UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC  20549

 

 

FORM 10-Q

 

 

 

 

BROADVISION, INC.

(Exact name of registrant as specified in its charter)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   ý No   o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes  o No  ý

 

As of November 7, 2003 there were 33,083,844 shares of the Registrant’s Common Stock issued and outstanding.

 

 

BROADVISION, INC. AND SUBSIDIARIES
FORM 10-Q
Quarter Ended September 30, 2003

 

TABLE OF CONTENTS

 

PART I.		FINANCIAL INFORMATION
Item 1.		Financial Statements
		Condensed Consolidated Balance Sheets-September 30, 2003 and December 31, 2002
		Condensed Consolidated Statements of Operations and Comprehensive Loss-Three and nine months ended September 30, 2003 and 2002
		Condensed Consolidated Statements of Cash Flows-Nine months ended September 30, 2003 and 2002
		Notes to Condensed Consolidated Financial Statements
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.		Quantitative and Qualitative Disclosures About Market Risk
Item 4.		Controls and Procedures
PART II.		OTHER INFORMATION
Item 1.		Legal Proceedings
Item 2.		Changes in Securities and Use of Proceeds
Item 3.		Defaults Upon Senior Securities
Item 4.		Submission of Matters to a Vote of Security Holders
Item 5.		Other Information
Item 6.		Exhibits and Reports on Form 8-K
SIGNATURES

 

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PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

 

BROADVISION, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)

 

		September 30, 2003			December 31, 2002
		(unaudited)
ASSETS
Cash and cash equivalents		$	80,620		$	77,386
Short-term investments		1,054			24,484
Accounts receivable, less allowance for doubtful accounts and reserves of  $3,329 as of September 30, 2003 and $5,502 as of December 31, 2002		11,079			22,917
Prepaids and other		5,404			9,181
Total current assets		98,157			133,968
Property and equipment, net		17,205			26,600
Long-term investments		—			587
Restricted cash		20,958			16,704
Equity investments		1,624			2,083
Goodwill and other intangibles, net		56,434			57,320
Other assets		2,483			2,874
Total assets		$	196,861		$	240,136
LIABILITIES AND STOCKHOLDERS’ EQUITY
Bank borrowings and current portion of long-term debt		$	27,977		$	25,977
Accounts payable		11,167			8,105
Accrued expenses		36,482			55,787
Unearned revenue		7,098			14,158
Deferred maintenance		16,477			24,325
Total current liabilities		99,201			128,352
Long-term debt, net of current portion		1,213			1,945
Other noncurrent liabilities		70,023			68,206
Total liabilities		170,437			198,503
Commitments and Contingencies (Note 4)
Stockholders’ equity:
Convertible preferred stock, $0.0001 par value; 10,000 shares authorized; none issued and outstanding		—			—
Common stock, $0.0001 par value; 2,000,000 shares authorized; 33,047 shares issued and outstanding as of September 30, 2003 and 32,440 shares issued and outstanding as of December 31, 2002		3			3
Additional paid-in capital		1,212,194			1,210,797
Accumulated other comprehensive loss, net of tax		(46		)	37
Accumulated deficit		(1,185,727		)	(1,169,204		)
Total stockholders’ equity		26,424			41,633
Total liabilities and stockholders’ equity		$	196,861		$	240,136

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

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BROADVISION, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(In thousands, except per share data; unaudited)

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2003			2002			2003			2002
Revenues:
Software licenses		$	5,076		$	10,756		$	19,875		$	29,244
Services		13,493			16,483			44,954			57,869
Total revenues		18,569			27,239			64,829			87,113
Cost of revenues:
Cost of software licenses		666			1,414			1,549			3,417
Cost of services		5,915			8,751			19,650			31,507
Total cost of revenues		6,581			10,165			21,199			34,924
Gross profit		11,988			17,074			43,630			52,189
Operating expenses:
Research and development		4,467			7,774			16,681			34,755
Sales and marketing		6,710			9,384			19,585			41,365
General and administrative		2,885			2,573			7,586			13,775
Litigation settlement costs		4,250			—			4,250			—
Other intangible amortization		—			887			887			2,661
Restructuring charge		4,509			63,205			13,361			103,150
Impairment of assets		—			853			—			3,129
Total operating expenses		22,821			84,676			62,350			198,835
Operating loss		(10,833		)	(67,602		)	(18,720		)	(146,646		)
Interest income, net		81			658			673			1,908
Other income (expense), net		574			(651		)	1,780			(8,588		)
Loss before provision for income taxes		(10,178		)	(67,595		)	(16,267		)	(153,326		)
Provision for income taxes		(87		)	(138		)	(256		)	(7,219		)
Net loss		$	(10,265	)	$	(67,733	)	$	(16,523	)	$	(160,545	)
Basic and diluted loss per share		$	(0.31	)	$	(2.11	)	$	(0.51	)	$	(5.02	)
Shares used in computing:
Basic and diluted shares		32,906			32,171			32,706			31,961
Comprehensive loss:
Net loss		$	(10,265	)	$	(67,733	)	$	(16,523	)	$	(160,545	)
Other comprehensive gain (loss), net of tax: Unrealized investment gains (losses) less reclassification adjustment for gains (losses) included in net loss		(46		)	17			(83		)	3,957
Total comprehensive loss		$	(10,311	)	$	(67,716	)	$	(16,606	)	$	(156,588	)

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

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BROADVISION, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands; unaudited)

 

		Nine Months Ended September 30,
		2003			2002
Cash flows from operating activities:
Net loss		$	(16,523	)	$	(160,545	)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization		9,386			14,512
Provision (credit) for doubtful accounts and reserves		684			(1,945		)
Provision for sales returns		(1,070		)	1,524
Amortization of prepaid royalties		973			2,730
Loss on cost method investments		326			10,328
Amortization of other intangible assets		887			2,661
Stock-based compensation charge		230			847
Restructuring charge, non-cash		(382		)	18,651
Loss on sale of assets		—			344
Impairment of assets		—			3,129
Provision for deferred tax asset valuation		—			6,279
Changes in operating assets and liabilities:
Accounts receivable		12,224			21,286
Prepaids and other		3,142			3,151
Accounts payable and accrued expenses		(3,679		)	(6,877		)
Accrued restructuring expenses		(10,442		)	7,583
Unearned revenue and deferred maintenance		(14,908		)	(13,668		)
Other noncurrent assets		344			(464		)
Net cash used for operating activities		(18,808		)	(90,474		)
Cash flows from investing activities:
Purchase of property and equipment		(131		)	(1,065		)
Transfer from (to) restricted cash		(4,254		)	13,304
Proceeds from sale of assets		186			247
Purchase of long-term investments		(2,729		)	(2,349		)
Sales/maturity of long-term investments		3,403			22,519
Purchase of short-term investments		(2,917		)	(31,141		)
Sales/maturity of short-term investments		26,288			69,198
Net cash provided by investing activities		19,846			70,713
Cash flows from financing activities:
Proceeds from issuance of common stock, net		1,166			2,849
Proceeds from borrowings, net		2,000			25,000
Repayments of borrowings		(970		)	(732		)
Net cash provided by financing activities		2,196			27,117
Net increase in cash and cash equivalents		3,234			7,356
Cash and cash equivalents at beginning of period		77,386			75,758
Cash and cash equivalents at end of period		$	80,620		$	83,114
Supplemental disclosures of cash flow information:
Cash paid for interest		$	170		$	164
Cash paid for income taxes		$	849		$	941

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

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BROADVISION, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1.   Organization and Summary of Significant Accounting Policies

 

Nature of Business

 

BroadVision, Inc. (“BroadVision” or the “Company”) is a global provider of enterprise self-service web applications. Our integrated solutions for process, commerce, portal and content help our customers increase revenues and streamline costs. As of September 30, 2003, BroadVision had approximately 1,000 customers and government entities around the globe using the Company’s applications to facilitate their portal-based commerce and information access initiatives.

 

BroadVision was founded in 1993 and has been a publicly traded corporation since 1996. BroadVision pioneered web-based e-commerce and was among the first to offer pre-integrated, packaged applications to power enterprise business portals.

 

BroadVision’s enterprise portal applications allow organizations to unify and extend their key business applications, information, and business processes by taking advantage of the power of the web and new wireless and mobile devices to allow customers, partners, and employees to do business on their own terms, in a personalized and collaborative way.  BroadVision solutions allow multiple constituents to serve themselves from anywhere, at anytime, through any web device.  BroadVision enterprise portal applications enable organizations to create business value by transforming the way they do business; moving business interactions and transactions from a manual, human-assisted paradigm to an automated, personalized self-service model that enhances growth, reduces costs and improves productivity.

 

The Company believes its products improve its customers’ revenue opportunities by enabling them to establish more effective and efficient one-to-one relationships with their customers and business partners. Web and wireless users are engaged by highly personalized real-time interactions, able to transact business securely and encouraged to remain online and make return visits.  The Company’s applications also improve the cost-effectiveness of one-to-one relationship management by enabling non-technical managers to modify business rules and content in real-time and by helping to reduce the cost of customer acquisition and retention, business development, technical support and employee workplace initiatives. Because the Company provides pre-integrated, packaged solutions, time to deployment is shorter and customers are able to manage and maintain their web and wireless applications in a cost-effective manner. Because of the Company’s commitment to open standards and open architecture, BroadVision applications integrate with its customers’ existing systems and expand as its customers’ needs and businesses grow.

 

Supporting this application infrastructure, as of September 30, 2003, are more than 100 partner firms around the world who are working to ensure the Company’s joint customers’ success through complementary technology, applications, tools and services offerings that extend and enhance BroadVision customers’ implementations.

 

BroadVision markets its products and services worldwide through a direct sales force and independent distributors, value-added resellers (“VARs”) and application service providers (“ASPs”). In addition, its sales are promoted through independent professional consulting organizations, known as systems integrators. The Company has operations in North America, Europe and Asia/Pacific.

 

BroadVision Global Services (“BVGS”) organization provides a full spectrum of global services to help ensure success for businesses, including strategic services, implementation services, migration services and ongoing training and maintenance.

 

Basis of Presentation and Use of Estimates

 

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions have been eliminated in consolidation.  In the Company’s opinion, the consolidated financial statements presented herein include all necessary adjustments, consisting of normal recurring adjustments, to fairly state the Company’s financial position, results of operations and cash flows for the periods indicated.  The preparation of consolidated financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make certain assumptions and estimates that affect reported amounts of assets and liabilities as of the date of the financial statements and the reported amount of revenues and expenses during the

 

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reporting period.  Actual results could differ from estimates.  The financial results and related information as of September 30, 2003 and for the three and nine months ended September 30, 2003 and 2002 are unaudited. The consolidated balance sheet at December 31, 2002 has been derived from the audited consolidated financial statements as of that date but does not necessarily reflect all of the informational disclosures previously reported in accordance with generally accepted accounting principles in the United States of America.

 

The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included with the Company’s Form 10-K and other documents that have been filed with the Securities and Exchange Commission (“SEC”). The results of the Company’s operations for the interim periods presented are not necessarily indicative of operating results for the full fiscal year or any future periods.

 

Revenue Recognition

 

Overview

 

The Company’s revenue consists of fees for licenses of the Company’s software products, maintenance, consulting services and customer training. The Company generally charges fees for licenses of its software products either based on the number of persons registered to use the product or based on the number of Central Processing Units (“CPUs”) on which the product is installed. The Company’s revenue recognition policies comply with the provisions of Statement of Position (“SOP”) No. 97-2, Software Revenue Recognition, as amended; SOP No. 98-9, Software Revenue Recognition, With Respect to Certain Transactions and the SEC’s Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements.

