual property claims are often time-consuming and may also be expensive to litigate or settle.
In addition to substantial defense costs, to the extent claims against us are successful, we may have to pay substantial monetary damages or discontinue one or more of our services or practices that are found to be in violation of another party’s rights. We may also acquire licenses or pay royalties in order to continue such practices, which may increase our operating expenses and have an adverse impact on our results of operations.
In September 2007, the Societe des Producteurs de Phonogrammes Francais filed copyright claims under French law against us alleging that the hosting on our SourceForge.net website of a certain third party Open Source software project, which may be used for so-called “peer-to-peer” file sharing, purportedly violates French law. An adverse result in this lawsuit may include an award of substantial monetary damages, costly royalty or licensing agreements or orders preventing us from offering downloads of certain third party Open Source software in France, which could result in a loss of revenue or an increase in operating expenses. In addition, this claim may require us to change our business practices, which could result in a loss of revenue or otherwise harm our business.
We may not detect weaknesses in our internal control over financial reporting in a timely manner, or at all. Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”), we are required to evaluate the effectiveness of our internal control over financial reporting as well as our disclosure controls and procedures each fiscal year. As of July 31, 2008 management has concluded that our internal control over financial reporting and our disclosure controls and procedures were effective. We will need to continue to evaluate, upgrade and enhance our internal controls. Because of inherent limitations, our internal control over financial reporting may not prevent or detect misstatements, errors or omissions, and any projections of any evaluation of effectiveness of internal controls to future periods are subject to the risk that the controls may become inadequate because of changes in conditions or that the degree of compliance with our policies or procedures may deteriorate. We cannot be certain in future periods that other control deficiencies that may constitute one or more “significant deficiencies” (as defined by the relevant auditing standards) or material weaknesses in our internal control over financial reporting will not be identified. If we fail to maintain the adequacy of our internal controls, including any failure to implement or difficulty in implementing required or new or improved controls, our business and results of operations could be harmed, the results of operations we report could be subject to adjustments, we may not be able to provide reasonable assurance as to our financial results or the effectiveness of our internal controls and/or we may not be able to meet our reporting obligations.
If we are unable to implement appropriate systems, procedures and controls, we may not be able to successfully offer our services and grow our business. Our ability to successfully offer our services and grow our business requires an effective planning and management process. We periodically update our operations and financial systems, procedures and controls, however; we still rely on manual processes and procedures that may not scale commensurately with our business growth. Our systems will continue to require automation, modifications and improvements to respond to current and future changes in our business. If we cannot grow our businesses, and manage that growth effectively, or if we fail to implement in a timely manner appropriate internal systems, procedures, controls and necessary automation and improvements to these systems, our businesses will suffer.
If we lose key personnel or fail to integrate replacement personnel successfully, our ability to manage our business could be impaired. Our future success depends upon the continued service of our key management, technical, sales, and other critical personnel. Our officers and other key personnel are employees-at-will, and we cannot assure that we will be able to retain them. Key personnel have left our company in the past and there likely will be additional departures of key personnel from time to time in the future. For example, our Chief Executive Officer resigned in June 2008. The loss of any key employee could result in significant disruptions to our operations, including adversely affecting the timeliness of product releases, the successful implementation and completion of company initiatives, and the results of our operations. Competition for these individuals is intense, and we may not be able to attract, assimilate or retain highly qualified personnel. Competition for qualified personnel in our industry and the San Francisco Bay Area, as well as other geographic markets, in which we recruit, is intense and characterized by increasing salaries, which may increase our operating expenses or hinder our ability to recruit qualified candidates. In addition, the integration of replacement personnel could be time consuming, may cause additional disruptions to our operations, and may be unsuccessful.
We have currently engaged an executive search firm to fill the President and Chief Executive Officer role. If we are not successful in recruiting the right candidate in a timely manner our business may suffer.
Our stock price has been volatile historically and may continue to be volatile. The trading price of our common stock has been and may continue to be subject to wide fluctuations. During our fiscal year ended July 31, 2008, the closing sale prices of our common stock on the NASDAQ Global Market ranged from $1.31 to $3.93 per share and the closing sale price on July 31, 2008, the last trading day of our fiscal year 2008, was $1.39 per share. Our stock price may fluctuate in response to a number of events and factors, such as quarterly variations in operating results, announcements of technological innovations or new products and media properties by us or our competitors, changes in financial estimates and recommendations by securities analysts, the operating and stock price performance of other companies that investors may deem comparable to us, and news reports relating to trends in our markets or general economic conditions.
In addition, the stock market in general, and the market prices for Internet-related companies in particular, have experienced volatility that often has been unrelated to the operating performance of such companies. These broad market and industry fluctuations may adversely affect the price of our stock, regardless of our operating performance. Additionally, volatility or a lack of positive performance in our stock price may adversely affect our ability to retain key employees, all of whom have been granted stock options.
Sales of our common stock by significant stockholders may cause the price of our common stock to decrease. Several of our stockholders own significant portions of our common stock. If these stockholders were to sell substantial amounts of their holdings of our common stock, then the market price of our common stock could be negatively impacted. The effect of such sales, or of significant portions of our stock being offered or made available for sale, could result in strong downward pressure on our stock price. Investors should be aware that they could experience significant short-term volatility in our stock if such stockholders decide to sell a substantial amount of their holdings of our common stock at once or within a short period of time.
Our networks may be vulnerable to unauthorized persons accessing our systems, which could disrupt our operations and result in the theft of our proprietary information. A party who is able to circumvent our security measures could misappropriate proprietary information or cause interruptions or malfunctions in our Internet operations. We may be required to expend significant capital and resources to protect against the threat of security breaches or to alleviate problems caused by breaches in security.
Increasing regulation of the Internet or imposition of sales and other taxes on products or services sold or distributed over the Internet could harm our business. The E-commerce market on the Internet is relatively new and rapidly evolving. While this is an evolving area of the law in the United States and overseas, currently there are relatively few laws or regulations that directly apply to commerce on the Internet. Changes in laws or regulations governing the Internet and E-commerce, including, without limitation, those governing an individual’s privacy rights, pricing, content, encryption, security, acceptable payment methods and quality of products or services could have a material adverse effect on our business, operating results and financial condition. Taxation of Internet commerce, or other charges imposed by government agencies or by private organizations, may also be imposed. Recently New York State has adopted legislation which attempts to impose sales tax collection and reporting obligation on Internet companies. Any of these regulations could have an adverse effect on our future sales and revenue growth.
Business disruptions could affect our future operating results. Our operating results and financial condition could be materially and adversely affected in the event of a major earthquake, fire or other catastrophic event. Our corporate headquarters and certain other critical business operations are located in California, near major earthquake faults. A catastrophic event that results in the destruction of any of our critical business or information technology systems could severely affect our ability to conduct normal business operations and as a result our future operating results could be adversely affected.
System disruptions could adversely affect our future operating results. Our ability to attract and maintain relationships with users, advertisers, merchants and strategic partners will depend on the satisfactory performance, reliability and availability of our Internet channels and network infrastructure. Our Internet advertising revenue relates directly to the number of advertisements delivered to our users. System interruptions or delays that result in the unavailability of Internet pages or slower response times for users would reduce the number of advertisements delivered to such users and reduce the attractiveness of our web properties to users, strategic partners and advertisers or reduce the number of impressions delivered and thereby reduce revenue. In the past year, all of our web properties have experienced unplanned service interruptions. We will continue to suffer future interruptions from time to time whether due to capacity constraints, natural disasters, telecommunications failures, other system failures, rolling blackouts, viruses, hacking or other events. System interruptions or slower response times could have a material adverse effect on our revenue and financial condition.
Item 1B.
Item 1B. Unresolved Staff Comments None.
Item 2.
Item 2. Properties Our principal locations are as follows:
(1) In September 2008 we entered into a 2 year lease agreement for a new 4,300 square feet facility in Dexter, Michigan.
Item 3.
Item 3. Legal Proceedings Information with respect to this Item may be found in Note 5 of the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K, which information is incorporated into this Item 3 by reference.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders Not applicable.
PART II Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Our common stock is traded on the NASDAQ Global Market under the symbol LNUX. As of September 30, 2008, there were 712 holders of record of our common stock. We have not declared any cash dividends since our inception and do not expect to pay any dividends in the foreseeable future. The high and low closing sales prices, as reported by NASDAQ, of our common stock are as follows:
The foregoing reflects interdealer prices without retail markup, markdown, or commissions and may not necessarily reflect actual transactions.
Stock Performance Graph Set forth below is a line graph comparing the percentage change in the cumulative return to the stockholders of our Common Stock with the cumulative return of the NASDAQ Stock Market (U.S.) Index, the Goldman Sachs Technology Internet (“GSTI”) Index and the RDG Internet Composite (“RDG”) Index for the period commencing July 31, 2003 and ending on July 31, 2008. Returns for the indices are weighted based on market capitalization at the beginning of each measurement point.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among SourceForge Inc, The NASDAQ Composite Index,
The RDG Internet Composite Index And The GSTI Internet Index
* The graph assumes that $100 was invested on July 31, 2003, in our Common Stock, at the closing price of $1.88 per share, and $100 was invested on July 31, 2003, in the NASDAQ Stock Market (U.S.) Index, the GSTI Index and the RDG Internet Composite Index, and that all dividends were reinvested. We have not declared or paid any dividends on our Common Stock. Stockholder returns over the indicated period should not be considered indicative of future stockholder returns. We have removed the S&P Application Software Index from the performance graph as we sold our Software business segment in April 2007 and no longer have business in the segment. We are replacing the GSTI Index with the RDG Internet Composite Index, because the GSTI Index no longer exists.
Item 6.
Item 6. Selected Consolidated Financial Data You should read the selected consolidated financial data set forth below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the related notes included elsewhere in this Form 10-K.
The statement of operations data for the fiscal years ended July 31, 2008, July 31, 2007 and July 31, 2006 and the balance sheet data as of July 31, 2008 and July 31, 2007 are derived from the audited financial statements and related notes appearing elsewhere in this Form 10-K. The statement of operations data for the fiscal years ended July 31, 2005 and July 31, 2004 and the balance sheet data as of July 31, 2006, July 31, 2005 and July 31, 2004 are derived from audited financial statements not appearing in this Form 10-K. Net revenue, cost of revenue and operating expenses data excludes the results of our Software business, which was sold in April 2007 and our Online Images business, which was sold in December 2005. The historical results are not necessarily indicative of results that may be expected for any future period.
Summary Financial Information
(In Thousands, Except per Share Data)
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis should be read in conjunction with “Selected Consolidated Financial Data” and our financial statements and the related notes included elsewhere in this Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of certain factors including the risks discussed in “Item 1A. Risk Factors” and elsewhere in this Form 10-K. See Part I - Item 1 - “Special Note Regarding Forward-Looking Statements.”
Overview We are a leading provider of web properties that enable the creation, review, hosting and distribution of online peer-produced content. We are also an online seller of technology-themed retail products.
Our audience of technology professionals and enthusiasts relies on our web properties, SourceForge.net, Slashdot.org, Linux.com and freshmeat.net, to create, improve, compare and distribute Open Source software, and to debate and discuss current issues facing, and innovation in, the technology marketplace. Through our ThinkGeek, Inc. E-commerce subsidiary, we sell retail products to this audience and others.
