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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
(Mark One)
 
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended July 31, 2002
 
or
 
¨
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _________________ to _______________________
 
Commission file number: 000-32377
 
OPSWARE INC. (formerly Loudcloud, Inc.)
(Exact name of registrant as specified in its charter)
 
Delaware
  
94-3340178
(State or other jurisdiction of
incorporation or organization)
  
(I.R.S. Employer
Identification Number)
 
599 N. Mathilda Avenue
Sunnyvale, CA 94085
(Address, including zip code, of
Registrant’s principal executive offices)
 
Registrant’s telephone number, including area code: (408) 744-7300
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
 
Yes  x    No  ¨
 
There were 78,277,534 shares of the Company’s Common Stock, par value $0.001, outstanding on August 31, 2002.

Table of Contents
TABLE OF CONTENTS
 
         
Page
PART I.
      
1
Item 1.
      
3
       
3
       
4
       
5
       
6
Item 2.
      
14
Item 3.
      
33
PART II
      
34
Item 1.
      
34
Item 2.
      
34
Item 3.
      
34
Item 4.
      
34
Item 5.
      
35
Item 6.
      
35
       
37
       
38

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PART I FINANCIAL INFORMATION
 
Cautionary Statement Regarding Forward-Looking Statements
 
This Quarterly Report on Form 10-Q contains forward-looking statements. These statements relate to our, and in some cases our customers’ or partners’, future plans, objectives, expectations, intentions and financial performance and the assumptions that underlie these statements. These forward-looking statements include, but are not limited to, statements regarding the following:
 
 
•
 
anticipated market trends and uncertainties;
 
 
•
 
our estimates regarding the value of assets being transferred to EDS, and the assumption of liabilities by EDS, in connection with the sale of our Managed Services Business;
 
 
•
 
our expectations regarding revenue generated from the sale of our Opsware software;
 
 
•
 
our expectations concerning our operating losses;
 
 
•
 
our expectations concerning our cost of revenue;
 
 
•
 
our expectations concerning our operating expenses;
 
 
•
 
our expectations concerning our future restructuring expense;
 
 
•
 
our expectations concerning our stock-based compensation expense;
 
 
•
 
our anticipated capital expenditures and lease commitments;
 
 
•
 
the adequacy of our capital resources to fund our operations;
 
 
•
 
our expectations concerning our judgments about our allowance for doubtful accounts;
 
 
•
 
our expectations regarding operating losses and negative cash flow;
 
 
•
 
the anticipated increase in customers and expansion of our service offerings and target markets;
 
 
•
 
our expectations regarding ongoing developments of our Opsware technology and other technical capabilities; and
 
 
•
 
the anticipated expansion in our direct and indirect sales organizations.
 
These statements involve known and unknown risks, uncertainties and other factors that may cause industry trends or our actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these statements. These factors include those listed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Factors That May Affect Future Results” in this Quarterly Report on Form 10-Q.

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Although we believe that expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We will not update any of the forward-looking statements after the date of this Quarterly Report on Form 10-Q to conform these statements to actual results or changes in our expectations, except as required by law. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q.
 
The financial statements and related information contained in this Quarterly Report reflect our results as they existed for the period ended July 31, 2002. On August 15, 2002, we completed the sale of our Managed Services Business to EDS. As a result, the financial information for the period ended July 31, 2002 is not indicative of future results.

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ITEM 1.     FINANCIAL STATEMENTS
 
OPSWARE INC.
 
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
 
    
July 31, 2002
     
January 31, 2002
  
    
(unaudited)
     
(A)
  
ASSETS
                  
Current assets:
                  
Cash and cash equivalents
   
$
15,504
 
   
$
91,415
 
Short-term investments
   
 
—  
 
   
 
3,288
 
Accounts receivable, net
   
 
11,403
 
   
 
11,303
 
Prepaid expenses and other current assets
   
 
5,785
 
   
 
3,086
 
    
  
Total current assets
   
 
32,692
 
   
 
109,092
 
Property and equipment, net
   
 
28,765
 
   
 
43,090
 
Restricted cash
   
 
16,582
 
   
 
20,935
 
Other assets
   
 
1,541
 
   
 
1,180
 
    
  
Total assets
   
$
79,580
 
   
$
174,297
 
    
  
LIABILITIES AND STOCKHOLDERS’ EQUITY
                  
Current liabilities:
                  
Accounts payable
   
$
3,329
 
   
$
3,598
 
Other accrued liabilities
   
 
19,383
 
   
 
21,230
 
Deferred revenue
   
 
15,299
 
   
 
16,234
 
Accrued restructuring costs
   
 
13,468
 
   
 
17,081
 
Capital lease obligations, current portion
   
 
1,453
 
   
 