 

Software License Revenue

 

The Company licenses its products through its direct sales force and indirectly through resellers. In general, software license revenues are recognized when a non-cancelable license agreement has been signed under which the customer acknowledges an unconditional obligation to pay, the software product has been delivered, there are no uncertainties surrounding product acceptance, the fees are fixed and determinable and collection is considered probable. Delivery is considered to have occurred when title and risk of loss have been transferred to the customer, which generally occurs when media containing the licensed programs is provided to a common carrier. In the case of electronic delivery, delivery occurs when the customer is given access to the licensed programs. If collectibility is not considered probable, revenue is recognized when the fee is collected.  Subscription-based license revenues are recognized ratably over the subscription period. The Company enters into reseller arrangements that typically provide for sublicense fees payable to the Company based upon a percentage of list price. The Company does not grant its resellers the right of return.

 

The Company recognizes revenue using the residual method pursuant to the requirements of SOP No. 97-2, as amended by SOP No. 98-9. Revenues recognized from multiple-element software arrangements are allocated to each element of the arrangement based on the fair values of the elements, such as licenses for software products, maintenance, consulting services or customer training. The determination of fair value is based on objective evidence, which is specific to the Company. The Company limits its assessment of objective evidence for each element to either the price charged when the same element is sold separately or the price established by management having the relevant authority to do so, for an element not yet sold separately. If evidence of fair value of all undelivered elements exists but evidence does not exist for one or more delivered elements, then revenue is recognized using the residual method. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue.

 

The Company records deferred revenue for software license agreements when cash has been received from the customer and the agreement does not qualify for revenue recognition under the Company’s revenue recognition policy. The Company records accounts receivable for software license agreements when the agreement qualifies for revenue recognition but cash or other consideration has not been received from the customer.

 

Services Revenue

 

Consulting services revenues and customer training revenues are recognized as such services are performed. Maintenance revenues, which include revenues bundled with software license agreements that entitle the customers to technical support and future unspecified enhancements to the Company’s products, are deferred and recognized ratably over the related agreement period, generally twelve months.  The Company’s consulting services, which consist of consulting, maintenance and training, are delivered through BVGS. This group provides consulting services, manages projects and client relationships, manages the needs of our partner community, provides training-related services to employees, customers and partners, and also provides software maintenance services, including technical support, to our customers and partners. We

 

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record reimbursement by our customers for out-of-pocket expenses as a component of services revenue.  Services that the Company provides are not essential to the functionality of the software.

 

Stock Split

 

On July 24, 2002, the Company announced that its Board of Directors had approved a one-for-nine reverse split of the Company’s common stock. The reverse split was effective July 29, 2002. Each nine shares of outstanding common stock of the Company automatically converted into one share of common stock. The accompanying consolidated financial statements and related financial information contained herein have been retroactively restated to give effect for this stock split.

 

Employee Stock Option and Purchase Plans

 

The Company accounts for employee stock-based awards in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, Financial Accounting Standards Board Interpretation No. 44 (“FIN 44”), Accounting for Certain Transactions Involving Stock Compensation—an Interpretation of APB No. 25, and related interpretations. As such, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price on such date. Pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation, the Company discloses the pro forma effects of using the fair value method of accounting for stock-based compensation arrangements. The Company accounts for equity instruments issued to non-employees in accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force (“EITF”) 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees For Acquiring or in Conjunction with Selling Goods or Services.

 

The Company applies APB Opinion Number 25, Accounting for Stock Issued to Employees, and related interpretations when accounting for its stock option and stock purchase plans. In accordance with APB No. 25, the Company applies the intrinsic value method in accounting for employee stock options. Accordingly, the Company generally recognizes no compensation expense with respect to stock-based awards to employees.

 

During the nine months ended September 30, 2003, the Company recorded compensation expense of $279,000 as a result of granting a third-party consultant common stock in the Company and a vesting modification to a grant for a terminated employee.  These charges were calculated based upon the market value of the underlying stock.  During the nine months ended September 30, 2002, the Company recorded compensation expense of $846,000 as a result of granting terminated employees continued vesting of their stock options for a period beyond their actual termination date. This compensation charge was calculated using the Black-Scholes model.

 

The Company has determined pro forma information regarding net loss and net loss per share as if it had accounted for employee stock options under the fair value method as required by SFAS Number 123, Accounting for Stock Compensation. The fair value of these stock-based awards to employees was estimated using the Black-Scholes option pricing model. Had compensation cost for the Company’s stock option plan and employee stock purchase plan been determined consistent with SFAS No. 123, the Company’s reported net loss and net loss per share would have been changed to the amounts indicated below (in thousands, except per share data, unaudited):

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2003			2002			2003			2002
Net loss as reported		$	(10,265	)	$	(67,733	)	$	(16,523	)	$	(160,545	)
Add: Stock-based employee compensation expense included in reported net loss, net of related tax effects		231			77			279			846
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(2,734		)	(4,917		)	(6,739		)	(39,949		)
Pro forma net loss		$	(12,768	)	$	(72,573	)	$	(22,983	)	$	(199,648	)
Loss per share:
Basic—as reported		$	(0.31	)	$	(2.11	)	$	(0.51	)	$	(5.02	)
Basic—pro forma		$	(0.39	)	$	(2.26	)	$	(0.70	)	$	(6.25	)
Diluted—as reported		$	(0.31	)	$	(2.11	)	$	(0.51	)	$	(5.02	)
Diluted—pro forma		$	(0.39	)	$	(2.26	)	$	(0.70	)	$	(6.25	)

 

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Net Loss Per Share

 

SFAS No. 128, Earnings Per Share, requires the presentation of basic and diluted earnings or losses per share. Earnings or losses per share are calculated by dividing net income or loss available to common stockholders by a weighted average number of shares outstanding for the period. Basic earnings or losses per share are determined solely on common shares whereas diluted earnings or losses per share include common equivalent shares, unless anti-dilutive as determined under the treasury stock method.

 

The following table sets forth basic and diluted losses per share computational data for the periods presented (in thousands, except per share amounts, unaudited):

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2003			2002			2003			2002
Net loss		$	(10,265	)	$	(67,733	)	$	(16,523	)	$	(160,545	)
Weighted average common shares outstanding utilized for basic net loss per share		32,906			32,171			32,706			31,961
Potential common shares		—			—			—			—
Weighted average common shares outstanding utilized for diluted net loss per share		32,906			32,171			32,706			31,961
Basic net loss per share		$	(0.31	)	$	(2.11	)	$	(0.51	)	$	(5.02	)
Diluted net loss per share		$	(0.31	)	$	(2.11	)	$	(0.51	)	$	(5.02	)

 

There were 127,938 and 136,825 potential common shares excluded from the determination of diluted net loss per share for the three and nine months ended September 30, 2003, respectively, as the effect of such shares is anti-dilutive. There were 31,937 and 266,844 potential common shares excluded from the determination of diluted net loss per share for the three and nine months ended September 30, 2002, respectively, as the effect of such shares is anti-dilutive.

 

Allowances and Reserves

 

Occasionally, the Company’s customers experience financial difficulty after the Company records the revenue but before payment has been received. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company’s normal payment terms are 30 to 90 days from invoice date. If the financial condition of the Company’s customers was to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. The Company records reductions to revenue for estimated returns of products by our customers and related allowances. If market conditions were to decline, we may experience larger volumes of returns resulting in an incremental reduction of revenue at the time the return occurs.

 

Restructuring

 

The Company has approved certain restructuring plans to, among other things, reduce its workforce and consolidate facilities. These restructuring charges were taken to align the Company’s cost structure with changing market conditions and to create a more efficient organization. The Company’s restructuring charges are comprised primarily of: (i) severance and benefits termination costs related to the reduction of the Company’s workforce; (ii) lease termination costs and/or costs associated with permanently vacating its facilities; (iii) other incremental costs incurred as a direct result of the restructuring plan; and (iv) impairment costs related to certain long-lived assets abandoned. The Company accounts for each of these costs in accordance with SEC Staff Accounting Bulletin No. 100, Restructuring and Impairment Charges.

 

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The Company accounts for severance and benefits termination costs in accordance with EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring) for exit or disposal activities initiated prior to December 31, 2002. Accordingly, the Company records the liability related to these termination costs when the following conditions have been met: (i) management with the appropriate level of authority approves a termination plan that commits the Company to such plan and establishes the benefits the employees will receive upon termination; (ii) the benefit arrangement is communicated to the employees in sufficient detail to enable the employees to determine the termination benefits; (iii) the plan specifically identifies the number of employees to be terminated, their locations and their job classifications; and (iv) the period of time to implement the plan does not indicate changes to the plan are likely. The termination costs recorded by the Company are not associated with nor do they benefit continuing activities.  The Company accounts for severance and benefits termination costs for exit or disposal activities initiated after December 31, 2002 in accordance with SFAS No. 146, Accounting for Costs Associated with Exit Activities.  SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred.  This differs from EITF 94-3, which required that a liability for an exit cost be recognized at the date of an entity’s commitment to an exit plan.

 

Prior to the adoption on January 1, 2003 of SFAS No. 146, the Company accounted for the costs associated with lease termination and/or abandonment in accordance with EITF 88-10, Costs Associated with Lease Modification or Termination. Accordingly, the Company recorded the costs associated with lease termination and/or abandonment when the leased property has no substantive future use or benefit to the Company.

 

Inherent in the estimation of the costs related to the Company’s restructuring efforts are assessments related to the most likely expected outcome of the significant actions to accomplish the restructuring. In determining the charge related to the restructuring, the majority of estimates made by management related to charges for excess facilities. In determining the charges for excess facilities, the Company was required to estimate future sublease income, future net operating expenses of the facilities, and brokerage commissions, among other expenses. The most significant of these estimates related to the timing and extent of future sublease income in which to reduce the Company’s lease obligations. Specifically, in determining the restructuring obligations related to facilities as of September 30, 2003, the Company reduced its lease obligations by estimated sublease income of $45.4 million. The Company based its estimates of sublease income, in part, on the opinions of independent real estate experts, current market conditions and rental rates, an assessment of the time period over which reasonable estimates could be made, the status of negotiations with potential subtenants, and the location of the respective facility, among other factors.

 

These estimates, along with other estimates made by management in connection with the restructuring, may vary significantly depending, in part, on factors that may be beyond the Company’s control. Specifically, these estimates will depend on the Company’s success in negotiating with lessors, the time periods required to locate and contract suitable subleases and the market rates at the time of such subleases. Adjustments to the facilities reserve will be required if actual lease exit costs or sublease income differ from amounts currently expected. The Company will review the status of restructuring activities on a quarterly basis and, if appropriate, record changes to its restructuring obligations in current operations based on management’s most current estimates.

 

Legal Matters

 

The Company’s current estimated range of liability related to pending litigation is based on claims for which it is probable that a liability has been incurred and the Company can estimate the amount and range of loss. The Company has recorded the minimum estimated liability related to those claims, where there is a range of loss. Because of the uncertainties related to both the determination of the probability of an unfavorable outcome and the amount and range of loss in the event of an unfavorable outcome, the Company is unable to make a reasonable estimate of the liability that could result from the remaining pending litigation. As additional information becomes available, the Company will assess the potential liability related to its pending litigation and revise its estimates, if necessary. Such revisions in the Company’s estimates of the potential liability could materially impact the Company’s results of operations and financial position.