We were incorporated in California in January 1995 and reincorporated in Delaware in December 1999. From the date of our incorporation through October 2001, we sold Linux-based hardware systems and services under the name VA Linux Systems, Inc. In December 2001, we changed our name to VA Software Corporation to reflect our decision to pursue our Online Media, E-commerce, Software and Online Images businesses. In December 2005, we sold our Online Images business to Jupitermedia Corporation (“Jupitermedia”) and in April 2007, we sold our Software business to CollabNet, Inc. (“CollabNet”). On May 24, 2007 we changed our name to SourceForge, Inc. and merged with our wholly-owned subsidiary, OSTG, Inc.
Our business consists of two operating segments: Online Media and E-commerce. Our Online Media segment consists of a network of Internet web sites which connect millions of influential technology professionals and enthusiasts. Our Online Media segment’s network of web sites include: SourceForge.net, Slashdot.org, Linux.com and freshmeat.net. Our E-commerce segment sells technology-themed retail products to technology professionals and enthusiasts through our ThinkGeek.com web site.
Our network of web sites served an average of over 33 million unique visitors per month* over the past twelve months (*Source: Google Analytics and Omniture). During fiscal 2008 we served 817 million downloads from our SourceForge.net web site. We have migrated substantially all of our web sites to our new data center. Within the E-commerce segment, we continued to increase our customer base, increasing the average order size by 9% and the number of orders by 20% during fiscal 2008 as compared to fiscal 2007.
Our sales continue to be primarily attributable to customers located in the United States of America.
Net revenue from continuing operations increased 21% in fiscal 2008 as compared to fiscal 2007 due to revenue increases of 6% in our Online Media business and 31% in our E-commerce business. Within the Online Media segment, the revenue increase was primarily due to an increase in cash advertising as new customers participated in our advertising campaigns as well as our premium advertising products, which were introduced in the second half of our 2008 fiscal year. E-commerce revenue increased due to a 20% increase in orders shipped to our customer base in this segment.
Net revenue from continuing operations increased 35% in fiscal 2007 as compared to fiscal 2006 due to revenue increases of 32% in our Online Media business and 38% in our E-commerce business. Within the Online Media segment, revenue increased due to our focus on developing innovative advertising campaigns for targeted customers as well as increased revenue from greater levels of contextually-relevant advertising. E-commerce revenue increased due to a 37% increase in orders shipped to our customer base in this segment.
Critical Accounting Policies Accounting policies, methods and estimates are an integral part of the consolidated financial statements prepared by management and are based upon management’s current judgments. Those judgments are normally based on knowledge and experience with regard to past and current events and assumptions about future events. Certain accounting policies, methods and estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ markedly from management’s current judgments. While there are a number of accounting policies, methods and estimates affecting our financial statements, areas that are particularly significant include revenue recognition policies, the assessment of impairment of long-lived assets, restructuring reserves for excess facilities for non-cancelable leases, income taxes, stock-based compensation and contingencies and litigation.
Revenue Recognition Online Media Revenue Online Media revenue is derived from the sale of advertising space on our various web sites. We recognize Online Media revenue in accordance with SEC Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition” over the period in which the advertisements are displayed, provided that persuasive evidence of an arrangement exists, no significant obligations remain, the fee is fixed or determinable, and collection of the receivable is reasonably assured. Our obligations typically include guarantees of a minimum number of “impressions” (times that an advertisement is viewed by users of our online services). To the extent that minimum guaranteed impressions are not met in the specified time frame, we do not recognize the corresponding revenue until the guaranteed impressions are achieved.
We measure revenue on barter transactions based on the recorded amount of the non-monetary asset relinquished. Our barter transactions generally consist of the exchange of advertising on our Online Media web sites for access and advertising at industry trade shows. Accordingly, we do not record any revenue as a result of these transactions.
E-commerce Revenue E-commerce revenue is derived from the online sale of consumer goods. We recognize E-commerce revenue from the sale of consumer goods in accordance with SAB 104. Under SAB 104, product revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the sale price is fixed or determinable, and collectibility is reasonably assured. In general, we recognize E-commerce revenue when the goods are shipped and title transfers to the customer. We grant customers a right to return E-commerce products within 30 days of the shipment date. Such returns are recorded as incurred and have been immaterial for the periods presented.
Impairment of Long-Lived Assets We continually evaluate whether events and circumstances have occurred that indicate the remaining estimated useful life of long-lived assets may warrant revision or that the remaining balance of long-lived assets may not be recoverable in accordance with Statement of Financial Accounting Standards “SFAS” No. 144, “Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of.” When factors indicate that long-lived assets should be evaluated for possible impairment, we use an estimate of the related undiscounted future cash flows over the remaining life of the long-lived assets in measuring whether they are recoverable. If the carrying value of the asset exceeds the estimated undiscounted future cash flows, a loss is recorded as the excess of the asset’s carrying value over fair value. Long-lived assets and certain identifiable intangible assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.
Restructuring Costs In October 2007, we relocated our corporate headquarters to Mountain View, California. During fiscal 2008, we recorded a restructuring charge of $2.2 million for the remaining facility space and leasehold improvements at our former corporate headquarters located in Fremont, California. In conjunction with the sale of its Software business in April 2007, we accrued a restructuring charge of $0.6 million for the excess facility space formerly used by our Software business, which was included in the gain on disposal of
discontinued operations. In fiscal 2001 and 2002, we exited our hardware systems and hardware-related software engineering and professional services businesses, as well as a sublease agreement, and reduced our general and administrative overhead costs. The restructuring liability of $5.2 million as of July 31, 2008 represents the remaining accrual from non-cancelable lease payments, which continue through 2010, less estimated sublease rent. This accrual is subject to change should actual circumstances change. We will continue to evaluate and update, if applicable, these accruals on an annual basis.
All charges as a result of restructuring activities have been recorded in accordance with SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities” and Emerging Issues Task Force (“EITF”) 94-3 “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs incurred in a Restructuring).”
Income Taxes Effective August 1, 2007, we adopted the provisions of FASB Financial Accounting Standards Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in accordance with SFAS No. 109, Accounting for Income Taxes. FIN 48 prescribes a comprehensive model for how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that the Company has taken or expects to take on a tax return.
The adoption of FIN 48 did not result in any adjustment in the liability for unrecognized income tax benefits. As of July 31, 2008 and August 1, 2007, we reduced our unrecognized tax benefits by $0.6 million and $0.6 million, respectively. Since a full valuation allowance was provided for these unrecognized tax benefits, there was no impact on retained earnings as of August 1, 2007.
It is our policy to classify accrued interest and penalties as part of the accrued FIN 48 liability and record the expense in the provision for income taxes. As of the adoption date and July 31, 2008, it was not necessary to accrue interest and penalties related to our uncertain tax positions. For unrecognized tax benefits that exist at July 31, 2008, we do not anticipate any significant changes within the next twelve months. We are not currently subject to any federal, state or foreign income tax examination.
Stock-Based Compensation We account for stock based compensation using the provisions of SFAS No. 123R “Share-Based Compensation.” Under the fair value recognition provisions of SFAS 123R, we recognize stock-based compensation expense net of an estimated forfeiture rate and therefore only recognize compensation cost for those shares expected to vest over the service period of the award.
Calculating stock-based compensation expense requires the input of subjective assumptions, including the expected term of the option grant, stock price volatility, and the pre-vesting option forfeiture rate. We estimate the expected life of options granted based on historical exercise patterns. We estimate stock price volatility based on historical implied volatility in our stock. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. We estimate the forfeiture rate based on historical experience of our stock-based awards that are granted, exercised, or cancelled.
Contingencies and Litigation We are subject to proceedings, lawsuits and other claims. We assess the likelihood of any adverse judgments or outcomes to these matters as well as ranges of probable losses. A determination of the amount of loss contingency required, if any, is assessed in accordance with SFAS No. 5, “Contingencies and Commitments” and recorded if probable after careful analysis of each individual matter. The required loss contingencies may change in the future as the facts and circumstances of each matter change.
Results of Operations We believe that the application of accounting standards is central to a company’s reported financial position, results of operations and cash flows. We review our annual and quarterly results, along with key accounting policies, with our audit committee prior to the release of financial results. In addition, we have not entered into any significant transactions with related parties. We do not use off-balance sheet arrangements with unconsolidated related parties, nor do we use other forms of off-balance sheet arrangements such as research and development arrangements.
The following table sets forth our operating results for the periods indicated as a percentage of net revenue, represented by selected items from the consolidated statements of operations. This table should be read in conjunction with the consolidated financial statements and the accompanying notes included in this Form 10-K.
Net Revenue
Sales for the fiscal years ended 2008, 2007, and 2006 were primarily to customers located in the United States of America.
For the fiscal years ended July 31, 2008, 2007, and 2006, respectively, no one customer represented 10% or greater of net revenue. Going forward, we do not anticipate that any one customer will represent more than 10% of annual net revenue.
Online Media Revenue
Online Media revenue was derived primarily from sales of advertising space on our various web sites as well as sponsorship-related arrangements and contextually-relevant advertising associated with advertising on these web sites.
Cash advertising revenue is derived from advertisements or services delivered to advertisers. Such advertisements may be in the form of an advertising impression, a click, the display of a text link, the download of a file or the collection of some data such as a lead.
The increase in cash advertising revenue during fiscal 2008 as compared to fiscal 2007 was due primarily to the addition of new customers participating in some of the new custom and premium programs we began offering in the second half of fiscal 2008.
The increase in cash advertising revenue during fiscal 2007 as compared to fiscal 2006 was due to the addition of new advertisers as well as additional spending by existing customers. The new customers were primarily due to the attractive demographics of the users of our web sites to these advertisers while the increased spending by existing customers was due to customers taking advantage of the programs we offer, such as our download program and custom landing page program.
Sponsorship revenue is derived from web marketing programs that are used to increase brand awareness. Revenue related to sponsorships is recognized ratably over the term of the marketing program or in conjunction with the delivery requirements set forth in the contract. The increase in sponsorship revenue in fiscal 2008 as compared to fiscal 2007 was due to customer participation in the sponsorship programs surrounding our 2008 Community Choice Awards. The increase in sponsorship revenue in fiscal 2007 as compared to fiscal 2006 was primarily due to additional advertisers participating in our sponsorship programs as well as increased revenue from existing advertisers whose campaigns ran partially during fiscal 2006 and for a full year in fiscal 2007.
Other revenue consists primarily of paid search, contextually-relevant advertising and referral fees. The decrease in other revenue during fiscal 2008 as compared to fiscal 2007 was primarily due to decreased revenue from referral fees resulting from completion of a partner’s contracts. The increase in other revenue during fiscal 2007 as compared to fiscal 2006 was primarily due to an increase in revenue resulting from a higher allocation of unsold inventory to the providers of contextually-relevant advertising, including $0.7 million related to a new program with our largest partner.
We believe that our audience of technology professionals and enthusiasts who rely on our web properties, along with our favorable online visitor demographics, makes us an attractive advertising vehicle. We expect our Online Media revenue to increase in the future as we continue to develop new products which appeal to advertisers and optimize our web properties to increase monetization of ad network and international traffic.