2,021
 
    
  
Total current liabilities
   
 
52,932
 
   
 
60,164
 
Capital lease obligations, net of current portion
   
 
452
 
   
 
168
 
Senior discount notes
   
 
—  
 
   
 
50,536
 
Deferred revenue
   
 
5,200
 
   
 
5,953
 
Commitments and contingencies
                  
Stockholders’ equity:
                  
Common stock
   
 
78
 
   
 
76
 
Additional paid-in capital
   
 
531,846
 
   
 
534,590
 
Notes receivable from stockholders
   
 
(2,652
)
   
 
(3,022
)
Deferred stock compensation
   
 
(12,094
)
   
 
(24,539
)
Accumulated deficit
   
 
(496,662
)
   
 
(449,606
)
Accumulated other comprehensive income (loss)
   
 
480
 
   
 
(23
)
    
  
Total stockholders’ equity
   
 
20,996
 
   
 
57,476
 
    
  
Total liabilities and stockholders’ equity
   
$
79,580
 
   
$
174,297
 
    
  
 
(A)
 
The balance sheet at January 31, 2002 has been derived from the audited consolidated financial statements at that date, but does not include all the information and footnotes required by generally accepted accounting principles for complete financial statements.
 
See accompanying notes.

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OPSWARE INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
 
    
Three months ended
July 31,
     
Six months ended
July 31,
  
    
2002
     
2001
     
2002
     
2001
  
Net revenues
   
$
17,507
 
   
$
14,088
 
   
$
34,945
 
   
$
25,750
 
Cost and expenses:
                                    
Cost of revenues*
   
 
22,760
 
   
 
28,045
 
   
 
48,027
 
   
 
57,536
 
Research and development*
   
 
3,255
 
   
 
5,336
 
   
 
7,181
 
   
 
12,619
 
Sales and marketing*
   
 
6,223
 
   
 
11,467
 
   
 
12,838
 
   
 
23,435
 
General and administrative*
   
 
3,079
 
   
 
4,585
 
   
 
7,187
 
   
 
10,293
 
Restructuring costs
   
 
7,013
 
   
 
30,162
 
   
 
7,013
 
   
 
30,162
 
Amortization of deferred stock compensation
   
 
44
 
   
 
10,282
 
   
 
5,980
 
   
 
27,182
 
    
  
  
  
Total cost and expenses
   
 
42,374
 
   
 
89,877
 
   
 
88,226
 
   
 
161,227
 
    
  
  
  
Loss from operations
   
 
(24,867
)
   
 
(75,789
)
   
 
(53,281
)
   
 
(135,477
)
Interest and other income (expense), net
   
 
(545
)
   
 
(198
)
   
 
(2,511
)
   
 
(823
)
    
  
  
  
Net loss before extraordinary item
   
$
(25,412
)
   
$
(75,987
)
   
$
(55,792
)
   
$
(136,300
)
Extraordinary item: gain from retirement of senior discount notes
   
 
8,736
 
   
 
—  
 
   
 
8,736
 
   
 
—  
 
    
  
  
  
Net loss applicable to common stockholders
   
$
(16,676
)
   
$
(75,987
)
   
$
(47,056
)
   
$
(136,300
)
    
  
  
  
Basic and diluted net loss per share applicable to common stockholders
   
$
(0.24
)
   
$
(1.19
)
   
$
(0.68
)
   
$
(2.42
)
    
  
  
  
Shares used in computing basic and diluted net loss per share applicable to common stockholders
   
 
70,686
 
   
 
63,876
 
   
 
69,615
 
   
 
56,273
 
    
  
  
  
                                   
*       Excludes amortization of deferred stock compensation of the following:
                                    
    Cost of revenues
   
$
1,248
 
   
$
3,255
 
   
$
3,096
 
   
$
8,208
 
    Research and development
   
 
739
 
   
 
2,217
 
   
 
1,994
 
   
 
5,260
 
    Sales and marketing
   
 
(948
)
   
 
1,540
 
   
 
(169
)
   
 
6,127
 
    General and administrative
   
 
(995
)
   
 
3,270
 
   
 
1,059
 
   
 
7,587
 
    
  
  
  
    Total amortization of deferred stock compensation
   
$
44
 
   
$
10,282
 
   
$
5,980
 
   
$
27,182
 
    
  
  
  
 
See accompanying notes.

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Table of Contents
 
OPSWARE INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
    
Six months ended July 31,
  
    
2002
     
2001
  
Operating activities:
                  
Net loss before extraordinary item
   
$
(55,792
)
   
$
(136,300
)
Extraordinary item
   
 
8,736
 
   
 
—  
 
Adjustments to reconcile net loss to net cash used in operating activities:
                  
Depreciation and amortization