 

Foreign Currency Transactions

 

The functional currency of the Company’s foreign subsidiaries is the U.S. dollar. Foreign exchange gains and losses resulting from the remeasurement of foreign currency assets and liabilities are included in other income (expense), net in the Condensed Consolidated Statements of Operations.

 

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Valuation of Long-Lived Assets

 

The Company periodically assesses the impairment of long-lived assets in accordance with the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The Company assesses the impairment

 

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of goodwill and identifiable intangible assets in accordance with SFAS No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets.

 

Fair Value of Financial Instruments

 

The Company’s financial instruments consist of cash and cash equivalents, short-term investments, restricted cash, long-term investments, equity investments, accounts receivable, accounts payable and debt. The Company does not have any derivative financial instruments. The Company believes the reported carrying amounts of its financial instruments approximates fair value, based upon the maturities and nature of its cash equivalents, short-term investments, long-term investments, accounts receivable and payable, and based on the current rates available to it on similar debt issues. Additionally, the Company periodically evaluates the carrying value of all of its investments for other-than-temporary impairment when events and circumstances indicate that the book value of an asset may not be recoverable. If such assets are considered to be impaired, the impairment to be recognized is measured by the amounts by which the carrying amount exceeds its fair market value. The Company’s equity investments are comprised of investments in public and non-public technology-related companies. The Company may record future impairment charges due to continued economic decline and the potential resulting negative impact on these companies.

 

New Accounting Pronouncements

 

In April 2002, the FASB issued Statement of Financial Accounting Standards No. 145 (“SFAS 145”), “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections.” Among other provisions, SFAS 145 rescinds SFAS 4, “Reporting Gains and Losses from Extinguishment of Debt.” Accordingly, gains or losses from extinguishment of debt shall not be reported as extraordinary items unless the extinguishment qualifies as an extraordinary item under the criteria of APB No. 30. Gains or losses from extinguishment of debt that do not meet the criteria of APB 30 should be reclassified to income from continuing operations in all prior periods presented. SFAS 145 is effective for fiscal years beginning after May 15, 2002. The adoption of SFAS 145, at the beginning of our fiscal year 2003, did not have a material impact on our consolidated financial position, results of operations or cash flows.

 

In July 2002, the FASB issued Statement of Financial Accounting Standards No. 146 (“SFAS 146”), “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities. This statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Previous guidance, provided under EITF No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including certain costs incurred in a restructuring),” required that an exit cost liability be recognized at the date of an entity’s commitment to an exit plan. The adoption of SFAS 146, at the beginning of our fiscal year 2003, did not have a material impact on our consolidated financial position, results of operations or cash flows. See “Restructuring” for additional disclosure.

 

In November 2002, the FASB issued FIN 45, which expands on the accounting guidance of Statements of Financial Accounting Standards No. 5, 57 and 107 and incorporates without change the provisions of FASB Interpretation No. 34, which has been superseded. FIN 45 affects, among other things, leasing transactions involving residual guarantees, vendor and manufacturer guarantees and tax and environmental indemnities. All such guarantees are required to be disclosed in the notes to the financial statements starting with the period ending after December 15, 2002. For guarantees issued after December 31, 2002, the fair value of the obligation must be reported on the balance sheet. Existing guarantees are permitted to be grandfathered and are not recognized on the balance sheet. The adoption of FIN 45, at the beginning of our fiscal year 2003, did not have a material impact on our consolidated financial position, results of operations or cash flows. See “Warranties and Indemnification” for additional disclosures.

 

In December 2002, the FASB issued SFAS 148, which provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of Statement 123 to require more prominent and more frequent disclosures in financial statements about the effects of stock-based compensation. The transition guidance and annual disclosure provisions of SFAS 148 are effective for fiscal years ending after December 15, 2002. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. The adoption of SFAS 148 did not have a material impact on our consolidated financial position, results of operations or cash flows. See “Stock-Based Incentive Compensation” for the impact to our required pro forma disclosures.

 

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In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities.” FIN 46 expands upon and strengthens existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities and activities of another entity. A variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (i) does not have equity investors with voting rights or (ii) has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or is entitled to receive a majority of the entity’s residual returns or both. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after December 15, 2003. Disclosure requirements apply to any financial statements issued after January 31, 2003. We do not expect the adoption of SFAS 146 to have a material impact on our consolidated financial position, results of operations or cash flows.

 

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS 149 amends and clarifies the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS 149 is generally effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. We are currently evaluating the impact of SFAS 149 on our consolidated financial position and results of operations. We do not expect the adoption of SFAS 149 to have a material impact on our consolidated financial position, results of operations or cash flows.

 

In May 2003, the FASB issued SFAS 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS 150 requires that certain financial instruments, which under previous guidance were accounted for as equity, must now be accounted for as liabilities. The financial instruments affected include mandatorily redeemable stock, certain financial instruments that require or may require the issuer to buy back some of its shares in exchange for cash or other assets and certain obligations that can be settled with shares of stock. SFAS 150 is effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. We do not expect the adoption of SFAS 150 to have a material impact on our consolidated financial position, results of operations or cash flows.

 

Note 2.   Selective Balance Sheet Detail

 

Property and equipment consisted of the following (in thousands):

 

		September 30, 2003			December 31, 2002
		(unaudited)
Furniture and fixtures		$	9,149		$	9,138
Computers and software		49,444			49,579
Leasehold improvements		21,525			21,456
		80,118			80,173
Less accumulated depreciation and amortization		(62,913		)	(53,573		)
		$	17,205		$	26,600

 

Accrued expenses consisted of the following (in thousands):

 

		September 30, 2003			December 31, 2002
		(unaudited)
Employee benefits		$	1,772		$	2,081
Commissions and bonuses		2,138			2,027
Sales and other taxes		7,496			11,956
Restructuring (See Note 6)		19,749			29,056
Other		5,327			10,667
		$	36,482		$	55,787

 

Other noncurrent liabilities consisted of the following (in thousands):

 

		September 30, 2003			December 31, 2002
		(unaudited)
Restructuring (See Note 6)		$	69,110		$	67,139
Other		913			1,067
		$	70,023		$	68,206

 

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Note 3.   Commercial Credit Facilities

 

The Company has various credit facilities with a commercial lender which include term debt in the form of notes payable and a revolving line of credit. The amount available under the revolving line of credit is $27.0 million. Borrowings are collateralized by all of the Company’s assets and bear interest at the bank’s prime rate (floating with a floor of 4.25%). Interest is due monthly and principal is due at expiration in February 2004. The amended and restated loan and security agreement requires us to maintain certain levels in cash and cash equivalents, short-term investments and long-term investments (excluding equity investments). Additionally, the amended and restated loan and security agreement requires us to maintain certain levels on deposit with our commercial lender and certain quarterly operating levels and ratios.  At September 30, 2003 and December 31, 2002, $27.0 million and $25.0 million was outstanding under the line of credit, respectively.

 

As of September 30, 2003, the Company was not in compliance with the profitability and financial covenants of its commercial credit facilities.  Subsequently, the Company received a waiver from the bank regarding non-compliance.

 

As of September 30, 2003 and December 31, 2002, outstanding term debt borrowings were approximately $2.3 million and $2.9 million, respectively.  Borrowings bear interest at the bank’s prime rate (4.00% as of September 30, 2003 and December 31, 2002) and prime rate plus 1.25%. Principal and interest are due in monthly payments through maturity based on the terms of the facilities. Principal payments of $977,000 are due annually from 2000 through 2004, $611,000 due in 2005, and a final payment of $357,000 due in 2006.

 

Commitments totaling $21.0 million and $16.7 million in the form of standby letters of credit were issued on the Company’s behalf from financial institutions as of September 30, 2003 and December 31, 2002, respectively, in favor of the Company’s various landlords to secure obligations under the Company’s facility leases.

 

Note 4.   Commitments and Contingencies

 

On February 15, 2002, BroadVision and Hewlett-Packard signed an agreement that terminated Hewlett-Packard’s rights to resell BroadVision software effective February 15, 2002.  Under the terms of the termination agreement, the Company is required to pay back to Hewlett-Packard prepaid royalty payments of approximately $2.4 million that were received from Hewlett-Packard in prior periods. These amounts payable have been paid in full as of September 30, 2003.  In addition, in the event BroadVision becomes insolvent, files a petition for relief under the United States Bankruptcy Code, or materially breaches the agreement, Hewlett-Packard will have rights to a limited term license for BroadVision’s business-to-business customer portals software products and a limited use license for BroadVision’s One-to-One Enterprise software product.  Such license will be limited in term until such time as Hewlett-Packard has received monies for sale of the products up to a maximum of $12.0 million.

 

In November 2002, the FASB issued FASB Interpretation No. 45 (“FIN 45”), Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others—an interpretation of FASB Statements No. 5, 57 and 107 and rescission of FIN 34.  FIN 45 requires that disclosures be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued and clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee.  FIN 45 does not apply to certain guarantee contracts, such as residual value guarantees provided by lessees in capital leases, guarantees that are accounted for as derivatives, guarantees that represent contingent consideration in a business combination, guarantees issued between either parents and their subsidiaries or corporations under common control, a parent’s guarantee of a subsidiary’s debt to a third party, and a subsidiary’s guarantee of the debt owed to a third party by either its parent or another subsidiary of that parent.  This interpretation is effective on a prospective basis for guarantees issued or modified after December 31, 2002 and for financial statements of interim or annual periods ending after December 15, 2002.  This interpretation did not have a material impact on the Company’s financial position or results of operations.

 

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Warranties and Indemnification

 

The Company provides a warranty to its customers that its software will perform substantially in accordance with documentation typically for a period of 90 days following receipt of the software. The Company also indemnifies certain customers from third-party claims of intellectual property infringement relating to the use of its products.  Historically, costs related to these guarantees have not been significant and the Company is unable to estimate the maximum potential impact of these guarantees on its future results of operations.

 

The Company has agreements whereby it indemnifies its officers and directors for certain events or occurrences while the officer is, or was, serving in such capacity. The term of the indemnification period is for so long as such officer or director is subject to an indemnifiable event by reason of the fact that such person was serving 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 a director and officer insurance policy that limits its exposure and enables 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 insignificant. Accordingly, the Company has no liabilities recorded for these agreements as of either September 30, 2003 or December 31, 2002. The Company assesses the need for an indemnification reserve on a quarterly basis and there can be no guarantee that an indemnification reserve will not become necessary in the future.

 

Leases

 

The Company leases its headquarters facility and its other facilities under non-cancelable operating lease agreements expiring through the year 2013. Under the terms of the agreements, the Company is required to pay lease costs, property taxes, insurance and normal maintenance costs.

 

A summary of total future minimum lease payments as of September 30, 2003, under noncancelable operating lease agreements is as follows (in thousands):

 

Years Ending December 31,		Operating Leases
2003		$	5,767
2004		23,312
2005		23,579
2006		21,223
2007		18,695
2008 and thereafter		89,661
Total minimum lease payments		$	182,237

 

As of September 30, 2003, the Company has accrued $87.6 million of estimated future facilities costs as a restructuring accrual. See Note 6 below.

 

Equity Investment

 

In January 2000, the Company entered into a limited partnership agreement with a venture capital firm under which it is obligated to contribute capital based upon the periodic funding requirements.  The total capital commitment is $2.0 million, of which $900,000 has been contributed through September 30, 2003.  The remaining $1.1 million will be contributed in future periods based upon the capital requirements of the fund.