E-commerce Revenue
E-commerce revenue is derived from the online sale of consumer goods, including shipping, net of any returns and allowances.
The growth in E-commerce revenue in fiscal 2008 and 2007 as compared to the prior year was primarily due to increased consumer awareness of our web site as a result of broader product offerings, an increase in the number of custom developed products such as the Wi-Fi Detector Shirt and the 8-bit Tie, catalog marketing and media coverage of our web site which attracted a larger customer base, as well as web site enhancements, including improved search capability and customer communication features, that drove a 26% increase in the number of unique visitors to our web site. This increase in unique visitors resulted in a 20% and 37% increase in the number of orders shipped during fiscal 2008 and 2007, respectively. The average order size increased by 9% and 1% in fiscal 2008 and fiscal 2007, respectively, when compared to the prior fiscal year.
We expect E-commerce revenue to continue to grow as we increase the number of orders received by visitors to our site.
Cost of Revenue/Gross Margin
Gross margins increased in fiscal 2008 as compared to fiscal 2007 and in fiscal 2007 as compared to fiscal 2006. The increase in gross margins in fiscal 2008 as compared to fiscal 2007 was primarily due to increased gross margins in our E-commerce business, which was primarily due to the significant increase in E-commerce net revenue, offset in part by decreased gross margins in our Online Media business, which was primarily due to the significant increase in Online Media cost of revenue. The increase in gross margins in fiscal 2007 as compared to fiscal 2006 was primarily due to the 35% increase in net revenue, offset in part by a 34% increase in cost of revenue.
Cost of Revenue/Gross Margin by Segment Online Media Cost of Revenue/Gross Margin
Online Media cost of revenue consists of personnel and related overhead, equipment and bandwidth associated with the operation of our data center, personnel costs and related overhead associated with developing the editorial content of our sites and personnel and related overhead and third-party costs associated with delivering revenue producing products. Online Media cost of revenue includes both costs which do not vary directly with revenue (fixed costs), such as equipment, personnel and editorial costs, as well as costs which are more directly affected by revenue (variable costs), such as bandwidth for delivering content and ad-serving costs. While our fixed costs will generally not vary directly with revenue; they may increase to the extent that we expand or upgrade the equipment necessary to operate our network or if we add additional sites to our network of web sites. Our variable costs generally vary based on the delivery of web pages, content, the number of advertisements delivered and the size of the advertisement. To the extent that we are able to increase our revenue without increasing our fixed costs, our gross margins will increase; however, to the extent that we expand our equipment in anticipation of increased activity, we may experience decreased gross margins.
The decrease in Online Media gross margin percentage for fiscal 2008 as compared to fiscal 2007 was primarily due to the higher cost of revenue of $2.5 million. The increase in cost of revenue was primarily due to increases in data center co-location costs of $0.9 million, amortization of equipment and software of $0.9 million, headcount and related overhead costs of $0.5 million, and ad serving costs of $0.2 million. Our data center costs increased due to the relocation of our Santa Clara, California data center to a new larger data center near Chicago, Illinois. Our new data center is expected to provide us with the capacity required as we expand our platform and add features which enhance the user experience of our audience. Our depreciation and amortization costs increased due to equipment and related software purchased for our data center and amortization of internally developed software. Headcount and related costs increased due to increased personnel, primarily related to our ad serving operations and the transfer of an executive to network operations. Our ad serving cost increase was primarily due to the implementation and adoption of technology which provides for the automation of customer quotes, approval of the resulting order and transfer of the order to our ad server.
The slight increase in Online Media gross margin percentage for fiscal 2007 as compared to fiscal 2006 was due to a 32% increase in revenue, partially offset by a $1.0 million, or 27%, increase in cost of revenue. The increase in cost of revenue was primarily due to an increase in personnel costs related to providing editorial content and additional maintenance of our web sites of $0.6 million, an increase in our co-location costs of $0.3 million, including bandwidth costs to deliver content to users, and an increase in ad-serving costs of $0.1 million due primarily to higher volumes of units served and to a lesser extent to the serving of rich media ads and Really Simple Syndication (“RSS”) feeds.
We expect Online Media cost of revenue to increase in absolute dollars resulting from depreciation expense related to network equipment purchased for our new data center, as well as the associated ongoing operating costs, and amortization of internally developed software costs. To the extent that Online Media revenue does not increase proportionately, our Online Media gross margins may decline.
E-commerce Cost of Revenue/Gross Margin
E-commerce cost of revenue consists of product costs, shipping and fulfillment costs and personnel and related overhead associated with the operations and merchandising functions.
E-commerce gross margin percentage decreased in fiscal 2008 as compared to fiscal 2007 due to shipping revenue comprising a higher percent as a result of increases in shipping costs. We generate a significantly lower gross margin on shipping revenue than product revenue. E-commerce cost of revenue in fiscal 2008 increased as compared to fiscal 2007 consistent with increased E-commerce revenue levels; however,
increased shipping cost resulted in a slightly lower gross margin percentage. The increase in E-commerce cost of revenue in absolute dollars in fiscal 2008 as compared to fiscal 2007 was primarily due to increased product costs of $4.0 million, shipping costs of $1.6 million, fulfillment costs of $0.5 million, and merchandising costs of $0.5 million. Increases in product costs were the result of increased E-commerce revenue levels, shipping costs were related to the increased volume of orders shipped as well as significant increases in shipping rates resulting from increased fuel prices, and the increase in fulfillment costs were related to increased number of orders processed and an increased range of product offerings.
E-commerce gross margin percentage increased slightly in fiscal 2007 as compared to fiscal 2006 primarily as a result of lower affiliate commission, due to our replacing our largest affiliate with additional direct revenue, and to a lesser extent due to lower operating expenses as a percent of revenue, offset slightly by lower product margins due to product mix. The increase in E-commerce cost of revenue in absolute dollars in fiscal 2007 as compared to fiscal 2006 was primarily due to increased product costs of $3.7 million, shipping costs of $1.2 million, and fulfillment costs of $0.6 million. Increases in product costs were the result of increased E-commerce revenue levels, shipping costs were directly related to the increased volume of orders shipped and fulfillment costs were directly related to increased revenue levels.
We expect E-commerce cost of revenue in absolute dollars to increase proportionately with E-commerce revenue. In addition, we expect E-commerce overall gross margins will remain relatively constant.
Operating Expenses Sales and Marketing Expenses Sales and marketing expenses consist primarily of personnel and related overhead expenses, including sales commission, for personnel engaged in sales, marketing and sales support functions, as well as costs associated with advertising and promotional activities.
The increase in absolute dollars spent on sales and marketing in fiscal 2008 as compared to fiscal 2007 was primarily due to increases in headcount and related expenses of $1.8 million and marketing expenses of $0.2 million. The increase in headcount was due to additional personnel in our Online Media sales and marketing organizations and the increase in headcount related expense was due to stock-based compensation and travel expense for training and customer visits. The increase in discretionary marketing expenses was primarily due to increased E-commerce marketing expenses of $0.4 million, resulting from the printing and mailing of our E-commerce catalogs, fees paid to affiliates and consultants, which were offset in part by lower discretionary Online Media marketing expenses of $0.2 million.
The increase in absolute dollars spent on sales and marketing in fiscal 2007 as compared to fiscal 2006 was primarily related to an increase in personnel and related overhead expenses in our Online Media business of $0.8 million, an increase in marketing expense of $0.7 million, an increase in credit card fees of $0.3 million and an increase in recruiting fees of $0.2 million, offset by a decrease in commission expense of $0.3 million. The increase in employee expense was primarily related to an increase in headcount including $0.3 million of stock-based compensation expense. The increase in marketing expense was primarily due to market research programs for our SourceForge.net Marketplace product, our corporate name change and the branding of our new corporate name and to a lesser extent marketing catalogs for our E-commerce business. The increase in credit card fees was due to our E-commerce segment and resulted from increased sales volumes. The increase in recruiting fees related to new hires in fiscal 2007 and executive search fees paid for our Online Media business’ executives. The $0.3 million decrease in commission expense was a direct result of the Online Media sales team over achieving their quota levels in the prior fiscal year.
We believe that our sales and marketing expenses in absolute dollars will increase in the future as we increase our revenue, grow our sales force and expand our marking organization and marketing programs. However, in the future, we expect sales and marketing expenses to decrease slightly as a percentage of revenue.
Research and Development Expenses Research and development (“R&D”) expenses consist primarily of personnel and related overhead expenses for software engineers involved in developing our Online Media and E-commerce web sites. We expense all of our R&D costs as they are incurred; however, costs related to internally developed software, including personnel related expenses, are capitalized.
In accordance with SOP 98-1, “Accounting for the Cost of Computer Software Developed or Obtained for Internal Use,” costs related to the planning and post implementation phases of internal use software products are recorded as an operating expense. Direct costs incurred in the development phase are capitalized and amortized over the product’s estimated useful life as charges to cost of revenue. During fiscal 2008 and fiscal 2007, we capitalized $0.7 million and $1.8 million, respectively, of software development costs relating to the development of our SourceForge.net Marketplace platform.
The increase in R&D expense in absolute dollars in fiscal 2008 compared to fiscal 2007 was primarily due to increases in both our Online Media and E-commerce R&D expenses. The increase in Online Media expense was primarily due to increased personnel and related overhead expenses incurred to modernize our web sites and services, and the increase in E-commerce expense was due to increased personnel who were hired to update and add additional functionality for our ThinkGeek.com web site.
The increase in R&D expense absolute dollars in fiscal 2007 as compared to fiscal 2006 was primarily due to an increase in Online Media R&D expense. The increase in Online Media R&D expense was primarily related to increased personnel and related overhead expenses of $1.6 million and increased contractor expenses of $0.9 million, offset by the capitalization of internally developed software costs related to the development of our SourceForge.net Marketplace platform of $1.8 million. The increase in personnel and the contractor expenses were primarily related to additional resources required to support the development of the Marketplace platform as well as enhancements to our SourceForge.net web site. The decrease as a percentage of net revenue was primarily due to increased revenue levels, offset in part by higher expenses.
We expect R&D expenses to increase in absolute dollars, but not change significantly as a percentage of revenue in the future.
General and Administrative Expenses General and administrative (“G&A”) expenses consist of salaries and related expenses for finance and accounting, human resources and legal personnel, professional fees for accounting and legal services as well as insurance and other public company related costs.
The increase in G&A expenses in absolute dollars in fiscal 2008 as compared to fiscal 2007 was primarily related to stock-based compensation expense of $1.5 million and increased severance costs of $0.8 million, primarily related to the resignation of our former Chief Executive Officer, legal fees of $0.5 million, including $0.4 million related to the resolution of the Okerman legal matter, recruiting, advisor and Board of Director fees of $0.2 million, and higher bad debt expenses of $0.2 million resulting from increased revenue levels, and G&A expenses of $1.8 million which were allocated to our discontinued Software business in 2007, partially offset by a decrease in accounting fees of $0.3 million. The increase in G&A expense as a percentage of net revenue was primarily due to the significant increase in G&A expenses.
