Stardate 20020725.1911

(On Screen): About two years ago, I was participating in a public forum owned by Stardock Systems and among many other things we discussed, I posted some rather negative opinions about the long term prospects for what was then known as VA Linux. There was another participant in that forum, a guy named Pierre, who was a big fan of the company, and I suspect a major investor, and he had a tendency to try to intimidate people who criticized VA's business plans by saying, in essence, "I'm gonna tell Daddy on you." He'd post that he had forwarded each such post to Larry Augustin, who was the CEO of the company, and there was a clear but unspoken threat that Augustin would then show up and sue our tails off for libel so we had better shut up, and besides which Augustin was rich and we were not and therefore he was smarter than we were. For reasons I never quite understood, he also forwarded several of them to Eric Raymond. (Perhaps it's because Eric was a member of the board.)

I'm not about to be intimidated by that kind of thing, and I continued to make my posts. For one thing, what I was doing was to criticize VA's public announcements of their financial status by comparing it against their GAAP results included in their SEC filings. Everything I said was true and documented, and the truth is never libelous. This was at the end of the dot-com boom, when no-one worried about profits and when companies were going overboard with "pro forma" announcements which covered up most of their losses and made everything look really rosy.

As a result of several of those messages being forwarded to, there ended up being a four-way email exchange between Augustin, Pierre, Brad Wardell (owner of Stardock) and myself, where Augustin tried to lay on us the same line he'd been trying to feed everyone else about how everything was going according to plan and the company was gonna turn profitable real soon now. In fact, he gave an actual date: July, 2001.

That discussion was rather strange, in many ways. At one point, Augustin tried to claim that losses were declining and as evidence of that he gave a chart of earnings-per-share, and indeed the EPS had been going down. But that's because VA had massively increased the amount of stock by using it for a number of acquisitions, and from the SEC filings the absolute losses, in actual dollars, were rising.

I ultimately ended up writing one letter where I called him on that, gave the URLs for the SEC filings, presented the actual numbers, showed that VA's losses had been rising in absolute dollars, and then told him he was a liar. The next letter I received was from a corporate flack instead of from Augustin himself, and the flack tried to tell me that it was just all in how you looked at things and so on and so forth...

Steven, thank you for your note. I understand the point you are making. From a securities standpoint, I think the key is disclosure. One can provide information in any form they want as long as the context is clear to a potential investor. I mean, as long as we note that a given earnings(loss)-per-share is "excluding non-cash charges", then it is not a problem to disclose results in that manner. All six of the Wall Street sell-side analysts with active coverage VA Linux report their estimates on the "excluding non-cash charges" basis, giving that format even more credence. For that manner, we show our results both ways in our public reporting. As you probably already understand, the reason we report results "excluding non-cash charges" because the large amount of amortization expense resulting from acquisitions (which make up the bulk of non-cash charges) does not have an effect on the operation or management of our business.

The reason all this discussion came up was that Brad had recently switched the direction of his company to develop software for the Windows world, and Pierre was trying to convince him that this was commercial suicide and that the business plans being used by Red Hat, and VA Linux, and so on were obviously the right way to go. Clearly Brad should imitate them and start developing open source software for Linux, and watch the cash flow in.

Well, Stardock Systems still exists; it's small but its prospering. VA, on the other hand, is in a world of hurt, and Larry Augustin finally resigned as CEO a couple of weeks ago.

And it never did make a profit.

By last July, instead of becoming profitable, VA made two hard decisions: to get out of the Linux server business, and then to get out of Linux entirely. What's left, basically, is one of the original acquisitions, which was originally known as Andover.net. VA consists of a number of advertising-supported web sites (most notably Slashdot and SourceForge) and a small group which is developing and now attempting to sell the software which operates SourceForge. Head count is way down; expenses are way down, and revenue is way down. And they're still losing money, and still burning cash, and it's not going to last much longer, unless a miracle occurs.

As of the quarter ending 4/27/2002, the company was down to $42 million in cash. That was about $8 million less than in