 

Standby Letter of Credit Commitments

 

As of September 30, 2003, the Company had $21.0 million of outstanding commitments in the form of standby letters of credit in favor of the Company’s various landlords to secure obligations under the Company’s facility leases.

 

Legal Proceedings

 

During the first quarter of 2003, the Company settled a dispute with Avalon Partners, Inc., doing business as Cresa Partners (“Cresa”) with respect to broker commissions related to the Company’s termination and restructuring of

 

15

 

certain facilities leases associated with the Company’s restructuring plans taken during the second quarter of 2002. Under the terms of the settlement, the Company made a one-time payment of $2.2 million to Cresa in April 2003.

 

During the third quarter of 2003, the Company reached a confidential settlement with Verity, Inc. (“Verity”) with respect to our outstanding litigation. The detailed terms and conditions of this settlement are confidential and cannot be disclosed without the consent of each party.  The settlement is not expected to have a material effect on the Company’s business, financial condition or results of operations.

 

The Company is also subject to various other claims and legal actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material effect on the Company’s business, financial condition or results of operations. Although management currently believes that the outcome of other outstanding legal proceedings, claims and litigation involving the Company will not have a material adverse effect on its business, results of operations or financial condition, litigation is inherently uncertain, and there can be no assurance that existing or future litigation will not have a material adverse effect on the Company’s business, results of operations or financial condition.

 

Note 5.   Geographic, Segment and Significant Customer Information

 

The Company operates in one segment, electronic business commerce solutions. The Company’s reportable segment includes the Company’s facilities in North and South America (“Americas”), Europe and Asia Pacific and the Middle East (“Asia/Pacific”). The Company’s chief operating decision maker is considered to be the Company’s Chief Executive Officer (“CEO”). The CEO reviews financial information presented on a consolidated basis accompanied by disaggregated information about revenues by geographic region and by product for purposes of making operating decisions and assessing financial performance.

 

The disaggregated revenue information reviewed by the CEO is as follows (unaudited, in thousands):

 

		Three months ended September 30,						Nine months ended September 30,
		2003			2002			2003			2002
Software licenses		$	5,076		$	10,756		$	19,875		$	29,244
Consulting services		4,692			7,092			17,038			28,532
Maintenance		8,801			9,391			27,916			29.337
Total revenues		$	18,569		$	27,239		$	64,829		$	87,113

 

The Company sells its products and provides services worldwide through a direct sales force and through a channel of independent distributors, VARs and ASPs. In addition, the licenses of the Company’s products are promoted through independent professional consulting organizations known as systems integrators. The Company provides services worldwide through its BroadVision Global Services Organization and indirectly through distributors, VARs, ASPs, and systems integrators.

 

Disaggregated financial information regarding the Company’s products and services and geographic revenues is as follows (in thousands):

 

		Three months ended September 30,						Nine months ended September 30,
		2003			2002			2003				2002
		(unaudited)			(unaudited)			(unaudited)				(unaudited)
Revenues:
Americas		$	9,073		$	16,319		$	32,750			$	53,373
Europe		7,997			9,005			25,966				28,846
Asia/Pacific		1,499			1,915			6,113				4,894
Total Company		$	18,569		$	27,239		$	64,829			$	87,113
								September 30, 2003				December 31, 2002
								(unaudited)
Long-Lived Assets:
Americas								$		74,841		$		84,727
Europe								604				1,175
Asia/Pacific								677				892
Total Company								$		76,122		$		86,794

 

16

 

During the three months and nine months ended September 30, 2003 and 2002, no single customer accounted for more than 10% of the Company’s revenues.

 

17

 

Note 6.   Restructuring Charges

 

The Company has approved restructuring plans to, among other things, reduce its workforce and consolidate facilities in an effort to respond to changing market conditions and to create a more efficient organization.  As a result, pre-tax restructuring charges of $4.5 million and $63.2 million were recorded during the three months ended September 30, 2003 and 2002, respectively, to provide for these actions and other related items. The Company recorded the low-end of a range of assumptions modeled for the restructuring charges, in accordance with SFAS No. 5, Accounting for Contingencies.  Adjustments to the restructuring accruals will be made in future periods, if necessary, based upon the then-current actual events, estimates and circumstances.

 

The following table summarizes the restructuring accrual activity recorded during the three months ended September 30, 2003 (unaudited, in thousands):

 

		Severance and Benefits			Facilities			Total
Accrual balances, June 30, 2003		$	1,041		$	89,216		$	90,257
Restructuring charges		1,478			3,031			4,509
Cash payments		(1,234		)	(4,672		)	(5,906		)
Accrual balances, September 30, 2003		$	1,285		$	87,575		$	88,860

 

The nature of the charges summarized above is as follows:

 

Severance and benefits – As of September 30, 2003, the Company has accrued $1.3 million of estimated severance and benefits costs as a restructuring accrual.  These costs represent severance, payroll taxes and COBRA benefits related to restructuring plans implemented prior to September 30, 2003.  The Company recorded a related charge of $1.5 million during the three months ended September 30, 2003.  This charge related to workforce reductions as a component of the Company’s restructuring plans executed during the quarter.  The Company estimates that the $1.3 million accrual will be paid in full by September 2004.

 

Facilities – As of September 30, 2003, the Company has accrued $87.6 million of estimated future facilities costs as a restructuring accrual.  Of this accrual, $68.6 million relates to future minimum lease payments, net of estimated sublease income and planned company occupancy, and the remaining $19.0 million relates to estimated allowances, fees and expenses.  The estimated sublease income netted against the restructuring accrual consists of the following (unaudited, in millions):

 

Sublease income to be received under non-cancelable sublease agreements signed prior to September 30, 2003		$	17.0
Estimated sublease income for sublease agreements yet to be negotiated		28.4
Total estimated sublease income		$	45.4

 

We expect to pay the following future minimum lease payment amounts, net of estimated sublease income, related to restructured or abandoned leased space and the related allowances, fees and expenses through October 2013 (in millions):

 

Years Ending December 31,
2003		$	4.7
2004		16.7
2005		15.6
2006		14.5
2007		5.9
2008 and thereafter		30.2
Total minimum lease payments		$	87.6

 

Of these amounts, $18.5 million is due within the twelve months ending September 30, 2004, and has been classified as a current liability in the accompanying condensed consolidated balance sheet.  Actual future cash requirements may differ materially from the accrual at September 30, 2003, particularly if actual sublease income is significantly different from prospective estimates.

 

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During the three months ended September 30, 2003, the Company recorded a facilities-related restructuring charge of $3.3 million. This charge primarily related to the Company’s revision of some of its estimates with respect to anticipated future subleases.  This revision was necessary due to a further decline in the market for commercial real estate.  The Company estimated future sublease timing and rates based upon current market indicators and information obtained from a third party real estate expert.

 

Note 7.   Goodwill and Other Intangible Assets

 

Goodwill and other intangibles consist of the following (in thousands):

 

		September 30, 2003			December 31, 2002
		(unaudited)
Goodwill		$	437,207		$	437,206
Less: Accumulated amortization		(380,773		)	(379,886		)
Goodwill, net		56,434			57,320
Other intangibles		22,732			22,732
Less: Accumulated amortization		(22,732		)	(22,732		)
Other intangibles, net		—			—
Goodwill and other intangibles, net		$	56,434		$	57,320

 

On January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Intangible Assets. Under SFAS No. 142, goodwill and intangible assets with indefinite lives are no longer subject to amortization but are tested for impairment at least annually using a fair value approach, and whenever there is an impairment indicator. Other intangible assets continue to be valued and amortized over their estimated lives.

 

Pursuant to SFAS No. 142, the Company is required to test its goodwill for impairment upon adoption and annually or more often if events or changes in circumstances indicate that the asset might be impaired. While there was no accounting charge to record upon adoption, at September 30, 2002, the Company concluded that, based on the existence of impairment indicators, including a decline in its market value, it would be required to test goodwill for impairment. SFAS No. 142 provides for a two-stage approach to determining whether and by how much goodwill has been impaired. Since the Company has only one reporting unit for purposes of applying SFAS No. 142, the first stage requires a comparison of the fair value of the Company to its net book value. If the fair value is greater, then no impairment is deemed to have occurred. If the fair value is less, then the second stage must be completed to determine the amount, if any, of actual impairment. The Company completed the first stage and has determined that its fair value at September 30, 2002 exceeded its net book value on that date, and as a result, no impairment of goodwill was recorded in the consolidated financial statements. The Company obtained an independent appraisal of fair value to support its conclusion. Additionally, the Company concluded that, based upon the market value of its stock in relation to the Company’s net book value at September 30, 2003 and December 31, 2002, there was no additional impairment of goodwill warranted.

 

The process of evaluating the potential impairment of goodwill is highly subjective and requires significant judgment. In estimating the fair value of the Company, the Company made estimates and judgments about future revenues and cash flows. The Company’s forecasts were based on assumptions that are consistent with the plans and estimates the Company is using to manage the business. Changes in these estimates could change the Company’s conclusion regarding impairment of goodwill and potentially result in a non-cash goodwill impairment charge for all or a portion of the goodwill balance at September 30, 2003.

 

Upon adoption of SFAS No. 142, on January 1, 2002, the Company no longer amortizes goodwill. Additionally, upon adoption of SFAS No. 141 and 142, the Company no longer amortizes its non-technology based intangible asset, or assembled workforce. The remaining other intangible assets have been fully amortized as of September 30, 2003.

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

This report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to the “safe harbor” created by those sections. These forward-looking statements are generally identified by words such as “expect,” “anticipate,” “intend,” “believe,” “hope,” “assume,” “estimate,” “plan,” “will” and other

 

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similar words and expressions. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in the forward-looking statements as a result of certain factors, including those described herein and in the Company’s Annual Report on Form 10-K and other documents filed with the Securities and Exchange Commission.  We undertake no obligation to publicly release any revisions to the forward-looking statements or to reflect events and circumstances after the date of this document.

 

Overview

 

BroadVision is a global provider of enterprise self-service web applications. Our integrated solutions for process, commerce, portal and content help our customers increase revenues and streamline costs.  As of September 30, 2003, BroadVision had approximately 1,000 customers and government entities around the globe using the Company’s applications to facilitate their portal-based commerce and information access initiatives.

 

BroadVision was founded in 1993 and has been a publicly traded corporation since 1996. BroadVision pioneered web-based e-commerce and was among the first to offer pre-integrated, packaged applications to power enterprise business portals.

 

BroadVision’s enterprise portal applications allow organizations to unify and extend their key business applications, information, and business processes by taking advantage of the power of the web and new wireless and mobile devices to allow customers, partners, and employees to do business on their own terms, in a personalized and collaborative way.  BroadVision solutions allow multiple constituents to serve themselves from anywhere, at anytime, through any web device.  BroadVision enterprise portal applications enable organizations to create business value by transforming the way they do business; moving business interactions and transactions from a manual, human-assisted paradigm to an automated, personalized self-service model that enhances growth, reduces costs and improves productivity.

