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MOZILLA FOUNDATION AND SUBSIDIARY DECEMBER 31, 2006 AND 2005 …
Tags: board of directors, business advisors, california suite, consolidated financial statements, consolidated statement of financial position, consolidated statements, december 31, fi, independent auditors report, mountain view california, mozilla, net assets, san francisco, spear street, statement of financial position, subsidiary,Pages: 14
Language: english
Created: Fri Sep 28 16:51:55 2007
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MOZILLA FOUNDATION AND SUBSIDIARY
DECEMBER 31, 2006 AND 2005
INDEPENDENT AUDITORS' REPORT
AND
CONSOLIDATED FINANCIAL STATEMENTS
Mozilla Foundation and Subsidiary
Independent Auditors' Report
and Consolidated Financial Statements
Independent Auditors' Report 1
Consolidated Financial Statements
Consolidated Statement of Financial Position 2
Consolidated Statement of Activities and Changes in Net Assets 3
Consolidated Statement of Cash Flows 4
Notes to Consolidated Financial Statements 5 - 12
Consultants and
Business Advisors
Independent Auditors' Report
THE BOARD OF DIRECTORS
MOZILLA FOUNDATION 60 Spear Street
Mountain View, California Suite 400
San Francisco
We have audited the accompanying consolidated statement of financial position of
MOZILLA FOUNDATION AND SUBSIDIARY (Mozilla) as of December 31, 2006 and CA 94105
2005 and the related consolidated statements of activities and changes in net assets and cash
415.781.0793
flows for the years then ended. These financial statements are the responsibility of Mozilla's
management. Our responsibility is to express an opinion on these financial statements based fax 415.421.2976
on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the
United States of America. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material San Francisco
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing the accounting San Jose
principles used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Mozilla Foundation and Subsidiary as of
December 31, 2006 and 2005, and the changes in their net assets and their cash flows for the
years then ended in conformity with accounting principles generally accepted in the United
States of America.
September 28, 2007
1
Mozilla Foundation and Subsidiary
Consolidated Statement of Financial Position
December 31, 2006 2005
Assets
Cash and cash equivalents $ 13,156,912 $ 36,405,598
Receivables 6,833,191 5,318,714
Prepaids 711,070 74,380
Deferred taxes 1,204,294 509,190
Investments 50,842,504 9,125,732
Furniture and equipment, net 1,285,122 898,773
Deposits 115,617 64,000
Total assets 74,148,710 $ 52,396,387
Liabilities and Net Assets
Liabilities:
Accounts payable and accrued liabilities 2,317,297 $ 1,346,632
Income tax payable 8,463 7,774,040
Deferred revenue 137,500
Unrecognized income tax benefits 14,041,000 13,250,000
Total liabilities 16,366,760 22,508,172
Net Assets:
Unrestricted 57,781,950 29,888,215
Total net assets 57,781,950 29,888,215
Total liabilities and net assets $ 74,148,710 $ 52,396,387
The accompanying notes are an integral part of this statement. 2
Mozilla Foundation and Subsidiary
Consolidated Statement of Activities and Changes in Net Assets
Years Ended December 31, 2006 2005
Revenues and Other Support:
Royalties - search $ 61,501,145 $ 50,516,268
Royalties - product sales 94,590 171,329
Product revenues 1,000,416 841,138
Contracted services 137,500 356,500
Contributions 92,602 493,867
Interest income 2,162,756 577,351
Other income 60,351 12,593
Unrealized gain (loss) from investments 1,791,490 (62,444)
Total revenue and support 66,840,850 52,906,602
Expenses:
Program services 540,384
Software development 11,775,516 6,075,474
Sales and marketing 4,836,238 768,701
General and administrative 2,624,055 1,328,353
Total expenses 19,776,193 8,172,528
Change in Net Assets before Provision
for Income Taxes 47,064,657 44,734,074
Provision for income taxes 19,170,922 18,614,850
Change in Net Assets 27,893,735 26,119,224
Net Assets - beginning of year 29,888,215 3,768,991
Net Assets - end of year $ 57,781,950 $ 29,888,215
The accompanying notes are an integral part of this statement. 3
Mozilla Foundation and Subsidiary
Consolidated Statement of Cash Flows
Years Ended December 31, 2006 2005
Cash Flows from Operating Activities:
Change in net assets $ 27,893,735 $ 26,119,224
Adjustments to reconcile change in net assets
to net cash provided by operations:
Depreciation 607,578 162,876
Unrealized (gain)/loss on investments (1,791,490) 62,444
Change in deferred taxes (695,104) (509,190)
Changes in assets and liabilities:
Receivables (1,515,421) (1,344,747)