The increase in G&A expenses in fiscal 2007 as compared to fiscal 2006 was primarily related to stock-based compensation expense of $0.6 million, increased personnel and related overhead expenses of $0.4 million, contractor expenses of $0.2 million, higher legal fees of $0.1 million, and G&A expenses of $0.8 million, which were previously allocated to our discontinued Software business, partially offset by lower bad debt expenses of $0.2 million due to reduced levels of bad debt write-offs in fiscal 2007. The increase in stock-based compensation was primarily related to stock options granted to executive personnel hired in the fourth quarter of fiscal 2006 and to a lesser extent to stock awards granted in fiscal 2007; the increase in personnel related expenses was primarily due to increased headcount; the contractor expenses were primarily related to temporary help to cover maternity leave and vacant positions, and the higher legal fees were due to increased legal defense costs.
We expect G&A expenses to decrease from fiscal 2008 levels in absolute dollars because in fiscal 2008 we incurred severance and legal resolution expenses that we do not expect to recur, and we also expect G&A expenses to decrease as a percentage of revenue in the future.
Restructuring Costs In October 2007, we relocated our corporate headquarters to Mountain View, California. During fiscal 2008, we recorded a restructuring charge of $2.2 million for the remaining facility space and leasehold improvements at our former corporate headquarters located in Fremont, California. In conjunction with the sale of our Software business in April 2007, we accrued a restructuring charge of $0.6 million for the excess facility space used in the operation of our Software business, which was included in the gain on disposal of discontinued operations. In fiscal 2001 and 2002, we adopted plans to exit our hardware systems and hardware-related software engineering and professional services businesses, as well as exit a sublease agreement and to reduce our general and administrative overhead costs. The restructuring liability of $5.2 million as of July 31, 2008 represents the remaining accrual from non-cancelable lease payments, which continue through 2010, less estimated sublease rent. This accrual is subject to change should actual circumstances change. We will continue to evaluate and update, if applicable, these accruals on an annual basis.
All charges as a result of restructuring activities have been recorded in accordance with SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities” and Emerging Issues Task Force (“EITF”) 94-3 “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs incurred in a Restructuring).”
Below is a summary of the restructuring charges (in thousands):
(1) Included in discontinued operations.
Below is a summary of the changes to the restructuring liability (in thousands):
Other represents the reclassification of excess of straight-line rent expense over the cash payments to the restructuring reserve of $0.7 million, offset in part by the write-off of leasehold improvements of $0.1 million.
Components of the total accrued restructuring liability are as follows (in thousands):
Share-Based Compensation Expense During fiscal 2008, fiscal 2007, and fiscal 2006 we recognized $3.6 million, $1.4 million and $0.4 million in stock-based compensation expense from continuing operations, respectively, related to options and awards granted to employees and directors. The increase in stock-based compensation in fiscal 2008 as compared with fiscal 2007 is due to approximately $1.0 million of expense related to the modifications in the terms of stock option and awards granted to our former CEO as well as the impact of a change in our forfeiture rate assumption.
Related Party Transactions We own approximately 9% of the outstanding capital stock of CollabNet. Our holdings in CollabNet consist of shares of CollabNet’s Series C-1 preferred stock. We also own approximately 14% of VA Linux Systems Japan K.K.’s (“VA Linux Japan”) common stock. As the Company holds less than 20% of the voting stock of these companies and does not otherwise exercise significant influence over them, these investments are accounted for under the cost method. CollabNet is a developer of software used in collaborative software development and also purchases advertising on our Online Media web sites. VA Linux Japan distributes software and related consulting services and previously resyndicated certain of the Company’s Online Media business web sites for the Japanese market. In September 2007, VA Linux Japan sold its syndication rights to an unrelated third party which is now known as OSDN K.K. Subsequent to such sale, the Company no longer has any transactions with VA Linux Japan.
We continually evaluate whether events or circumstances have occurred that indicate the remaining value of these investments may be impaired. In fiscal 2008, fiscal 2007 and fiscal 2006, no impairment was recorded on these investments. There is no quoted market price for these investments; accordingly, fair value is estimated by management based on the estimated fair value of the underlying net assets or an annual appraisal performed by an independent valuation firm.
There were $0.9 million, $0.4 million and $0.1 million of related-party revenue from continuing operations associated with CollabNet and VA Linux Japan for the fiscal years ended July 31, 2008, July 31, 2007 and July 31, 2006, respectively.
Interest and Other Income, Net
Interest income decreased in fiscal 2008 as compared to fiscal 2007 as a result of reduced yields on our investments resulting from lower interest rates and our decision to invest in short-term treasuries, which generally have lower yields.
Interest income increased in fiscal 2007 as compared to fiscal 2006 as a result of increased cash balances, primarily related to cash generated from operating activities and the proceeds from the exercise of stock options, as well as increased yields on our investments due to rising interest rates.
Interest expense increased in fiscal 2008 as compared to fiscal 2007 as a result of interest expense on a legal settlement which was paid in 2008. Interest expense was insignificant in both fiscal 2007 and fiscal 2006.
We expect interest income to fluctuate as interest rates and cash balances fluctuate. For additional information, please refer to Item 7A
Item 7A. Quantitative and Qualitative Disclosures About Market Risk The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without significantly increasing risk. Some of the securities that we have invested in may be subject to market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate.
For example, if we hold a security that was issued with a fixed interest rate at the then-prevailing rate and the prevailing interest rate later rises, the principal amount of our investment will probably decline. To minimize this risk, we maintain a portfolio of cash equivalents, short-term investments and long-term investments in a variety of securities, including commercial paper, money market funds and government and non-government debt securities. In general, money market funds are not subject to market risk because the interest paid on such funds fluctuates with the prevailing interest rate.
As of July 31, 2008, we held approximately $10.2 million of auction-rate securities, included in long-term investments. Approximately 93% of these securities are backed by pools of student loans, of which 97% is guaranteed by the U.S. Department of Education. In October 2008 our investment manager, UBS, offered to repurchase our outstanding auction-rate securities at their par value of $10.8 million on June 30, 2010.
The following table presents the amounts of our cash equivalents, short-term investments and long-term investments (in thousands) that are subject to market risk and weighted-average interest rates, categorized by expected maturity dates, as of July 31, 2008. This table does not include treasury money market funds.
We have operated primarily in the United States, and virtually all sales have been made in U.S. dollars. Accordingly, we have not had any material exposure to foreign currency rate fluctuations.
The estimated fair value of our cash, cash equivalents and investments approximate carrying value. We do not currently hold any derivative instruments and do not engage in hedging activities.
Item 8.
Item 8. Consolidated Financial Statements and Supplementary Data
All other schedules are omitted because they are not applicable, not required, or because the required information is included in the consolidated financial statements or notes thereto.
REPORT OF STONEFIELD JOSEPHSON, INC.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To The Board of Directors and Stockholders of
SourceForge, Inc.:
We have audited the accompanying consolidated balance sheets of SourceForge, Inc. (the “Company”) as of July 31, 2008 and July 31, 2007, and the related consolidated statements of operations, stockholders’ equity and other comprehensive income (loss), and cash flows for each of the years in the three-year period ended July 31, 2008. We also have audited the Company’s internal control over financial reporting as of July 31, 2008, based on criteria established in Internal Control - Integrated framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Our audits also included the financial statement schedule listed in the Index at Item 15(a). The Company is responsible for these consolidated financial statements and schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management’s Report on Internal Control over Financial Reporting.” Our responsibility is to express an opinion on these consolidated financial statements and schedule and an opinion on the Company’s internal control over financial reporting based on our audits.
We conducted our audits 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 consolidated financial statements and schedule are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements and schedule include examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements and schedule, assessing the accounting principles used and significant estimates made by management, and evaluating the overall consolidated financial statements and schedule presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of SourceForge, Inc. as of July 31, 2008 and July 31, 2007, and the results of its operations and its cash flows for each of the years in the three-year period ended July 31, 2008, in conformity with accounting principles generally accepted in the United States. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Also in our opinion, SourceForge, Inc. maintained, in all material respects, effective internal control over financial reporting as of July 31, 2008, based on criteria established in Internal Control - Integrated Framework issued by COSO.
/s/ Stonefield Josephson, Inc.
San Francisco, California
October 10, 2008
SOURCEFORGE, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except per Share Information)
The accompanying notes are an integral part of these consolidated financial statements.
SOURCEFORGE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except per Share Amounts)
The accompanying notes are an integral part of these consolidated financial statements.
SOURCEFORGE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND OTHER COMPREHENSIVE INCOME (LOSS)
(In Thousands)
The accompanying notes are an integral part of these consolidated financial statements.
SOURCEFORGE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
The accompanying notes are an integral part of these consolidated financial statements.
SOURCEFORGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Organization and Operations of the Company Overview SourceForge, Inc. (“SourceForge” or the “Company”) is a leading a provider of web properties that serve as platforms for the creation, review, hosting and distribution of online peer-produced content. The Company also sells technology-themed retail products.
SourceForge’s audience of technology professionals and enthusiasts relies on its web properties - SourceForge.net, Slashdot.org, Linux.com and freshmeat.net - to create, improve, compare and distribute Open Source software, and to debate and discuss current issues facing, and innovation in, the technology marketplace. The Company’s ThinkGeek, Inc. E-commerce subsidiary, sells technology-themed retail products to this audience and others.
SourceForge was incorporated in California in January 1995 and reincorporated in Delaware in December 1999. From the date of its incorporation through October 2001, the Company sold Linux-based hardware systems and services under the name VA Linux Systems, Inc. In December 2001, the Company changed its name to VA Software Corporation to reflect its decision to pursue its Online Media, E-commerce, Software and Online Images businesses. In December 2005, the Company sold its Online Images business to Jupitermedia Corporation (“Jupitermedia”) and in April 2007, the Company sold its Software business to CollabNet, Inc. (“CollabNet”). In May 2007 the Company changed its name to SourceForge, Inc. and merged with and into its wholly-owned subsidiary, OSTG, Inc.
As a result of the sale of the Company’s Software business to CollabNet and the sale of its Online Images business to Jupitermedia, the Company no longer has operations in these segments. These dispositions meet the criteria in Statement of Financial Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” to be presented as discontinued operations. Accordingly, all financial information related to the Software and Online Images businesses have been presented as discontinued operations in the accompanying condensed consolidated financial statements. See Note 11 - Discontinued Operations.
2. Summary of Significant Accounting Policies Use of Estimates in Preparation of Consolidated Financial Statements The preparation of consolidated financial statements in conformity with accounting principles generally accepted by the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of such financial statements, as well as the reported amounts of revenue and expenses during the periods indicated. Actual results could differ from those estimates.
Reclassifications Certain reclassifications have been made to the prior year consolidated financial statements to conform to the current year presentation. These reclassifications have no impact on previously reported net loss or cash flows.
Principles of Consolidation These consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Related Party Transactions The Company owns approximately 9% of CollabNet consisting of CollabNet’s Series C-1 preferred stock and approximately 14% of VA Linux Systems Japan K.K.’s (“VA Linux Japan”) common stock. As the Company holds less than 20% of the voting stock of these companies and does not otherwise exercise
SOURCEFORGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. Summary of Significant Accounting Policies - (continued) significant influence over them, these investments are accounted for under the cost method. CollabNet is a developer of software used in collaborative software development. VA Linux Japan distributes software and related consulting services and resyndicated certain of the Company’s Online Media business web sites for the Japanese market. In September 2007, VA Linux Japan sold its syndication rights to an unrelated third party which is now known as OSDN K.K. Subsequent to such sale, the Company no longer has any transactions with VA Linux Japan.