 

The Company believes its products improve its customers’ revenue opportunities by enabling them to establish more effective and efficient one-to-one relationships with their customers and business partners. Web and wireless users are engaged by highly personalized real-time interactions, able to transact business securely and encouraged to remain online and make return visits.  The Company’s applications also improve the cost-effectiveness of one-to-one relationship management by enabling non-technical managers to modify business rules and content in real-time and by helping to reduce the cost of customer acquisition and retention, business development, technical support and employee workplace initiatives. Because the Company provides pre-integrated, packaged solutions, time to deployment is shorter and customers are able to manage and maintain their web and wireless applications in a cost-effective manner. Because of the Company’s commitment to open standards and open architecture, BroadVision applications integrate with its customers’ existing systems and expand as its customers’ needs and businesses grow.

 

Supporting this application infrastructure, as of September 30, 2003, are more than 100 partner firms around the world who are working to ensure the Company’s joint customers’ success through complementary technology, applications, tools and services offerings that extend and enhance BroadVision customers’ implementations.

 

BroadVision markets its products and services worldwide through a direct sales force and independent distributors, value-added resellers (“VARs”) and application service providers (“ASPs”). In addition, its sales are promoted through independent professional consulting organizations, known as systems integrators. The Company has operations in North America, Europe, and Asia/Pacific.

 

BroadVision Global Services (“BVGS”) organization provides a full spectrum of global services to help ensure success for businesses, including strategic services, implementation services, migration services and ongoing training and maintenance.

 

Recent Events

 

We have experienced a general downturn in the economy, our industry and our business since the beginning of 2001. This downturn is likely to continue in the future and has had and is likely to continue to have an impact on our financial results. As discussed in Note 6 of Notes to Condensed Consolidated Financial Statements, we have recorded significant restructuring charges in connection with our reduction in workforce and abandonment of certain operating facilities as part of our program to restructure our operations and related facilities initiated in the second quarter of fiscal 2001. Pre-tax charges of $4.5 million and $63.2 million were recorded during the three months ended September 30, 2003 and September 30, 2002, respectively, to provide for these actions and other related items. Costs for the abandoned facilities

 

20

 

were estimated to include the impairment of assets, remaining lease liabilities and brokerage fees, partially offset by estimated sublease income. Estimates related to sublease costs and income are based on assumptions regarding the period required to locate and contract with suitable sublessees and sublease rates based upon market trend information analyses. Adjustments to the restructuring accrual will be made in future periods, if necessary, based upon the then current actual events and circumstances.

 

During the second quarter of  2003, the Company settled a dispute with Avalon Partners, Inc., doing business as Cresa Partners (“Cresa”), with respect to broker commissions related to the Company’s termination and restructuring of certain facilities leases associated with the Company’s restructuring plans taken during the second quarter of 2002. Under the terms of the settlement the Company made a one-time payment of $2.2 million to Cresa in April 2003.

 

During the third quarter of 2003, the Company settled outstanding litigation which resulted in a charge of $4.3 million.  The settlement involved a third-quarter payment for past royalties and certain legal expenses and license fee that are due and payable in future quarters. These payments are not expected to have a material effect on the Company’s business, financial condition or results of operations.

 

We renewed and amended our revolving credit facility in June 2003. Borrowings under the revolving line of credit are collateralized by all of our assets and bear interest at the bank’s prime rate (floating with a floor of 4.25%). Interest is due monthly and principal is due at expiration in February 2004. The amended and restated loan and security agreement requires us to maintain certain levels in cash and cash equivalents, short-term investments and long-term investments (excluding equity investments). Additionally, the amended and restated loan and security agreement requires us to maintain certain levels on deposit with our commercial lender and certain quarterly operating levels and ratios.  As of September 30, 2003, the Company was not in compliance with the profitability and financial covenants of the commercial credit facilities.  Subsequently, the Company received a waiver from the bank regarding non-compliance.  At September 30, 2003 and December 31, 2002, $27.0 million and $25.0 million, respectively, was outstanding under the line of credit.

 

Critical Accounting Policies

 

This management’s discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America. In preparing these financial statements, we are required to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to doubtful accounts, product returns, investments, goodwill and intangible assets, income taxes and restructuring, as well as contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe are reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates using different assumptions or conditions. We believe the following critical accounting policies reflect the more significant judgments and estimates used in the preparation of our consolidated financial statements.

 

Revenue Recognition

 

Overview — Our revenue consists of fees for licenses of our software products, maintenance, consulting services and customer training. We generally charge fees for licenses of our software products either based on the number of persons registered to use the product or based on the number of Central Processing Units (“CPUs”) on which the product is installed. Our revenue recognition policies comply with the provisions of Statement of Position (“SOP”) No. 97-2, Software Revenue Recognition, as amended; SOP No. 98-9, Software Revenue Recognition, With Respect to Certain Transactions and the Securities and Exchange Commission’s Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements.

 

Software License Revenue — We license our products through our direct sales force and indirectly through resellers. In general, software license revenues are recognized when a non-cancelable license agreement has been signed under which the customer acknowledges an unconditional obligation to pay, the software product has been delivered, there are no uncertainties surrounding product acceptance, the fees are fixed and determinable and collection is considered probable. Delivery is considered to have occurred when title and risk of loss have been transferred to the customer, which generally occurs when media containing the licensed programs is provided to a common carrier. In the case of electronic delivery, delivery occurs when the customer is given access to the licensed programs. If collectibility is not considered probable, revenue is recognized when the fee is collected. Subscription-based license revenues are recognized ratably over the subscription period. We enter into reseller arrangements that typically provide for sublicense fees payable to us based upon a percentage of list price. We do not grant our resellers the right of return.

 

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We recognize revenue using the residual method pursuant to the requirements of SOP No. 97-2, as amended by SOP No. 98-9. Revenues recognized from multiple-element software arrangements are allocated to each element of the arrangement based on the fair values of the elements, such as licenses for software products, maintenance, consulting services or customer training. The determination of fair value is based on objective evidence, which is specific to us. We limit our assessment of objective evidence for each element to either the price charged when the same element is sold separately or the price established by management having the relevant authority to do so, for an element not yet sold separately. If evidence of fair value of all undelivered elements exists but evidence does not exist for one or more delivered elements, then revenue is recognized under the residual method. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue.

 

We record deferred revenue for software arrangements when cash has been received from the customer and the arrangement does not qualify for revenue recognition under our revenue recognition policy. We record accounts receivable for software arrangements when the arrangement qualifies for revenue recognition but cash or other consideration has not been received from the customer.

 

Services Revenue — Consulting services revenues and customer training revenues are recognized as such services are performed. Maintenance revenues, which include revenues bundled with software license agreements that entitle the customers to technical support and future unspecified enhancements to our products, are deferred and recognized ratably over the related agreement period, generally twelve months. Our professional services which consist of consulting, maintenance and training are delivered through BVGS. This group provides consulting services, manages projects and client relationships, manages the needs of our partner community, provides training-related services to employees, customers and partners, and also provides software maintenance services, including technical support, to our customers and partners. We record reimbursement by our customers for out-of-pocket expenses as a component of services revenue.  Services that we provide are not essential to the functionality of our software.

 

Allowances and Reserves

 

Occasionally, our customers experience financial difficulty after we record the revenue but before we are paid. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Our normal payment terms are 30 to 90 days from invoice date. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. We record reductions to revenue for estimated returns of products by our customers and related allowances. If market conditions were to decline, we may experience larger volumes of returns resulting in an incremental reduction of revenue at the time the return occurs.

 

Impairment Assessments

 

We adopted Statement of Financial Accounting Standard (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” on January 1, 2002. This standard requires that goodwill no longer be amortized, and instead, be tested for impairment on a periodic basis.

 

Pursuant to SFAS No. 142, we are required to test goodwill for impairment upon adoption and annually or more often if events or changes in circumstances indicate that the asset might be impaired. While there was no accounting charge to record upon adoption, at September 30, 2002, we concluded that, based on the existence of impairment indicators, including a decline in our market value, we would be required to test goodwill for impairment. SFAS No. 142 provides for a two-stage approach to determining whether and by how much goodwill has been impaired. Since we have only one reporting unit for purposes of applying SFAS No. 142, the first stage requires a comparison of the fair value of the Company to its net book value. If the fair value is greater, then no impairment is deemed to have occurred. If the fair value is less, then the second stage must be completed to determine the amount, if any, of actual impairment. We completed the first stage and determined that our fair value at September 30, 2002 exceeded our net book value on that date and, as a result, no impairment of goodwill was recorded in the consolidated financial statements. We obtained an independent appraisal of fair value to support our conclusion. We also determined that our fair value exceeded our net book value as of September 30, 2003 and December 31, 2002 and, therefore, no additional impairment was warranted.

 

The process of evaluating the potential impairment of goodwill is highly subjective and requires significant judgment. In estimating our fair value, we made estimates and judgments about future revenues and cash flows. Our forecasts were based on assumptions that are consistent with the plans and estimates we are using to manage our business. Changes in these estimates could change our conclusion regarding impairment of goodwill and potentially result in a non-cash goodwill

 

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impairment charge, for all or a portion of the goodwill balance at September 30, 2003. For long-lived assets, accounting standards dictate that assets become impaired when the undiscounted future cash flows expected to be generated by them are less than their carrying amounts. When that occurs, the affected assets are written down to their estimated fair value.

 

Deferred Tax Assets

 

We analyze our deferred tax assets with regard to potential realization. We have established a valuation allowance on our deferred tax assets to the extent that we determined that it is more likely than not that some portion or all of the deferred tax assets will not be realized based upon the uncertainty of their realization. We have considered estimated future taxable income and ongoing prudent and feasible tax planning strategies in assessing the amount of the valuation allowance. Based upon this analysis, we recorded a charge of $6.3 million as an additional valuation allowance for our deferred tax assets during the three months ended June 30, 2002.

 

Accounting for Stock-Based Compensation

 

We apply Accounting Principles Board (“APB”) Opinion Number 25, Accounting for Stock Issued to Employees, and related interpretations when accounting for our stock option and stock purchase plans. In accordance with APB No. 25, we apply the intrinsic value method in accounting for employee stock options. Accordingly, we generally recognize no compensation expense with respect to stock-based awards to employees.

 

During the nine months ended September 30, 2003, the Company recorded compensation expense of $279,000 as a result of granting a third-party consultant common stock in the Company and a vesting modification to a grant for a terminated employee. These charges were calculated based upon the market value of the underlying stock.  During the nine months ended September 30, 2002, the Company recorded compensation expense of $846,000 as a result of granting terminated employees continued vesting of their stock options for a period beyond their actual termination date. This compensation charge was calculated using the Black-Scholes model.

 

We have determined pro forma information regarding net loss and net loss per share as if we had accounted for employee stock options under the fair value method as required by SFAS Number 123, Accounting for Stock Compensation. The fair value of these stock-based awards to employees was estimated using the Black-Scholes option pricing model. Had compensation cost for the Company’s stock option plan and employee stock purchase plan been determined consistent with SFAS No. 123, the Company’s reported net loss and net loss per share would have been changed to the amounts indicated below (in thousands, except per share data):

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2003			2002			2003			2002
Net loss as reported		$	(10,265	)	$	(67,733	)	$	(16,523	)	$	(160,545	)
Add: Stock-based employee compensation expense included in reported net loss, net of related tax effects		231			77			279			846
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(2,734		)	(4,917		)	(6,739		)	(39,949		)
Pro forma net loss		$	(12,768	)	$	(72,573	)	$	(22,983	)	$	(199,648	)
Loss per share:
Basic—as reported		$	(0.31	)	$	(2.11	)	$	(0.51	)	$	(5.02	)
Basic—pro forma		$	(0.39	)	$	(2.26	)	$	(0.70	)	$	(6.25	)
Diluted—as reported		$	(0.31	)	$	(2.11	)	$	(0.51	)	$	(5.02	)
Diluted—pro forma		$	(0.39	)	$	(2.26	)	$	(0.70	)	$	(6.25	)

 

Restructuring

 

The Company has approved certain restructuring plans to, among other things, reduce its workforce and consolidate facilities. These restructuring charges were taken to align the Company’s cost structure with changing market conditions and to create a more efficient organization. The Company’s restructuring charges are comprised primarily of: (i) severance and

 

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benefits termination costs related to the reduction of the Company’s workforce; (ii) lease termination costs and/or costs associated with permanently vacating its facilities; (iii) other incremental costs incurred as a direct result of the restructuring plan; and (iv) impairment costs related to certain long-lived assets abandoned. The Company accounts for each of these costs in accordance with SEC Staff Accounting Bulletin No. 100, Restructuring and Impairment Charges.