Prepaids and other assets (636,690) (74,380)
Deposits (51,617) (64,000)
Accounts payable and accrued expenses 970,665 1,188,147
Income tax payable (7,765,577) 7,774,040
Deferred revenue (137,500) 137,500
Unrecognized income tax benefits 791,000 11,355,000
Due to/from related parties 944 (6,696)
Net cash provided by operating activities 17,670,523 44,800,218
Cash Flows from Investing Activities:
Purchases of furniture and equipment (993,927) (962,729)
Purchases of investments (74,501,352) (10,188,176)
Proceeds from sale of investments 34,576,070 1,000,000
Net cash used by investing activities (40,919,209) (10,150,905)
Net (Decrease) Increase in Cash and
Cash Equivalents (23,248,686) 34,649,313
Cash and Equivalents - Beginning of year 36,405,598 1,756,285
Cash and Equivalents - End of year $ 13,156,912 $ 36,405,598
Supplemental Disclosure:
Cash paid for income taxes $ 26,777,000 $ 31,000
The accompanying notes are an integral part of this statement. 4
Mozilla Foundation and Subsidiary
Notes to Financial Statements
Note 1 - Nature of the Organization:
Established in July 2003, the Mozilla Foundation (the Foundation) is a California not-for-
profit corporation that exists to provide organizational, legal, and financial support for the
Mozilla open-source software project. The Foundation's purpose is to develop open source,
standards compliant, free Internet applications that will be useable free of charge to tens of
millions of users. In addition, its purpose is to develop foundational technologies that will be
used by content and software developers to develop standards compliant online content and
open source internet software.
In August 2005, the Foundation launched a wholly owned subsidiary, the Mozilla
Corporation (the Corporation.) The Corporation is a taxable subsidiary that serves the non-
profit, public benefit goals of its parent, the Foundation, and is responsible for product
development, marketing and distribution of Mozilla products. The activities of the
Foundation related to sponsorship contracts, contracted services and the affiliate program
were assigned to the new corporation. The employees were also transferred to the new
corporation. The Foundation retained the product royalty contract and continues to receive
contributions.
Note 2 - Summary of Significant Accounting Policies:
a. Principles of Consolidation
The consolidated financial statements include the accounts of the Foundation and the
Corporation (collectively Mozilla.) All significant intercompany transactions have been
eliminated.
b. Basis of Presentation
Net assets, revenues, expenses, gains and losses are classified based on the existence or
absence of donor imposed restrictions. Since no donor restrictions exist on the
Foundation's net assets, all of the net assets are classified as unrestricted.
c. Cash and Cash Equivalents
For purposes of the statement of cash flows, Mozilla considers its operating checking
accounts to be cash and cash equivalents.
d. Receivables
Receivables consist primarily of amounts due from contracts with the search engine
providers and the Amazon affiliates program. An allowance for uncollectible receivables
is provided based upon prior history and management's assessment of collectibility. No
allowance has been deemed necessary for any receivables.
5
Mozilla Foundation and Subsidiary
Notes to Financial Statements
e. Investments
Investments, which consist of money funds, common stock, mutual funds, government
bonds, commercial paper, corporate debentures, U.S. Agency-Discount Notes and
deposits are stated at market value, based upon quoted market prices. Changes in market
value are recognized on a current basis in the statement of activities.
f. Furniture and Equipment
Furniture and equipment are stated at cost. Contributed equipment is recorded at fair
value at the date of donation. Depreciation is calculated over the estimated useful lives of
the related assets using the straight-line method. Leasehold improvements are amortized
over the useful life or the term of the lease, whichever is shorter.
g. Recognition of Revenue
Royalties: Mozilla receives income from contracts with various search engine providers.
Revenue from these contracts is determined by the search engine provider based upon its
activity. In addition, Mozilla receives royalties from the sale of various products on its
website. Mozilla records revenue based upon the amounts received, with the revenue
recorded on the accrual basis.
Product revenues: Mozilla has a contract with Amazon under the Amazon's affiliates
program. Mozilla records revenue based upon amounts received, with revenue recorded
on the accrual basis.