Online Media revenue for the years ended July 31, 2008, July 2007 and July 2006 includes related party revenue of $0.9 million $0.4 and $0.1 million, respectively, from CollabNet and VA Linux Japan.
Foreign Currency Translation The Company has liquidated all of its wholly-owned foreign subsidiaries other than SourceForge Europe, which is located in Belgium. The functional currency of SourceForge Europe is the Euro, which is Belgium’s local currency. For the periods presented, no revenue or expenses resulted from the foreign entity. At July 31, 2008 the Company has a foreign cash balance of $0.02 million. Remaining balance sheet accounts are translated into U.S. dollars at exchange rates prevailing at balance sheet dates. Expenses are translated into U.S. dollars at average rates for the period. Gains and losses resulting from translation are charged or credited in other comprehensive income as a component of stockholders’ equity. As of July 31, 2008, the Company did not hold any foreign currency derivative instruments.
Segment and Geographic Information SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information for those segments to be presented in interim financial reports issued to stockholders. SFAS No. 131 also establishes standards for related disclosures about products and services and geographic areas. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker, or decision-making group, in making decisions about how to allocate resources and assess performance. The Company’s chief decision-making group, as defined under SFAS No. 131, is the Chief Executive Officer and the executive team. The Company currently operates as two reportable business segments: Online Media and E-commerce.
The Company markets its products in the United States through its direct sales force and its online web properties and with respect to international Online Media sales, through representatives in the United Kingdom, Europe and Australia. Revenue for each of the years ended July 31, 2008, July 31, 2007 and July 31, 2006 were primarily generated from sales to customers in the United States.
Cash, Cash Equivalents, Short-Term Investments and Long-Term Investments The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents consist principally of cash deposited in money market and checking accounts.
The Company accounts for its investments under the provisions of SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” Investments in highly liquid financial instruments with remaining maturities greater than three months and maturities of less than one year are classified as short-term investments. Financial instruments with remaining maturities greater than one year are classified as long-term investments. Investments in related party companies are included in “Other Assets” in the Consolidated Balance Sheets. All investments are classified as available-for-sale and are reported at fair value with net unrealized gains (losses) reported, net of tax, using the specific identification method as other comprehensive gain/(loss) in stockholders’ equity. The fair value of the Company’s available-for-sale securities are based on quoted market prices or other methodologies for those investments with no quoted market prices at the balance sheet dates.
SOURCEFORGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. Summary of Significant Accounting Policies - (continued) Cash, cash equivalents and investments consist of the following (in thousands):
At July 31, 2008, the Company has auction rate securities with an adjusted cost of $10.8 million. In mid-February 2008, liquidity issues in the global credit markets resulted in the failure of auctions for all auction rate securities in the Company’s portfolio, as the amount of securities submitted for sale in those auctions exceeded the amount of bids. As of July 31, 2008, these securities were all AAA rated by at least one of the major credit rating agencies and the Company has collected all interest payable on these auction rate securities when due. The principal associated with these auction rate securities will not be accessible until successful auctions occur, a buyer is found outside of the auction process, issuers establish different forms of financing to replace these securities, issuers elect to repay principal prior to final maturity, or final payments come due according to contractual maturities ranging from 20 to 37 years. In October 2008, the Company’s money manager offered to repurchase these securities at par value on June 30, 2010. As of July 31, 2008, the fair value of these auction rate securities was $10.2 million and accordingly, an unrealized loss of $0.6 million is reflected in other comprehensive loss. The fair value of the auction rate securities is included in long-term investments.
The contractual maturities of debt securities classified as available-for-sale at July 31, 2008 are as follows (in thousands):
SOURCEFORGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. Summary of Significant Accounting Policies - (continued) Restricted Cash The Company had an outstanding letter of credit of $1.0 million at July 31, 2008 and 2007, which is used to collateralize its former headquarters building lease in Fremont, California. The Company has a restricted cash balance with its bank to support this letter of credit.
Trade Accounts Receivable Trade accounts receivable are recorded at the invoiced amount and are not interest bearing. The Company maintains an allowance for doubtful accounts to reserve for potentially uncollectible trade receivables. The Company also reviews its trade receivables by aging category to identify specific customers with known disputes or collectibility issues. The Company exercises judgment when determining the adequacy of these reserves and evaluates historical bad debt trends, general economic conditions in the United States and internationally, and changes in customer financial conditions.
Inventories Inventories related to the Company’s E-commerce segment consist solely of finished goods that are valued using the average cost method. Provisions, when required, are made to reduce excess and obsolete inventories to their estimated net realizable values.
Property and Equipment Property and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the lesser of the estimated useful lives or the corresponding lease term. Property and equipment consist of the following (in thousands):
Depreciation and amortization expense for the years ended July 31, 2008, July 31, 2007, and July 31, 2006 was $1.5 million, $0.6 million, and $0.4 million, respectively.
Intangible Assets Intangible assets are amortized on a straight-line basis over three to five years. Intangible asset amortization was insignificant during fiscal 2008, 2007 and 2006. The intangible asset at July 31, 2008 relates to domain and trade names associated with our current Online Media business. This balance has been included in “Other Assets” in the Consolidated Balance Sheets. The Company continually evaluates whether events or circumstances have occurred that indicate the remaining estimated useful lives of these intangible assets may not be recoverable. No events or circumstances occurred during fiscal year 2008 that would indicate a possible impairment in the carrying value of intangible assets at July 31, 2008.
SOURCEFORGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. Summary of Significant Accounting Policies - (continued) The changes in the carrying amount of the intangible assets are as follows (in thousands):
Impairment of Long-Lived Assets As of July 31, 2008, the Company held investments in CollabNet and VA Linux Japan. The Company continually evaluates whether events or circumstances have occurred that indicate the remaining value of these investment may be impaired. There is no quoted price for these investments; accordingly, fair value was estimated by management based on the estimated fair value of the underlying net assets or an annual appraisal performed by an independent valuation firm. Based on the valuations performed during the years ended July 31, 2008, July 31, 2007 and July 31, 2006, there were no impairments of the investments.
Revenue Recognition The Company applies the provisions of SEC Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition,” for revenue recognition as follows:
Online Media Revenue Online Media revenue is derived primarily from sales of advertising space on the Company’s various web sites, as well as sponsorship-related arrangements and contextually-relevant advertising associated with advertising on these web sites. The Company recognizes Online Media revenue as advertising is delivered over the period in which the advertisements are displayed, provided that persuasive evidence of an arrangement exists, no significant obligations remain, the fee is fixed or determinable, and collection of the receivable is reasonably assured. The Company’s obligations may include guarantees of a minimum number of impressions (the number of times that an advertisement is viewed by users of the Company’s online services). To the extent that minimum guaranteed impressions are not delivered in the specified time frame, the Company does not recognize the corresponding revenue until the guaranteed impressions are delivered. Traffic to the Company’s Online Media web sites is seasonal, with relatively lower levels of traffic experienced during the summer months of the northern hemisphere.
E-commerce Revenue E-commerce revenue is derived from the online sale of consumer goods. The Company recognizes E-commerce revenue from the sale of consumer goods in accordance with SAB No. 104, “Revenue Recognition.” Under SAB No. 104, product revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the sale price is fixed or determinable, and collectibility is reasonably assured. The Company generally recognizes E-commerce revenue when the goods are shipped and title transfers to the customer. The Company grants customers a limited right to return E-commerce products. Such returns are recorded as incurred and have been immaterial for the periods presented.
Advertising Expenses The Company expenses advertising costs as incurred. Total advertising expenses for continuing operations were $1.5 million, $1.0 million and $0.5 million for fiscal years ending July 31, 2008, July 31, 2007 and July 31, 2006, respectively.
SOURCEFORGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. Summary of Significant Accounting Policies - (continued) Stock-Based Compensation The Company accounts for stock-based compensation using the provisions of SFAS No. 123(R) “Share-Based Payment.” SFAS 123(R) requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of awards that are ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s Consolidated Statements of Operations.
Software Development Costs In accordance with the American Institute of Certified Public Accountants Statement of Position (“SOP”) 98-1, “Accounting for the Cost of Computer Software Developed or Obtained for Internal Use,” costs related to the planning and post-implementation phases of internal use software products are recorded as an operating expense. Direct costs incurred in the development phase are capitalized and amortized over the product’s estimated useful life as charges to cost of revenue.
During the years ended July 31, 2008 and July 2007, the Company capitalized $0.7 million and $1.8 million, respectively, of internal use software costs. No costs were capitalized prior to the July 31, 2006.
In accordance with SFAS No. 86, “Accounting for the Cost of Computer Software to be Sold, Leased, or Otherwise Marketed,” development costs incurred in the research and development of new software products are expensed as incurred until technological feasibility in the form of a working model has been established at which time such costs are capitalized, subject to a net realizable value evaluation. Technological feasibility is established upon the completion of an integrated working model. The Company’s software development is related to its discontinued Software business and was completed concurrent with the establishment of technological feasibility. Accordingly, all software development costs have been charged to discontinued operations in the accompanying Condensed Consolidated Statements of Operations.
Computation of per Share Amounts Basic income (loss) per common share is computed using the weighted-average number of common shares outstanding (adjusted for treasury stock and common stock subject to repurchase activity) during the period. Diluted income (loss) per common share is computed using the weighted-average number of common and dilutive common equivalent shares outstanding during the period. Common equivalent shares are anti-dilutive when their conversion would increase earnings per share. Dilutive common equivalent shares consist primarily of stock options and restricted stock awards. For the fiscal year ended July 31, 2008, the Company excluded all stock options and restricted stock awards from the calculation of diluted net loss per common share because all such securities are antidilutive.
SFAS No. 128, “Earnings per Share,” requires that employee equity share options, nonvested shares, and similar equity instruments granted by entities be treated as potential common shares outstanding in computing diluted earnings per share. Diluted shares outstanding would include the dilutive effect of in-the-money options, calculated based on the average share price for each fiscal period using the treasury stock method, had there been any during the period. Under the treasury stock method, the amount the employee (or purchaser of the written call options) must pay for exercising stock options, the amount of compensation cost for future service that we have not yet recognized, and the amount of tax benefits that would be recorded in additional paid-in capital when the award becomes deductible are assumed to be used to repurchase shares. Additionally, under the treasury stock method the amount the purchaser of the written call options must pay for exercising stock options is assumed to be used to repurchase shares.
SOURCEFORGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. Summary of Significant Accounting Policies - (continued) The following table presents the calculation of basic and diluted net income (loss) per share (in thousands, except per share data):
The following potential common shares have been excluded from the calculation of diluted net income (loss) per share for all periods presented because they are anti-dilutive (in thousands):
Comprehensive Income (Loss) Comprehensive income (loss) is comprised of net income (loss) and other non-owner changes in stockholders’ equity, including foreign currency translation gains or losses and unrealized gains or losses on available-for-sale marketable securities.
Income Taxes Effective August 1, 2007, the Company adopted the provisions of FASB Financial Accounting Standards Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in accordance with SFAS No. 109, Accounting for Income Taxes. FIN 48 prescribes a comprehensive model for how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that the Company has taken or expects to take on a tax return.
SOURCEFORGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. Summary of Significant Accounting Policies - (continued) The adoption of FIN 48 did not result in any adjustment in the liability for unrecognized income tax benefits. As of July 31, 2008 and August 1, 2007, the Company reduced its unrecognized tax benefits by $0.6 million and $0.6 million, respectively. Since a full valuation allowance was provided for these unrecognized tax benefits, there was no impact on retained earnings as of August 1, 2007.
It is the Company’s policy to classify accrued interest and penalties as part of the accrued FIN 48 liability and record the expense in the provision for income taxes. As of the adoption date and July 31, 2008, it was not necessary to accrue interest and penalties related to uncertain tax positions. For unrecognized tax benefits that exist at July 31, 2008, the Company does not anticipate any significant changes within the next twelve months. The Company is not currently under federal, state or foreign income tax examination.
Recent Accounting Pronouncements In September 2006, the FASB issued SFAS No. 157 (“SFAS 157”), “Fair Value Measurements.” Among other requirements, SFAS 157 defines fair value and establishes a framework for measuring fair value and also expands disclosure about the use of fair value to measure assets and liabilities. In February 2008, the FASB issued FASB Staff Position (“FSP”) 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13” (“FSP 157-1”) and FSP 157-2, “Effective Date of FASB Statement No. 157” (“FSP 157-2”). FSP 157-1 amends SFAS 157 to remove certain leasing transactions from its scope. FSP 157-2 delays the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until the beginning of the first quarter of fiscal 2010. The measurement and disclosure requirements related to financial assets and financial liabilities are effective beginning the first quarter of fiscal 2009, which begins August 1, 2008. The Company does not believe that the adoption of SFAS 157 for financial assets and financial liabilities will have a material impact on its financial position or results of operations. The Company is currently assessing the impact that SFAS 157 will have on its results of operations and financial position when it is applied to nonfinancial assets and nonfinancial liabilities beginning in the first quarter of fiscal 2010.
In February 2007, the FASB issued SFAS No. 159 (“SFAS 159”), “The Fair Value Option for Financial Assets and Financial Liabilities,” SFAS 159 amends SFAS 115 and permits fair value measurement of financial instruments and certain other items. SFAS 159 is effective beginning the first fiscal year that begins after November 15, 2007. The Company is currently evaluating the impact of SFAS 159 on its financial position and results of operations.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141(R)”). SFAS 141R requires the use of “full fair value” to record all the identifiable assets, liabilities, noncontrolling interests and goodwill acquired in a business combination. SFAS 141R is effective for fiscal years beginning on or after December 15, 2008. The Company does not believe that the adoption of SFAS 141(R) will have a material impact on its financial position or results of operations.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51” (“SFAS 160”). SFAS 160 requires the noncontrolling interests (minority interests) to be recorded at fair value and reported as a component of equity. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008. The Company does not believe that the adoption of SFAS 160 will have a material impact on its financial position or results of operations.
SOURCEFORGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. Summary of Significant Accounting Policies - (continued) Supplier Concentration While no supplier concentration exists in the Company’s Online Media or E-commerce businesses, the Company’s E-commerce business relies on manufacturers located outside of the United States, most of which are located in Asia (primarily China), to supply and deliver products in a timely manner. The Company’s E-commerce business’s ability to receive inbound inventory and ship completed orders to its customers is substantially dependent on a single third-party contract fulfillment and warehouse provider.
Concentrations of Credit Risk and Significant Customers The Company’s investments are held with two reputable financial institutions; both institutions are headquartered in the United States. The Company’s investment policy limits the amount of risk exposure. As of July 31, 2008, long-term investments include $10.2 million of auction rate securities which have failed to provide liquidity. See Note 2 - Cash, Cash Equivalents, Short-Term Investments and Long-Term Investments.
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of trade receivables. The Company provides credit, in the normal course of business, to a number of companies and performs ongoing credit evaluations of its customers. The credit risk in the Company’s trade receivables is substantially mitigated by its credit evaluation process and reasonably short collection terms. The Company maintains reserves for potential credit losses and such losses have been within management’s expectations. As of July 31, 2008, no customer accounted for more than 10% of gross accounts receivable. As of July 31, 2007 one advertising agency accounted for 20.7% of gross accounts receivables.
For the fiscal years ended July 31, 2008, July 31, 2007 and July 31, 2006 no one customer represented more than 10% of net revenue. Going forward, the Company does not anticipate that any one customer will represent more than 10% of annual net revenue.
3. Restructuring Costs In October 2007 the Company relocated its corporate headquarters to Mountain View, California and recorded a restructuring charge of $2.2 million for the remaining facility space and leasehold improvements at its former corporate headquarters located in Fremont, California. In conjunction with the sale of its Software business in April 2007, the Company accrued a restructuring charge of $0.6 million for the excess facility space formerly used by its Software business, which was included in the gain on disposal of discontinued operations. In fiscal 2001 and 2002, the Company exited its hardware systems and hardware-related software engineering and professional services businesses, as well as a sublease agreement and reduced its general and administrative overhead costs. The restructuring liability of $5.2 million as of July 31, 2008 represents the remaining accrual from non-cancelable lease payments, which continue through 2010, less estimated sublease rent. This accrual is subject to change should actual circumstances change. The Company will continue to evaluate and update, if applicable, these accruals on an annual basis.
All charges as a result of restructuring activities have been recorded in accordance with SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities” and Emerging Issues Task Force (“EITF”) 94-3 “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs incurred in a Restructuring).”
SOURCEFORGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. Restructuring Costs - (continued) Below is a summary of the restructuring charges (in thousands):
(1) Included in discontinued operations.
Below is a summary of the changes to the restructuring liability (in thousands):
Components of the total accrued restructuring liability are as follows (in thousands):
The Company’s restructuring liability is comprised of non-cancelable operating lease payments, net of sublease income, of $2.9 million and $2.4 million for the years ending July 31, 2009 and July 31, 2010, respectively.
4. Commitments and Contingencies The Company leases its facilities under operating leases that expire at various dates through fiscal year 2013. Future minimum lease payments under non-cancelable operating leases, net of sublease income, as of July 31, 2008 are as follows (in thousands):
SOURCEFORGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. Commitments and Contingencies - (continued) Gross rent expense for the years ended July 31, 2008, July 31, 2007 and July 31, 2006 was approximately $1.4 million, $2.5 million and $2.6 million, respectively. This rent expense was offset by sublease income of $0.4 million, $1.5 million and $1.6 million for the years ended July 31, 2008, July 31, 2007 and July 31, 2006, respectively. No rent expense was recorded for the years ended July 31, 2008, July 31, 2007 and July 31, 2006 as a result of idle facilities charges. The idle facilities charge for the year ended July 31, 2007 has been included in discontinued operations in the consolidated statements of operations.
5. Litigation In January 2001, the Company, two of its former officers, and Credit Suisse First Boston, the lead underwriter in the Company’s initial public offering (“IPO”) were named as defendants in a shareholder lawsuit in the United States District Court for the Southern District of New York, later consolidated and captioned In re VA Software Corp. Initial Public Offering Securities Litigation, 01-CV-0242. Plaintiffs seek unspecified damages on behalf of a purported class action on behalf of purchasers of the Company’s common stock from the time of the Company’s initial public offering in December 1999 through December 2000.
Specifically, among other things, this complaint alleged that the prospectus pursuant to which shares of common stock were sold in the Company’s initial public offering contained certain false and misleading statements or omissions regarding the practices of the Underwriters with respect to their allocation of shares of common stock in these offerings and their receipt of commissions from customers related to such allocations. Various plaintiffs have filed actions asserting similar allegations concerning the initial public offerings of approximately 300 other issuers. These various cases pending in the Southern District of New York have been coordinated for pretrial proceedings as In re Initial Public Offering Securities Litigation, 21 MC 92. In April 2002, plaintiffs filed a consolidated amended complaint in the action against the Company, alleging violations of the Securities Act of 1933 and the Securities Exchange Act of 1934. Defendants in the coordinated proceeding filed motions to dismiss. In October 2002, the Company’s former officers were dismissed from the case without prejudice pursuant to a stipulation. On February 19, 2003, the Court granted in part and denied in part the motion to dismiss, but declined to dismiss the claims against the Company.
In June 2004, a stipulation of settlement and release of claims against the issuer defendants, including the Company, was submitted to the Court for approval. On August 31, 2005, the Court preliminarily approved the settlement. In December 2006, the appellate court overturned the certification of classes in the six test cases, which included the Company’s case, that were selected by the underwriter defendants and plaintiffs in the coordinated proceedings. Because class certification was a condition of the settlement, it was unlikely that the settlement would receive final Court approval. On June 25, 2007, the Court entered an order terminating the proposed settlement based upon a stipulation among the parties to the settlement. Plaintiffs subsequently filed an amended complaint and filed a motion for class certification based on their amended allegations. The Company’s motion to dismiss the amended complaint was denied. Defendants have opposed the pending class certification motion. It is uncertain whether there will be any revised or future settlement. If the litigation proceeds, the Company believes that it has meritorious defenses to plaintiffs’ claims and intends to defend the action vigorously.
On October 4, 2007, a purported SourceForge shareholder filed a complaint for violation of Section 16(b) of the Securities Exchange Act of 1934, which prohibits short-swing trading, against the Company’s IPO underwriters. The complaint, Vanessa Simmonds v. Credit Suisse Group, et al., Case No. C07-1583, in District Court for the Western District of Washington, seeks the recovery of short-swing profits. The Company is named as a nominal defendant. No recovery is sought from the Company.
SOURCEFORGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. Litigation - (continued) On November 9, 2001, a former employee of the Company, who had worked as a sales person in the Company’s former hardware business, filed a complaint captioned Okerman v. VA Linux Systems, Inc. & Larry Augustin, Civil No. 01-01825 (Norfolk Superior Court), in the Commonwealth of Massachusetts. The parties have agreed on a resolution to this matter and during the year ended July 31, 2008, the Company recorded an expense related to this resolution of $0.4 million.
In September 2007, Company received notification that it had been named as a defendant in a civil action filed by the Societe des Producteurs de Phonogrammes Francais (“SPPF”) in Paris, France. The action asserted statutory claims under the French Intellectual Property Code seeking monetary damages and injunctive relief. On May 14, 2008, the Company filed a motion to dismiss for lack of jurisdiction. Plaintiff filed its reply brief on June 18, 2008, and the Court heard oral argument from the parties on September 23, 2008. The Company believes that it has meritorious defenses to the action and intends to defend itself vigorously.
The Company is subject to various claims and legal actions arising in the ordinary course of business. The Company reviews all claims and accrues a liability for those matters where it believes that the likelihood that a loss will occur is probable and the amount of loss is reasonably estimable.
6. Guarantees and Indemnifications The following is a summary of the agreements that the Company has determined are within the scope of FIN 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” some of which are specifically grandfathered because the guarantees were in effect prior to December 31, 2002. Accordingly, we have no liabilities recorded for these agreements as of July 31, 2008.