 

The Company accounts for severance and benefits termination costs in accordance with EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring) for exit or disposal activities initiated prior to December 31, 2002. Accordingly, the Company records the liability related to these termination costs when the following conditions have been met: (i) management with the appropriate level of authority approves a termination plan that commits the Company to such plan and establishes the benefits the employees will receive upon termination; (ii) the benefit arrangement is communicated to the employees in sufficient detail to enable the employees to determine the termination benefits; (iii) the plan specifically identifies the number of employees to be terminated, their locations and their job classifications; and (iv) the period of time to implement the plan does not indicate changes to the plan are likely. The termination costs recorded by the Company are not associated with nor do they benefit continuing activities.  The Company accounts for severance and benefits termination costs for exit or disposal activities initiated after December 31, 2002 in accordance with SFAS No. 146, Accounting for Costs Associated with Exit Activities.  SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred.  This differs from EITF 94-3, which required that a liability for an exit cost be recognized at the date of an entity’s commitment to an exit plan.

 

Prior to the adoption on January 1, 2003 of SFAS No. 146, the Company accounted for the costs associated with lease termination and/or abandonment in accordance with EITF 88-10, Costs Associated with Lease Modification or Termination. Accordingly, the Company recorded the costs associated with lease termination and/or abandonment when the leased property has no substantive future use or benefit to the Company.

 

Inherent in the estimation of the costs related to the Company’s restructuring efforts are assessments related to the most likely expected outcome of the significant actions to accomplish the restructuring. In determining the charges related to the restructuring, the majority of estimates made by management related to charges for excess facilities. In determining the charge for excess facilities, the Company was required to estimate future sublease income, future net operating expenses of the facilities, and brokerage commissions, among other expenses. The most significant of these estimates related to the timing and extent of future sublease income in which to reduce the Company’s lease obligations. Specifically, in determining the restructuring obligations related to facilities as of September 30, 2003, the Company reduced its lease obligations by estimated sublease income of $45.4 million. The Company based its estimates of sublease income, in part, on the opinions of independent real estate experts, current market conditions and rental rates, an assessment of the time period over which reasonable estimates could be made, the status of negotiations with potential subtenants, and the location of the respective facility, among other factors.

 

These estimates, along with other estimates made by management in connection with the restructuring, may vary significantly depending, in part, on factors that may be beyond the Company’s control. Specifically, these estimates will depend on the Company’s success in negotiating with lessors, the time periods required to locate and contract suitable subleases and the market rates at the time of such subleases. Adjustments to the facilities reserve will be required if actual lease exit costs or sublease income differ from amounts currently expected. The Company will review the status of restructuring activities on a quarterly basis and, if appropriate, record changes to its restructuring obligations in current operations based on management’s most current estimates.

 

The following table summarizes the restructuring accrual activity recorded during the three months ended September 30, 2003 (in thousands):

 

		Severance and Benefits			Facilities			Total
Accrual balances, June 30, 2003		$	1,041		$	89,216		$	90,257
Restructuring charges		1,478			3,031			4,509
Cash payments		(1,234		)	(4,672		)	(5,906		)
Accrual balances, September 30, 2003		$	1,285		$	87,575		$	88,860

 

The nature of the charges summarized above is as follows:

 

Severance and benefits – As of September 30, 2003, the Company has accrued $1.3 million of estimated severance and benefits costs as a restructuring accrual.  These costs represent severance, payroll taxes and COBRA benefits related to

 

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restructuring plans implemented prior to September 30, 2003.  The Company recorded a related charge of $1.5 million during the three months ended September 30, 2003.  This charge related to workforce reductions as a component of the Company’s restructuring plans executed during the quarter.  The Company estimates that the $1.3 million accrual will be paid in full by September 2004.

 

Facilities – As of September 30, 2003, the Company has accrued $87.6 million of estimated future facilities costs as a restructuring accrual.  Of this accrual, $68.6 million relates to future minimum lease payments, net of estimated sublease income and planned company occupancy, and the remaining $19.0 million relates to estimated allowances, fees and expenses.  The estimated sublease income netted against the restructuring accrual consists of the following (in millions):

 

Sublease income to be received under non-cancelable sublease agreements signed prior to September 30, 2003		$	17.0
Estimated sublease income for sublease agreements yet to be negotiated		28.4
Total estimated sublease income		$	45.4

 

We expect to pay the following future minimum lease payment amounts related to restructured or abandoned leased space through October 2013 (in millions):

 

Years Ending December 31,
2003		$	4.7
2004		16.7
2005		15.6
2006		14.5
2007		5.9
2008 and thereafter		30.2
Total minimum lease payments		$	87.6

 

Of these amounts, $18.5 million is due within the twelve months ending September 30, 2004, and has been classified as a current liability in the accompanying condensed consolidated balance sheet.  Actual future cash requirements may differ materially from the accrual at September 30, 2003, particularly if actual sublease income is significantly different from prospective estimates.

 

During the three months ended September 30, 2003, the Company recorded a facilities-related restructuring charge of $3.3 million.  This charge primarily related to the Company’s revision of some of its estimates with respect to anticipated future subleases.  This revision was necessary due to a further decline in the market for commercial real estate.  The Company estimated future sublease timing and rates based upon current market indicators and information obtained from a third party real estate expert.

 

Legal Matters

 

The Company’s current estimated range of liability related to pending litigation is based on claims for which it is probable that a liability has been incurred and the Company can estimate the amount and range of loss. The Company has recorded the minimum estimated liability related to those claims, where there is a range of loss. Because of the uncertainties related to both the determination of the probability of an unfavorable outcome and the amount and range of loss in the event of an unfavorable outcome, the Company is unable to make a reasonable estimate of the liability that could result from the remaining pending litigation. As additional information becomes available, the Company will assess the potential liability related to its pending litigation and revise its estimates, if necessary. Such revisions in the Company’s estimates of the potential liability could materially impact the Company’s results of operations and financial position.

 

Results of Operations

 

Three and nine months ended September 30, 2003 and 2002

 

Revenues

 

Total revenues decreased 32% during the quarter ended September 30, 2003 to $18.6 million as compared to $27.2 million for the quarter ended September 30, 2002.   A summary of our revenues by geographic region is as follows (dollars in thousands, unaudited):

 

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		Software Licenses			%		Services			%		Total			%
Three Months Ended:
September 30, 2003
Americas		$	2,058		41	%	$	7,015		52	%	$	9,073		49	%
Europe		2,404			47		5,593			41		7,997			43
Asia Pacific		614			12		885			7		1,499			8
Total		$	5,076		100	%	$	13,493		100	%	$	18,569		100	%
September 30, 2002
Americas		$	6,511		61	%	$	9,808		60	%	$	16,319		60	%
Europe		3,508			32		5,497			33		9,005			33
Asia Pacific		737			7		1,178			7		1,915			7
Total		$	10,756		100	%	$	16,483		100	%	$	27,239		100	%
Nine Months Ended:
September 30, 2003
Americas		$	8,879		45	%	$	23,871		53	%	$	32,750		51	%
Europe		7,492			38		18,474			41		25,966			40
Asia Pacific		3,504			17		2,609			6		6,113			9
Total		$	19,875		100	%	$	44,954		100	%	$	64,829		100	%
September 30, 2002
Americas		$	16,855		58	%	$	36,518		63	%	$	53,373		61	%
Europe		11,087			38		17,759			31		28,846			33
Asia Pacific		1,302			4		3,592			6		4,894			6
Total		$	29,244		100	%	$	57,869		100	%	$	87,113		100	%

 

The Company operates in a competitive industry.  There have been declines in both the technology industry and in general economic conditions since the beginning of 2001.  These declines may continue.  Financial comparisons discussed herein may not be indicative of future performance.

 

Software license revenues decreased 53% during the quarter ended September 30, 2003 to $5.1 million as compared to $10.8 million for the quarter ended September 30, 2002. Software license revenue decreased 32% during the nine months ended September 30, 2003 to $19.9 million as compared to $29.2 million for the nine months ended September 30, 2002. These decreases are largely attributable to declines in spending in the information technology market due to economic and geopolitical uncertainties. As a result, the Company has experienced a decline in license transactions and related revenue from new customers, while the proportion of revenue from existing customers has increased.

 

Services revenues decreased 18% during the quarter ended September 30, 2003 to $13.5 million as compared to $16.5 million for the quarter ended September 30, 2002.  Services revenue decreased 22% during the nine months ended September 30, 2003 to $45.0 million as compared to $57.9 million for the nine months ended September 30, 2002. These declines were almost entirely due to decreases in consulting services revenue.  Consulting services revenues decreased 34% for the three months ended September 30, 2003 to $4.7 million as compared to $7.1 million for the three months ended September 30, 2002, and 40% during the nine months ended September 30, 2003 to $17.0 million as compared to $28.5 million for the nine months ended September 30, 2002. These decreases are a result of a corresponding decline in license revenues and of economic and geopolitical uncertainties.

 

Cost of Revenues

 

Cost of license revenues include the costs of product media, duplication, packaging and other manufacturing costs, as well as royalties payable to third parties for software that is either embedded in, or bundled and licensed with, our products.

 

Cost of services consists primarily of employee-related costs, third-party consultant fees incurred on consulting projects, post-contract customer support and instructional training services.

 

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A summary of the cost of revenues for the periods presented is as follows, (in thousands):

 

		Three Months Ended September 30,										Nine Months Ended September 30,
		2003			%		2002			%		2003			%		2002			%
Cost of software licenses (1)		$	666		13	%	$	1,414		13	%	$	1,549		8	%	$	3,417		12	%
Cost of services (2)		5,915			44		8,751			53		19,650			44		31,507			54
Total cost of revenues (3)		$	6,581		35	%	$	10,165		37	%	$	21,199		33	%	$	34,924		40	%

 

(1)           Percentages are calculated based on total software license revenues for the period indicated

(2)           Percentages are calculated based on total services revenues for the period indicated

(3)           Percentages are calculated based on total revenues for the period indicated

 

Cost of software licenses decreased 53% in absolute dollar terms during the quarter ended September 30, 2003 to $666,000 as compared to $1.4 million for the quarter ended September 30, 2002.  The cost of software licenses decreased 55% in absolute dollar terms during the nine months ended September 30, 2003 to $1.5 million as compared to $3.4 million for the nine months ended September 30, 2002. These decreases were principally a result of lower software license revenue, including revenue generated from the Company’s products that embed or include third-party products.