Contracted services: Revenues under service agreements are recognized over the
contracted service period if a term agreement or as earned if under specific services
agreement.
h. Contributions
Contributions are recorded at fair value when the donor makes an unconditional promise
to give. Contributions collected by third parties are recorded as revenue when received by
the third party. Donor-restricted contributions are reported as an increase in temporarily
or permanently restricted net assets, depending on the nature of the restriction. When a
restriction expires, temporarily restricted net assets are reclassified to unrestricted net
assets and reported in the Statement of Activities as net assets released from restrictions.
Contributions that are restricted by the donor are reported as increases in unrestricted net
assets if the restrictions expire in the same year in which the contributions are recognized.
Dues for the Tech Advisory Group have been recorded as contributions.
6
Mozilla Foundation and Subsidiary
Notes to Financial Statements
i. Software Development Costs
Mozilla develops open source software which is available free of charge to users. In
addition, due to the open source nature of the development, there is generally no passage
of time between achievement of technological feasibility and the availability for general
release. Therefore, Mozilla expenses the cost of software development as incurred.
j. Advertising costs
Mozilla expenses advertising costs as incurred.
k. Grants
Grants are recorded when approved by the Board and all significant conditions are met.
l. Income Taxes
In July 2004, the Foundation received its advance ruling as a public benefit charitable
organization exempt from income taxes on related income under Section 501(c)(3) of the
Internal Revenue Code and applicable sections of the California Revenue and Taxation
Code.
The Foundation provides for tax on its unrelated business income which consists of
revenue from the Amazon affiliates program.
The Foundation follows Financial Accounting Standards Interpretation No. 48 (FIN 48)
Accounting for Uncertainty in Income Taxes. See note 5.
The Corporation is a C corporation. Income taxes are accounted for using an asset and
liability approach, which requires the recognition of deferred tax liabilities and assets for
the expected future tax consequences of temporary differences between the financial
statement and tax basis of assets and liabilities at the applicable enacted tax rates. The
differences relate primarily to state taxes.
m. Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions. Actual results could
differ from those estimates.
n. Functional Expenses
Expenses are allocated to functional areas based on management's estimates. There were
no direct fundraising expenses incurred and the incidental expenses, such as the website,
were immaterial. Program services include costs related to furthering the Mozilla open-
source project. Grants totaling $220,532 are included in program services.
7
Mozilla Foundation and Subsidiary
Notes to Financial Statements
Note 3 Investments
At December 31, 2006 and 2005 investments consist of the following:
2006 2005
Common Stock $ 12,513,951
Closed End Funds 224,300
Mutual Funds 3,237,778
Government Bonds 4,576,688
Money Market Fund 7,585,307
Commercial Paper 10,619,670
US Agency Funds 4,370,901
Fixed Income Funds 988,107
Corporate Debentures 4,174,683
Certificate of Deposit 2,551,119
Institutional Diversified Assets (money fund) $ 4,094,338
Institutional Short/Intermediate bond fund 5,031,394
$ 50,842,504 $ 9,125,732
Note 4 - Furniture and Equipment:
Furniture and equipment as of December 31, 2006 and 2005 are as follows:
Useful
Life
2006 2005 (Years)
Computer equipment $ 1,572,831 $ 884,299 3
Furniture and office equipment 153,558 132,862 7
Leasehold improvements 48,979 43,030 4
Software 308,871 30,120 3
2,084,239 1,090,311
Less accumulated depreciation (799,117) (191,538)
Net furniture and equipment $ 1,285,122 $ 898,773
8
Mozilla Foundation and Subsidiary
Notes to Financial Statements
Note 5 - Income Taxes:
The Mozilla Foundation received revenue from various search engine providers in exchange
for being included in Mozilla's Firefox web browser. These contracts were transferred to the
Mozilla Corporation in August 2005. Management, having received a tax opinion from its
legal counsel with respect to the contract that is the source of most of the revenue, believes
that the revenue constitutes royalties as defined in the Internal Revenue Code. Therefore, it
would not be unrelated business taxable income, subject to income taxes. However, there is
no direct authority involving similar payments for such e-commerce activities for not-for-
profit organizations.
Management follows the provisions of FAS Interpretation No.48 (FIN 48) Accounting for
Uncertainty in Income Taxes. Under FIN 48, an entity must determine whether it is more
likely than not that a tax position will be sustained upon examination, including resolution of
any appeals or litigation processes, based upon the technical merits of the position. Due to
the lack of directly related case law, management cannot conclude that it is more likely than
not that the Internal Revenue Service would concur with the Foundation's position.