In conjunction with the sale of its Software business to CollabNet, the Company agreed to indemnify CollabNet for damages arising from any misrepresentation of representations and warranties, the breach of a covenant or agreement or the failure by the Company to assume certain liabilities excluded from the sale of the business. The indemnification expired on April 24, 2008, except for breaches of the non-competition covenant which expires in October 2009 or certain claims for fraud. The maximum amount of the indemnification for breach of the non-competition covenant is equal to the 11,733,777 shares of CollabNet Series C-1 preferred stock owned by the Company. The Company believes that it has complied with all of those items for which it has agreed to indemnify CollabNet, and the Company has not been subject to any claims or suffered any losses. CollabNet has not made any claims pursuant to the Company’s indemnification obligations. Accordingly, the Company has no liabilities recorded for this indemnification as of July 31, 2008.
As permitted under Delaware law, the Company has agreements whereby the Company’s officers and directors are indemnified for certain events or occurrences while the officer or director is, or was, serving at the Company’s request in such capacity. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has obtained director and officer liability insurance designed to limit the Company’s exposure and to enable the Company to recover a portion of any future amounts paid. As a result of the Company’s insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is minimal. Accordingly, the Company has no liabilities recorded for these agreements as of July 31, 2008.
The Company enters into standard indemnification agreements in the ordinary course of business. Pursuant to these agreements, the Company indemnifies, holds harmless, and agrees to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally, the Company’s business partners, subsidiaries and/or customers, in connection with any patent, copyright or other intellectual property infringement claim by any third party with respect to the Company’s products. The term of these indemnification agreements is generally perpetual any time after execution of the agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. The Company has not incurred significant costs to defend lawsuits or settle claims
SOURCEFORGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. Guarantees and Indemnifications - (continued) related to these indemnification agreements. As a result, the Company believes the estimated fair value of these agreements is insignificant. Accordingly, the Company has no liabilities recorded for these agreements as of July 31, 2008.
7. Retirement Savings Plan The Company maintains an employee savings and retirement plan which is qualified under Section 401(k) of the Internal Revenue Code and is available to substantially all full-time employees of the Company. The plan provides for tax deferred salary deductions and after-tax employee contributions. Contributions include employee salary deferral contributions and discretionary employer contributions. To date, there have been no employer discretionary contributions.
8. Common Stock Stock Option Plans In December 2007, the Company’s stockholders approved the 2007 Equity Incentive Plan (“2007 Plan”). The 2007 Plan replaced the Company’s 1998 Stock Plan (the “1998 Plan”) and the 1999 Director Option Plan (the “Directors’ Plan”), which are collectively referred to as the “Equity Plans.” In conjunction with the adoption of the 2007 Plan, no further awards can be made under the Equity Plans and 9,072,130 and 466,668 shares which were previously authorized under the 1998 Plan and the Directors’ Plan, respectively, were cancelled. The Equity Plans will continue to govern awards previously granted under each respective plan. There were initially 5,250,000 shares of common stock reserved for issuance under the 2007 Plan, subject to increase for stock options or awards previously issued under the Equity Plans which expire or are cancelled. At July 31, 2008, a total of 5,537,878 shares of common stock were available for issuance under the 2007 Plan. The 2007 Plan provides that each share award granted with an exercise price less than the fair market value on the date of grant will be counted as two shares towards the shares reserved and each such share award forfeited or repurchased by the Company will increase the shares reserved by two shares.
Under the 2007 Plan, the Board of Directors may grant to employees, consultants and directors an option to purchase shares of the Company’s Common Stock and/or awards of the Company’s common stock at terms and prices determined by the Board of Directors. The Compensation Committee of the Board of Directors also approved that each non-employee director who has been a member of the Board of Directors for at least nine months prior to the date of the stockholders’ meeting will be granted an annual right to purchase 10,000 restricted shares at $0.001 per share at each annual stockholders’ meeting. The restricted shares will vest 50 percent immediately and the remaining 50 percent on the one year anniversary of the grant.
The 2007 Plan will terminate in 2017. Options granted under the 2007 Plan must be issued at a price equal to at least the fair market value of the Company’s common stock at the date of grant. All vested options granted under the 2007 Plan may be exercised at any time within 10 years of the date of grant or within 90 days of termination of employment, or such other time as may be provided in the stock option agreement, and vest over a vesting schedule determined by the Board of Directors. The Company’s policy is to issue new shares upon exercise of options under the 2007 Plan.
As of July 31, 2008, the Company had reserved shares of its common stock for future issuance as follows:
SOURCEFORGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. Common Stock - (continued) Restricted Stock Purchase Rights The following table summarizes restricted stock activities from July 31, 2006 through July 31, 2008:
The following table summarizes option and restricted stock activities from July 31, 2005 through July 31, 2008:
SOURCEFORGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. Common Stock - (continued) Restricted stock outstanding is included in common stock outstanding. The total intrinsic value of options exercised was negligible during the year ended July 31, 2008 and $8.6 million and $5.5 million during the years ended July 31, 2007 and July 31, 2006, respectively. The Company issues new shares upon the exercise of options. During the years ended July 31, 2007 and July 31, 2006, the Company realized tax benefits of $0.2 million and $0.1 million, respectively, from exercised options. For the year ended July 31, 2008 no tax benefit was realized from exercised options.
The options outstanding and currently exercisable by exercise price at July 31, 2008 were as follows (in thousands, except years and per-share amounts):
The total intrinsic value of stock options outstanding and stock options exercisable as of July 31, 2008 was $0.1 million and $0.1 million, respectively. The aggregate intrinsic value in the above table is calculated as the excess of the July 31, 2008 closing price of our stock of $1.39 per share as reported by the NASDAQ Global Market over the exercise price of the shares. The weighted-average remaining contractual life of options exercisable as of July 31, 2008 was 3.73 years. The total number of in-the-money options exercisable as of July 31, 2008 was 0.4 million.
The total fair value of options vested during the year ended July 31, 2008 was insignificant and was $0.3 million, and $0.9 million, during the years ended July 31, 2007 and July 31, 2006, respectively. As of July 31, 2008, total compensation cost related to nonvested stock options not yet recognized was $4.4 million which is expected to be recognized over a weighted-average term of three years.
SOURCEFORGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. Common Stock - (continued) Valuation and Expense Information Under SFAS 123(R) The following table summarizes stock-based compensation expense related to employee stock options under SFAS 123(R) which was allocated as follows (in thousands):
In conjunction with the resignation of the Company’s former Chief Executive Officer in June 2008, the Company extended the exercise period for the former CEO’s options to purchase 1.8 million shares of the Company’s common stock by 12 months (following the completion of the former CEO’s consulting agreement) and accelerated vesting of his restricted stock purchase rights for 0.3 million shares. As a result of these modifications the Company recorded additional stock-based compensation of $1 million during the year ended July 31, 2008.
The fair value of the option grants has been calculated on the date of grant using the Black-Scholes option pricing model. The expected life for the year ended July 31, 2008 was based on historical settlement patterns. For the years ended July 31, 2007 and July 31, 2006, the simplified method for determining the expected term of options granted as allowed by the Securities and Exchange Commission Staff Accounting Bulletin No. 107 was used. Expected volatility was based on historical implied volatility in the Company’s stock. The interest rate for periods within the contractual life of the award is based on the U.S. Treasury yield curve in effect at the time of grant. The following table summarizes the weighted-average assumptions for stock options granted:
As stock-based compensation expense recognized in the Consolidated Statement of Operations for the years ended July 31, 2008, July 31, 2007 and July 31, 2006 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on historical experience.
SOURCEFORGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. Income Taxes The Company provides for income taxes using an asset and liability approach, under which deferred income taxes are provided based upon enacted tax laws and rates applicable to periods in which the taxes become payable.
Income (loss) from continuing operations before income taxes consists of the following components (in thousands):
The components of the provision for income taxes from continuing operations for the years ended July 31, 2008, July 31, 2007 and July 31, 2006 are as follows (in thousands):
During the years ended July 31, 2008, July 31, 2007 and July 31, 2006, the Company paid income taxes of $0.1 million, $0.2 million and $0.02 million, respectively.
A summary of total tax expense, by classification, included in the accompanying consolidated statements of income is as follows (in thousands):
Deferred tax assets (liabilities) consist of the following (in thousands):
SOURCEFORGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. Income Taxes - (continued) Reconciliation of the statutory federal income tax to the Company’s effective tax is as follows:
Included in the July 31, 2008 valuation allowance is approximately $30.5 million related to stock options, which will be credited to stockholders’ equity when realized for tax purposes.
At July 31, 2008, management believes that, based on a number of factors, the available objective evidence creates sufficient uncertainty regarding the realizability of the deferred tax assets such that a full valuation allowance was recorded.
As of July 31, 2008, the Company has approximately $254.0 million of federal net operating losses available to offset future federal taxable income, which expire at various dates through fiscal year 2028. This amount includes approximately $12.5 million of net operating loss carryforwards from the acquisition of Andover.net in fiscal 2000. The deferred tax assets related to this of approximately $5.6 million as of June 7, 2000, may be used to reduce the tax provision if and when realized. Approximately $23.2 million of federal net operating losses usage is limited pursuant to section 382 of the Internal Revenue Code due to certain changes in the Company’s ownership which occurred between 1996 and 1999, and a change in ownership resulting from the Company’s June 2000 acquisition of Andover.net. The Company also has California net operating loss carryforwards of approximately $76.4 million to offset future California taxable income, which expire at various dates through fiscal year 2018. The net operating loss carryforwards stated above are reflective of various federal and state tax limitations.
The Company adopted the provisions of FASB Financial Accounting Standards Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”) on August 1, 2007. FIN 48 clarifies the accounting for uncertain tax positions and requires companies to recognize the impact of a tax position in their financial statements, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. As a result of the implementation of FIN 48, a $0.6 million increase in the liability for unrecognized tax benefits, with a corresponding decrease in valuation allowance, was recognized. The adoption of SFAS 48 did not require an adjustment to retained earnings.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
The Company classifies interest expense and penalties related to unrecognized tax benefits and interest income on tax overpayments as components of its income tax expense. During the year ended July 31, 2008,
SOURCEFORGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. Income Taxes - (continued) no interest or penalties were recognized. The Company does not expect its unrecognized tax benefits to change significantly over the next 12 months. There are no unrecognized tax benefits that would affect the actual tax rate at July 31, 2008.
10. Segment and Geographic Information The Company’s operating segments are significant strategic business units that offer different products and services. The Company has two operating segments: Online Media and E-commerce.
The Company’s Online Media segment consists of a network of Internet web sites serving technology professionals and enthusiasts and the Company’s E-commerce segment provides online sales of a variety of retail products of interest to technology professionals and enthusiasts and other consumers. The Company’s network of web sites that comprise the Online Media segment include: SourceForge.net, Slashdot.org, freshmeat.net and Linux.com. Those corporate expenses that are not allocated to the individual operating segments and are not considered by the Company’s chief decision-making group in evaluating the performance of the operating segments are included in “Other.”
The accounting policies of the segments are consistent with those described in the summary of significant accounting policies. All intersegment sales have been stated separately in the table below. The Company’s chief decision-making group, as defined under SFAS No. 131, consists of the Chief Executive Officer and the executive team. The Company’s chief decision-making group excludes all intersegment sales when evaluating the performance of the segments. The Company’s assets and liabilities are not discretely allocated or reviewed by operating segment. The depreciation of the Company’s property, equipment and leasehold improvements are allocated based on headcount, unless specifically identified by operating segment.
SOURCEFORGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10. Segment and Geographic Information - (continued) During the time period covered by the table above, the Company marketed its products in the United States through its direct sales force and its online web sites and with respect to international Online Media sales, through representatives based in the United Kingdom, Europe and Australia. Revenue for each of the fiscal years ended July 31, 2008, July 31, 2007 and July 31, 2006 were primarily generated from customers in the United States of America.
11. Discontinued Operations In April 2007, the Company sold substantially all of the assets and certain liabilities of its Software business to CollabNet, Inc. (“CollabNet”) in exchange for a minority equity interest in CollabNet, comprised of 11,733,777 shares of its Series C-1 Preferred Stock, valued at $6.6 million, which is included in “Other Assets” in the Consolidated Balance Sheets.
In conjunction with the sale, the Company agreed to indemnify CollabNet for damages arising from any misrepresentation of representations and warranties, the breach of a covenant or agreement or the failure by the Company to assume certain liabilities excluded from the sale of the business. The indemnification is generally limited to the 2,933,444 shares of CollabNet preferred stock which are held in escrow; however the maximum amount of the indemnification for breach of the non-competition covenant is equal to the 11,733,777 shares of CollabNet Series C-1 preferred stock, owned by the Company. CollabNet may not make an indemnification claim until their aggregate losses under the indemnification provisions exceed $0.1 million. The term of the indemnification is generally through April 24, 2008, except for certain claims for fraud or breaches of the non-competition covenant. The Company believes that it has complied with all of those items for which it has agreed to indemnify CollabNet, and the Company has not been subject to any claims or suffered any losses, and CollabNet has not made any claims pursuant to the Company’s indemnification obligations. Accordingly, the Company has no liabilities recorded for this indemnification as of July 31, 2007.
As specified in the agreement, the assets sold to CollabNet consisted primarily of intellectual property and property and equipment. In conjunction with the sale, the Company terminated those employees of our Software business who were not offered employment by CollabNet and also recorded a restructuring reserve for the excess facility space formerly used by its Software business. The Company’s gain on the sale of this business is as follows (in thousands):
In December 2005, the Company sold the assets, net of deferred revenue, of its Online Images business to Jupitermedia Corporation (“Jupitermedia”) for $9.4 million. The Company received $8.4 million in cash, and $0.9 million in an escrow account, which was fully paid as of July 31, 2007. As specified in the agreement, the assets sold to Jupitermedia consisted primarily of intellectual property, inventories and property and equipment.
SOURCEFORGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. Discontinued Operations - (continued) Income from discontinued operations consists of direct revenue and direct expenses of the Software and Online Images businesses, including cost of revenue, as well as other fixed and allocated costs. A summary of the operating results of the discontinued operations in the accompanying condensed consolidated statements of income is as follows (in thousands):
SOURCEFORGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Quarterly Financial Data
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable.
Item 9A.
Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures The Company’s management, with the participation of the Company’s chief executive officer and chief financial officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of July 31, 2008. Based on this evaluation, the Company’s chief executive officer and chief financial officer concluded that as of July 31, 2008, the Company’s disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting No change in the Company’s internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act) occurred during the fourth quarter ended July 31, 2008, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of internal control over financial reporting. As defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, internal control over financial reporting is a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
The Company’s internal control over financial reporting is supported by written policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorizations of the Company’s management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
In connection with the preparation of the Company’s annual financial statements, management of the Company has undertaken an assessment of the effectiveness of the Company’s internal control over financial reporting as of July 31, 2008 based on criteria established in Internal Controls - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO Framework”). Management’s assessment included an evaluation of the design of the Company’s internal control over financial reporting and testing of the operational effectiveness of the Company’s internal control over financial reporting. As a result of this assessment, management has concluded that, as of July 31, 2008, the Company’s internal control over financial reporting was effective based on those criteria.
Our independent registered public accounting firm, Stonefield Josephson, Inc., has issued an attestation report on management’s assessment of our internal control over financial reporting, which is included in this Annual Report on Form 10-K.
Limitations on Effectiveness of Controls SourceForge, Inc.’s management, including our chief executive officer and chief financial officer, does not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to
their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of the effectiveness of controls to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
Item 9B.
Item 9B. Other Information None.
PART III Item 10.
Item 10. Directors, Executive Officers and Corporate Governance The information called for by this item is incorporated by reference to the sections entitled “Certain Beneficial Owners,” “Security Ownership of Directors and Executive Officers” and “Information About The Directors, Nominees And Executive Officers” in the Company’s 2008 Proxy Statement, which will be delivered to stockholders in connection with the Company’s annual stockholders’ meeting to be held on December 3, 2008.
Code of Ethics In addition to the Company’s Code of Business Conduct and Ethics that is applicable to all employees and directors, the Company has adopted a Code of Ethics for Principal Executive and Senior Financial Officers. The Company has posted the text of its Code of Ethics for Principal Executive and Senior Financial Officers on its Internet web site at:
http://media.corporate-ir.net/media_files/irol/82/82629/corpgov/execFinancial_Officer_Code.pdf
We will post on this section of our website any amendment to our Code of Ethics for Principal Executive and Senior Financial Officers that are required to be disclosed by the rules of the SEC or The Nasdaq Stock Market.
Item 11.
Item 11. Executive Compensation The information called for by this item is incorporated by reference to the section entitled “Compensation of Directors and Executive Officers” in the Company’s 2008 Proxy Statement, which will be delivered to stockholders in connection with the Company’s annual stockholders’ meeting to be held on December 3, 2008.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Equity Compensation Plans The information called for by this item is incorporated by reference to the sections entitled “Certain Beneficial Owners” and “Security Ownership of Directors and Executive Officers” in the Company’s 2008 Proxy Statement, which will be delivered to stockholders in connection with the Company’s annual stockholders’ meeting to be held on December 3, 2008.
The following table summarizes our equity compensation plans as of July 31, 2008, all of which have been approved by our stockholders:
(1) The table does not include information for equity compensation plans assumed by the Company in acquisitions. As of July 31, 2008, a total of 69,611 shares of the Company’s common stock remain issuable and outstanding upon exercise of options granted under a plan assumed by the Company in its acquisition of OSTG. The weighted average exercise price of all outstanding options granted under this plan at July 31, 2008 is $39.19. The Company does not grant additional awards under this assumed plan.
(2) Includes 680,506 options outstanding under the Company’s 2007 Equity Plan, 4,783,745 options outstanding under the Company’s 1998 Stock Plan and 673,334 options outstanding under the Company’s 1999 Director’s Plan.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence The information called for by this item is incorporated by reference to the section entitled “Certain Relationships and Related Transactions” in the Company’s 2008 Proxy Statement, which will be delivered to stockholders in connection with the Company’s annual stockholders’ meeting to be held on December 3, 2008.
Item 14.
Item 14. Principal Accountant Fees and Services The information called for by this item is incorporated by reference to the section entitled “Principal Accountant Fees and Services” in the Company’s 2008 Proxy Statement, which will be delivered to stockholders in connection with the Company’s annual stockholders’ meeting to be held on December 3, 2008.
PART IV Item 15.
Item 15. Exhibits and Financial Statement Schedule
(a) The following documents are filed as part of this report:
(1) All Financial Statements:
See the Consolidated Financial Statements and notes thereto in Item 8 above.
(2) Schedule II - Valuation and Qualifying Accounts are filed as part of this Form 10-K.
(3) Exhibits:
See the Exhibit Index.
(b) Exhibits: We have filed, or incorporated into this Report by reference, the exhibits listed on the accompanying Exhibit Index immediately following the signature page to this Form 10-K.
(c) Financial Statement Schedules: See Item 15(a) above.
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SOURCEFORGE, INC.
Date: October 13, 2008
By:
/s/ Robert M. Neumeister, Jr.
Robert M. Neumeister, Jr.
Interim Chief Executive Officer and President
POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Robert M. Neumeister, Jr. and Patricia S. Morris, and each of them, his true and lawful attorneys-in-fact, each with full power of substitution, for him and all capacities, to sign any amendments to this report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission and does hereby ratify and confirm all that each of said attorneys-in-fact or their substitute or substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SOURCEFORGE, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
EXHIBIT INDEX
(1) Incorporated by reference to the corresponding exhibit of Registrant’s form S-1 and the amendment thereto (Commission registration no. 333-88687).
(2) Incorporated by reference from Exhibit 10.14 of Registrant’s Annual Report on Form 10-K for the period ended June 28, 2000 filed on October 26, 2000 (Commission file number 000-28369).
(3) Incorporated by reference from Exhibit 10.18 of Registrant’s Quarterly Report on Form 10-Q for the period ended January 28, 2000 filed on March 13, 2000 (Commission file number 000-28369).
(4) Incorporated by reference from Exhibit 10.42 of Registrant’s Annual Report on Form 10-K for the period ended July 31, 2004 filed on October 31, 2005 (Commission file number 000-28369).
(5) Incorporated by reference from Exhibit 10.43 of Registrant’s Annual Report on Form 10-K for the period ended July 31, 2004 filed on October 31, 2005 (Commission file number 000-28369).
(6) Incorporated by reference from Exhibit 2.1 of Registrant’s Quarterly Report on Form 10-Q for the period ended January 31, 2006 filed on April 10, 2006 (Commission file number 000-28369).
(7) Incorporated by reference from Exhibit 2.1 of Registrant’s Current Report on Form 8-K filed on April 25, 2007.
(8) Incorporated by reference from Exhibit 10.1 of Registrant’s Current Report on Form 8-K filed on May 4, 2007.
(9) Incorporated by reference from Exhibit 3.2 of Registrant’s Current Report on Form 8-K filed on May 24, 2007.
(10) Incorporated by reference from Exhibit 3.3 of Registrant’s Quarterly Report on Form 10-Q for the period ended October 27, 2001 filed on December 7, 2001 (Commission file number 00-28369).
(11) Incorporated by reference from Exhibit 3.1 of Registrant’s Current Report on Form 8-K filed on May 24, 2007.
(12) Incorporated by reference from Exhibit 10.1 of Registrant’s Current Report on Form 8-K filed on July 18, 2007.
(13) Incorporated by reference from Exhibit 10.1 of Registrant’s Current Report on Form 8-K filed on September 11, 2007.
(14) Incorporated by reference from Exhibit 10.1 of Registrant’s Current Report on Form 8-K filed on October 4, 2007.
(15) Incorporated by reference from Appendix A of Registrant’s Definitive Proxy Statement on Schedule 14A filed on November 1, 2007 (Commission file number 000-28369).
(16) Incorporated by reference from Exhibits 10.1 through 10.4 of Registrant’s Current Report on Form 8-K filed on December 31, 2007.
(17) Incorporated by reference from Exhibit 10.1 of Registrant’s Current Report on Form 8-K filed on June 10, 2008.
(18) Incorporated by reference from Exhibit 10.2 of Registrant’s Current Report on Form 8-K filed on June 10, 2008.
(19) Incorporated by reference from Exhibit 10.3 of Registrant’s Current Report on Form 8-K filed on July 14, 2008.
 Denotes a management contract or compensatory plan or arrangement.