 

Cost of services decreased 32% in absolute dollar terms during the quarter ended September 30, 2003 to $5.9 million as compared to $8.8 million for the quarter ended September 30, 2002. The cost of services decreased 38% in absolute dollar terms during the nine months ended September 30, 2003 to $19.7 million as compared to $31.5 million for the nine months ended September 30, 2002.  These decreases were the result of reductions in force that occurred primarily throughout the first three quarters of 2002, resulting in decreased salary and related expenses, in addition to a decrease in the use of third party consultants.  The declines in cost of services as a percentage of services revenue for the three and nine month periods were principally due to improved operating efficiencies.  Also contributing to the nine-month decline was an aggregate $1.4 million credit related to telecommunications costs renegotiated and recorded during the three months ended March 31, 2003, of which $473,000 was recorded in cost of services.

 

Operating Expenses and Other Income, net

 

Research and development expenses consist primarily of salaries, employee-related benefit costs and consulting fees incurred in association with the development of our products. Costs incurred for the research and development of new software products are expensed as incurred until technological feasibility, in the form of a working model, is established, at which time such costs are capitalized and recorded at the lower of unamortized cost or net realizable value. The costs incurred subsequent to the establishment of a working model but prior to general release of the product have not been significant. To date, we have not capitalized any costs related to the development of software for external use.

 

Sales and marketing expenses consist primarily of salaries, employee-related benefit costs, commissions and other incentive compensation, travel and entertainment and marketing program-related expenditures, such as collateral materials, trade shows, public relations, advertising and creative services.

 

General and administrative expenses consist primarily of salaries, employee-related benefit costs, provisions and credits related to uncollectible accounts receivable and professional service fees.

 

Operating expenses consisted of the following: (in thousands)

 

		Three Months Ended September 30,										Nine Months Ended September 30,
		2003			% (1)		2002			% (1)		2003			% (1)		2002			% (1)
Research and development		$	4,467		24	%	$	7,774		29	%	$	16,681		26	%	$	34,755		40	%
Sales and marketing		6,710			36		9,384			34		19,585			30		41,365			47
General and administrative		2,885			16		2,573			9		7,586			12		13,775			16
Litigation settlement costs		4,250			23		—			—		4,250			7		—			—
Goodwill and intangible amortization		—			—		887			3		887			1		2,661			3
Restructuring charge		4,509			24		63,205			233		13,361			21		103,150			118
Impairment of assets		—			—		853			3		—			—		3,129			4
Total operating expenses		$	22,821		123	%	$	84,676		311	%	$	62,350		96	%	$	198,835		228	%

 

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(1)           Expressed as a percent of total revenues for the period indicated

 

Research and development expenses decreased 43% during the quarter ended September 30, 2003 to $4.5 million as compared to $7.8 million for the quarter ended September 30, 2002.  Research and development expenses decreased  52% during the nine months ended September 30, 2003 to $16.7 million as compared to $34.8 million for the nine months ended September 30, 2002.  The decreases in research and development expenses were primarily attributable to compensation reductions through reductions in force as well as other cost-cutting efforts put in place, including reductions in facilities and communications costs. The Company recorded a one-time credit of $0.9 million in the quarter ended September 30, 2003, related to funding recognized under a third-party development arrangement.

 

Sales and marketing expenses decreased 28% during the quarter ended September 30, 2003 to $6.7 million as compared to $9.4 million for the quarter ended September 30, 2002.  Sales and marketing expenses decreased 53% during the nine months ended September 30, 2003 to $19.6 million as compared to $41.4 million for the nine months ended September 30, 2002.  The decreases were primarily due to decreased salary expense as a result of reductions in force, decreased variable compensation due to lower revenues, and decreased facility, travel and marketing program costs as a result of various cost-cutting actions.

 

General and administrative expenses increased 12% during the quarter ended September 30, 2003 to $2.9 million as compared to $2.6 million for the quarter ended September 30, 2002.  General and administrative expenses decreased 45% during the nine months ended September 30, 2003 to $7.6 million as compared to $13.8 million for the nine months ended September 30, 2002.  The increase for the three-month period was primarily due to increased legal costs related to the pending litigation. The decrease for the nine-month period was primarily attributable to decreases in salary expense as a result of reductions in force, reserves of accounts receivable, and facilities and professional services expenses as a result of cost cutting measures.  Also contributing to the nine-month decline was a non-recurring compensation-related credit of $0.4 million recorded in the quarter ended June 30, 2003.

 

Amortization of goodwill and other intangibles. As described in Note 7 in the Notes to the Condensed Consolidated Financial Statements, we no longer amortize goodwill or the assembled workforce as we have identified the assembled workforce as an intangible asset which does not meet the criteria of recognizable intangible asset as defined by SFAS No. 142.  The remaining other intangible assets have been fully amortized as of September 30, 2003.  We periodically assess goodwill and other intangibles for impairment as discussed in Note 7 of Notes to the Condensed Consolidated Financial Statements.  The remaining intangible assets that are being amortized are a result of the acquisition of Interleaf, Inc. that was completed in April of 2000.  We accounted for the acquisition as a purchase business combination.  It is possible that we may continue to expand our business through acquisitions and internal development.  Any additional acquisitions or impairment of goodwill and other purchased intangibles could result in additional merger and acquisition related expenses.

 

Restructuring charges.  The Company has approved restructuring plans to, among other things, reduce its workforce and consolidate facilities in an effort to respond to changing market conditions and to create a more efficient organization.  As a result, pre-tax restructuring charges of $4.5 million and $63.2 million were recorded during the three months ended September 30, 2003 and 2002, respectively, to provide for (i) severance and benefits termination costs related to the reduction of the Company’s workforce; (ii) lease termination costs and/or costs associated with permanently vacating its facilities; (iii) other incremental costs incurred as a direct result of the restructuring plan; and (iv) impairment costs related to certain long-lived assets abandoned. The Company recorded the low-end of a range of assumptions modeled for the restructuring charges, in accordance with SFAS No. 5, Accounting for Contingencies.  Adjustments to the restructuring accruals will be made in future periods, if necessary, based upon the then-current actual events, estimates and circumstances. See Note 6 of the accompanying Notes to Condensed Consolidated Financial Statements.

 

Restructuring charges consisted of the following (in thousands):

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2003			2002			2003			2002
Facilities		$	3,269		$	60,465		$	11,887		$	95,040
Severance and other		1,240			2,740			1,474			8,110
Total		$	4,509		$	63,205		$	13,361		$	103,150

 

28

 

The restructuring accrual at September 30, 2003, included in the accompanying Condensed Consolidated Financial Statements was approximately $88.9 million.  Of this, $87.6 million related to facilities and $1.3 million related to severance and other.  The severance and other accrual is expected to be paid in full by September 30, 2004.  The facilities accrual is expected to be paid as follows (in millions):

 

Years Ending December 31,
2003		$	4.7
2004		16.7
2005		15.6
2006		14.5
2007		5.9
2008 and thereafter		30.2
Total minimum lease payments		$	87.6

 

Actual future cash requirements may differ materially from the accrual at September 30, 2003, particularly if actual sublease income is significantly different from historical estimates.  Adjustments to the restructuring accruals will be made in future periods, if necessary, based upon the then current actual events and circumstances.

 

Litigation Settlement Charges.  During the third quarter of 2003, the Company settled outstanding litigation which resulted in a charge of $4.3 million.  The settlement involved a third-quarter payment for past royalties and certain legal expenses and license fee payments that are due and payable in future quarters. These payments are not expected to have a material effect on the Company’s business, financial condition or results of operations.

 

Interest and other income (expense), net, for the three months ended September 30, 2003 was income of $655,000 as compared to income of $7,000 in 2002.  Interest and other income (expense), net for the nine months ended September 30, 2003 was income of $2.5 million as compared to expense of $6.7 million in 2002. For the three months ended September 30, 2003, there was $1.0 million of other income from the sale of common stock offset by a loss in currency fluctuations and other miscellaneous expenses. Interest income has declined year-over-year due to lower cash balances.  Other expense in 2002 included a realized loss on cost method investments of $8.5 million that did not recur in 2003.

 

Impairment of assets —During the first quarter of 2002, we engaged a third party firm to conduct a physical inventory of our computer hardware assets located in North America. We conducted an internal physical inventory on computer hardware assets located outside of North America. The objective of the physical inventory was to verify the amount and location of our computer hardware. As a result of the findings of the physical inventory and related reconciliation with our asset records, we recorded an asset impairment charge of approximately $2.3 million net book value related to computer hardware during the first quarter of fiscal 2002.  During the third quarter of 2002, we conducted an additional review of remaining computer and communication related assets not reviewed during the first quarter inventory and recorded an asset impairment charge of $853,000 as a result of the findings of our inventory and related reconciliation with our asset records.

 

Income Taxes

 

During the quarter ended September 30, 2003, we recognized tax expense of $87,000.   The tax expense mainly relates to income taxes in foreign jurisdictions that are not available to credit against US income taxes.

 

Liquidity and Capital Resources

 

		September 30, 2003			December 31, 2002
Cash, cash equivalents and liquid short-term investments		$	81,674		$	101,870
Long-term liquid investments		$	—		$	587
Restricted cash and investments		$	20,958		$	16,704
Working capital		$	(1,044	)	$	5,616
Working capital ratio		1.0			1.0

 

29

 

As of September 30, 2003, cash, cash equivalents, liquid short-term investments, liquid long-term investments and restricted cash and investments totaled $102.6 million, which represents a decrease of $16.6 million as compared to a balance of $119.2 million on December 31, 2002. This decrease was attributable to net cash used for operations, partially offset by a $2 million increase in bank borrowings. We have a credit facility with Silicon Valley Bank that includes term loans in the form of promissory notes and a revolving line of credit (the “SVB Facilities”) for up to $29.3 million as of September 30, 2003. Under the revolving line of credit portion of the SVB Facilities, amounts borrowed bear interest at the bank’s prime rate with a floor minimum rate of 4.25% and interest is due monthly, with the principal due in February 2004. The amended and restated loan and security agreement requires us to maintain certain levels in cash and cash equivalents, short-term investments and long-term investments (excluding equity investments). Additionally, the amended and restated loan and security agreement requires us to maintain certain levels on deposit with our commercial lender and certain quarterly net income (loss) levels.  At September 30, 2003 and December 31, 2002, $27.0 million and $25.0 million were outstanding under the SVB Facilities, respectively.

 

As of September 30, 2003, the Company was not in compliance with the profitability and financial covenants of the SVB Facilities.  Subsequently, the Company received a waiver from the bank regarding non-compliance.

 

Under the term loan portion of the SVB Facilities, we have two outstanding loans and the total outstanding amounts of these loans were $2.3 million as of September 30, 2003 and $2.9 million as of December 31, 2002. Interest on these term loans are at the bank’s prime rate (4.00% as of September 30, 2003 and December 31, 2002) and prime rate plus 1.25%.  Principal and interest are due in consecutive monthly payments through maturity of these term loans in March 31, 2005 and September 30, 2006, respectively. Principal payments of $977,000 are due annually from 2000 through 2004, $611,000 is due in 2005, and a final payment of $357,000 is due in 2006.

 

Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. We had no derivative financial instruments as of September 30, 2003 and December 31, 2002. We place our investments in instruments that meet high credit quality standards and the amount of credit exposure to any one issue, issuer and type of instrument is limited.  Our interest rate risk related to borrowings historically has been minimal as interest expense related to borrowings has been immaterial for the three months ended September 30, 2003 and 2002.