Therefore, in accordance with FIN 48, the Foundation has accrued a liability for
unrecognized tax benefits related to the revenue received by the Foundation from the search
providers.
A reconciliation of unrecognized tax benefits as of the beginning and end of the year is as
follows:
2006 2005
Balance at January 1 $ 13,250,000 $ 1,895,000
Additions based upon tax positions related
to the current year 11,281,000
Additions for interest due on liabilities
from the prior year 791,000 74,000
Balance at December 31 $ 14,041,000 $ 13,250,000
The Foundation accrues interest related to unrecognized tax benefits due from the prior year
as part of the tax expense. However, due to the fact that the Foundation believes it has
substantial authority for its position, it has not accrued for any penalties.
9
Mozilla Foundation and Subsidiary
Notes to Financial Statements
The Foundation received the royalty revenue in 2004 and 2005. These years are open to
examination. It is not expected that there will be any significant increase or decrease in the
unrecognized tax benefits in the next year unless there is an examination of the issue.
The Foundation also receives revenue from its affiliate program which is considered to be
unrelated business taxable income. This affiliate program has two parts, the most significant
of which was transferred to the Corporation. Therefore, the remaining part is minimal and
the Foundation has not accrued any taxes on this source of revenue for 2006.
The provision for income taxes for 2006 and 2005 are comprised of the following:
2006 2005
Currently payable:
Corporation income taxes $ 19,075,026 $ 7,622,040
Foundation taxes on the affiliate program 147,000
Deferred:
Corporation related to state taxes (695,104) (509,190)
Unrecognized tax benefits, including interest 791,000 11,355,000
Total provision for income taxes $ 19,170,922 $ 18,614,850
Note 6 - Related Party Transactions:
a. Grants
During 2006, the Foundation awarded a grant for $30,000 to another foundation, at which
time the Chairman of the Board of the Foundation was also a board member of the
grantee foundation.
b. Shared Expenses
During part of 2005, the Foundation contracted with a for-profit company to provide
back-office support and services. The sole owner of this company is the Chairman of the
Foundation. For 2005, the total amount charged for such services was $50,659. All
amounts reimbursed were based upon the cost to the for-profit company and allocated
based upon estimates of time or usage. These transactions were reviewed in advance by
the Board of Directors to insure that the costs were fair and reasonable and did not exceed
market rates.
10
Mozilla Foundation and Subsidiary
Notes to Financial Statements
c. Affiliates
The Corporation works with affiliates in Japan and Europe to perform their marketing
and public relations, as well as other administrative functions. In exchange for these
services, the Corporation pays these affiliates certain amounts, which were $1,250,602
and $246,756 in 2006 and 2005, respectively. These are recorded as expenses in the
statement of activities.
Accounts receivable includes $100,000 due from Mozilla Japan.
Note 7 - Retirement Plan:
The Foundation and the Corporation have defined contribution plans covering substantially
all employees. The Foundation and the Corporation contribute an amount equal to 4% and
3% of the employee's qualified salary plus an additional discretionary percent of their
qualified salary. Contributions to the plans totaled $470,402 and $199,700 for 2006 and
2005.
Note 8 - Concentrations of Risk:
Mozilla has a contract with a search engine provider for royalties. The contract originally
expired in November 2006 but was renewed for two years and expires in November 2008.
Approximately 85% of Mozilla's revenue for 2006 was derived from this contract.
Mozilla has defined its financial instruments which are potentially subject to credit risk as
cash and investments. At December 31, 2006, essentially all of the cash and investments are
in excess of the federally insured limits.
11
Mozilla Foundation and Subsidiary
Notes to Financial Statements
Note 9 - Commitments and Contingencies:
Commitments
The Corporation leases office space under a lease which expires in October 2009. The
corporation provides space to the Foundation at no charge. Rent expense for 2006 totaled
$479,236. Future minimum lease commitments are as follows:
Year Ended,
2007 $ 564,731
2008 589,423
2009 456,453
$ 1,610,607
Contingencies
The Foundation has not accrued for any potential penalties related to unrecognized
income tax benefits as described in Note 5.
The Foundation is in its advance ruling period as a public benefit corporation. The ruling
period ends December 31, 2007 at which time it will be required to submit information
for its public support test. If it does not pass the public support test, the Foundation
would be ruled to be a private foundation subject to excise tax at 2% on its net investment
income.
12