 

As of September 30, 2003 and December 31, 2002, commitments totaling $21.0 million and $16.7 million, respectively, in the form of standby letters of credit were issued and outstanding from financial institutions in favor of our various landlords to secure obligations under our facility leases. These letters of credit are collateralized by a security agreement, under which we are required to maintain an equal amount of cash in a restricted specified interest bearing account.  Accordingly, $21.0 million and $16.7 million have been presented as restricted cash in the accompanying condensed consolidated balance sheets at September 30, 2003 and December 31, 2002, respectively.

 

Cash Provided Used For Operating Activities

 

Cash used for operating activities was $18.8 million and $90.5 million for the nine months ended September 30, 2003 and 2002, respectively. The primary reason for the net cash used by operating activities for the nine months ended September 30, 2003 is due to the net loss of $16.5 million, a decrease in accounts payable and accrued expenses ($3.7 million), a decrease in accrued restructuring expenses ($10.4 million) and a decrease in unearned revenue and deferred maintenance ($14.9 million).   Offsetting these uses of cash was $11.0 million of net non-cash items, such as depreciation expense, amortization of prepaid royalties, and amortization of intangibles, a decrease in accounts receivable ($12.2 million) and a decrease in prepaids and other ($3.1 million).  The primary reason for the cash used for operating activities for the nine months ended September 30, 2002 was due to the net loss of $160.5 million, adjusted by approximately $59.1 million for certain non-cash items such as depreciation expense, amortization of intangibles, impairment of assets, non-cash restructuring charge, realized losses on cash investments and provision for deferred tax asset valuation.  Also contributing to the cash decline was a decrease in accounts payable and accrued expenses of $6.9 million, a decrease in unearned revenues and deferred maintenance of $13.7 million, partially offset by decreases in accounts receivable of $21.3 million and in prepaids and other of $3.2 million, and an increase in accrued restructuring expenses of $7.6 million.

 

Cash Provided By Investing Activities

 

Cash provided by investing activities was $19.8 million for the nine months ended September 30, 2003 and was primarily due to net sales/maturities of investments of $26.8 million. Cash provided by investing activities was $70.7 million for the nine months ended September 30, 2002, and was primarily due to net sales/maturities of investments of $60.6 million and $13.3 million released from restricted cash and investments.

 

30

 

Cash Provided By Financing Activities

 

Cash provided by financing activities was $2.2 million for the nine months ended September 30, 2003, consisting of $1.2 million in proceeds from the issuance of common stock and $1.0 million from proceeds from borrowings, net of repayments.  Cash provided by financing activities was $27.1 million for the nine months ended September 30, 2002, consisting of $2.8 million on net proceeds from the issuance of common stock and $25.0 million in proceeds from borrowings less $732,000 of repayments on borrowings.

 

Capital expenditures were $131,000 and $1.1 million during the nine months ended September 30, 2003 and 2002, respectively.  Our capital expenditures consisted of purchases of operating resources to manage our operations and consisted primarily of computer hardware and software.

 

On May 9, 2002, the Company and Pacific Shores Development (“PacShores”) entered into (i) the Buildings 4 and 5 Termination Agreement and (ii) the Building 6 Amendment. Under the Buildings 4 and 5 Termination Agreement, the Triple Net Building Lease dated April 12, 2000 between PacShores, as Lessor, and the Company, as Lessee, for Premises at Pacific Shores Center, Building 4, Redwood City, California and the Triple Net Building Lease dated February 16, 2000 between PacShores, as Lessor, and the Company, as Lessee, for Premises at Pacific Shores Center, Building 5, Redwood City, California, were terminated. In conjunction with the termination, PacShores released all security deposits held by it relating to those premises in exchange for our payment to PacShores a total of $45.0 million as the termination fee. Under the Building 6 Amendment, the parties released each other from all claims and we agreed to provide an additional $3.5 million as security deposit in the form of letters of credit. This letter of credit is included as restricted cash in our Condensed Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002. We paid the termination fee in full during the second quarter of 2002 by payment of approximately $20.0 million from existing cash and investments and by drawing down approximately $25.0 million from our line of credit. The $25.0 million line of credit, was amended during the second quarter of 2003 to increase the facility by $2.0 million to $27.0 million, and is due in February 2004.

 

We expect to incur significant operating expenses for the foreseeable future in order to execute our business plan. A summary of total future minimum lease payments as of September 30, 2003, under noncancelable operating lease agreements, together with amounts included in restructuring reserves is as follows (in thousands):

 

Years Ended December 31,		Operating Leases
2003		$	5,767
2004		23,312
2005		23,579
2006		21,223
2007		18,695
2008 and thereafter		89,661
Total minimum lease payments		$	182,237

 

As of September 30, 2003, the Company has accrued $87.6 million of estimated future facilities costs as a restructuring accrual. See Note 6 in the Notes to Condensed Consolidated Financial Statements.

 

The following table summarizes our letters of credit and the effect such letters of credit could have on our liquidity and cash flows in future periods if the letters of credit were drawn upon (in thousands):

 

Less than 1 year		$	3,956
1-3 years		676
4-5 years		1,922
Over 5 years		14,404
Total		$	20,958

 

Restricted cash and investments represent collateral for these letters of credit.

 

Our net cash flows will depend heavily on the level of future revenues, our ability to restructure operations successfully and our ability to manage infrastructure costs.

 

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We currently expect to fund our short-term working capital and operating resource expenditure requirements, for at least the next twelve months, from our existing cash and cash equivalents and short-term investment resources, our anticipated cash flows from operations and anticipated cash flows from subleases. However, we could experience unforeseen circumstances, such as a worsening economic downturn, lease settlements and less than anticipated cash inflows from operations, invested assets, and subleases that may increase our use of available cash or need to obtain additional financing. Also, we may find it necessary to obtain additional equity or debt financing in order to support more rapid expansion, develop new or enhanced services, respond to competitive pressures, acquire complementary businesses or technologies or respond to unanticipated requirements.

 

We may seek to raise additional funds through private or public sales of securities, strategic relationships, bank debt, financing under leasing arrangements or otherwise. If additional funds are raised through the issuance of equity securities, the percentage ownership of our stockholders will be reduced, stockholders may experience additional dilution or such equity securities may have rights, preferences or privileges senior to those of the holders of our common stock. There can be no assurance that additional financing will be available on acceptable terms, if at all. If adequate funds are not available or are not available on acceptable terms, we may be unable to develop our products, take advantage of future opportunities or respond to competitive pressures or unanticipated requirements, which could have a material adverse effect on our business, financial condition and future operating results.

 

Factors That May Affect Future Operating Results

 

We may experience significant fluctuations in quarterly operating results that may be caused by many factors including, but not limited to, those discussed below and herein, as set out in Items 7 and 7A in our annual report on Form 10-K for the year ended December 31, 2002 and elsewhere therein and as disclosed in other documents filed with the Securities and Exchange Commission.

 

Significant fluctuations in future quarterly operating results may be caused by many factors including, among others, the timing of introductions or enhancements of products and services by us or our competitors, market acceptance of new products, the mix of our products sold, changes in pricing policies by us or our competitors, our ability to retain customers, changes in our sales incentive plans, budgeting cycles of our customers, customer order deferrals in anticipation of new products or enhancements by us or our competitors, nonrenewal of maintenance agreements (which generally automatically renew for one year terms unless earlier terminated by either party upon 90-days notice), product life cycles, changes in strategy, seasonal trends, the mix of distribution channels through which our products are sold, the mix of international and domestic sales, the rate at which new sales people become productive, changes in the level of operating expenses to support projected growth and general economic conditions. We anticipate that a significant portion of our revenues will be derived from a limited number of orders, and the timing of receipt and fulfillment of any such orders is expected to cause material fluctuations in our operating results, particularly on a quarterly basis. Due to the foregoing factors, quarterly revenues and operating results are difficult to forecast, and we believe that period-to-period comparisons of our operating results will not necessarily be meaningful and should not be relied upon as any indication of future performance. It is likely that our future quarterly operating results from time to time will not meet the expectations of market analysts or investors, which may have an adverse effect on the price of our common stock.

 

We are continuing efforts to reduce and control our expense structure. We believe strict cost containment and expense reductions are essential to achieving positive cash flow and profitability. A number of factors could preclude us from successfully bringing costs and expenses in line with our revenues, including unplanned uses of cash, the inability to accurately forecast business activities and further deterioration of our revenues. If we are not able to effectively reduce our costs and achieve an expense structure commensurate with our business activities and revenues, we may have inadequate levels of cash for operations or for capital requirements, which could significantly harm our ability to operate our business.

 

We renewed and amended the SVB Facility during the second quarter of fiscal 2003. The SVB Facility is secured by substantially all of our owned assets.  The primary financial covenant under the SVB Facility obligates us to maintain certain levels of available cash, cash equivalents, short-term investments and long-term investments (excluding equity investments). Falling below such levels would be an event of default for which Silicon Valley Bank may, among other things, accelerate the payment of the facility.  As of September 30, 2003, the Company was not in compliance with the profitability and financial covenants of the commercial credit facilities.  Subsequently, the Company received a waiver from the bank regarding non-compliance.  While we plan to adhere to the financial covenants of the SVB Facility and avoid an event of default in future periods, in the event that we are unable to avoid another event of default, it may be necessary or advisable to retire and terminate the SVB Facility and pay off all remaining balances borrowed. Such a payoff would further limit our available cash and cash equivalents.

 

32

 

Our success depends largely on the skills, experience and performance of key personnel. If we lose one or more key personnel, our business could be harmed. Our future success depends on our ability to continue attracting and retaining highly skilled personnel. We may not be successful in attracting, assimilating and retaining qualified personnel in the future. Furthermore, the significant downturn in our business environment had a negative impact on our operations. We are currently restructuring our operations and have taken actions to reduce our workforce and implement other cost containment activities. These actions could lead to disruptions in our business, reduced employee morale and productivity, increased attrition and problems with retaining existing employees and recruiting future employees and increased financial costs.

 

We effected a one-for-nine reverse stock split in July 2002.  Prior to the effective time of the reverse stock split, our common stock was trading below $1.00 per share.  The Nasdaq National Market has a $1.00 per share minimum bid requirement, pursuant to which our common stock could be de-listed from Nasdaq if it trades below $1.00 for thirty consecutive trading days and does not subsequently trade above $1.00 for 10 consecutive days.  There can be no assurance that our trading price will remain above the $1.00 per share requirement for the necessary time period mandated by Nasdaq.  If we do not meet the Nasdaq requirements to maintain our listing on The Nasdaq National Market, our common stock could trade on the OTC Bulletin Board or in the “pink sheets” maintained by the National Quotation Bureau, Inc.  Such alternatives are generally considered to be less efficient markets, and our stock price, as well as the liquidity of our common stock, would be adversely impacted by a Nasdaq delisting.

 

Some of these risks and uncertainties relate to the rapidly evolving nature of the markets in which we operate. These related market risks include, among other things, the evolution of the online commerce market, the dependence of online commerce on the development of the Internet and its related infrastructure, the uncertainty pertaining to widespread adoption of online commerce and the risk of government regulation of the Internet. Other risks and uncertainties relate to our ability to, among other things, successfully implement our marketing strategies, respond to competitive developments, continue to develop and upgrade our products and technologies more rapidly than our competitors, and commercialize our products and services by incorporating these enhanced technologies. There can be no assurance that we will succeed in addressing any or all of these risks.

 

There has been a general downturn in the Unites States of America and global economy.  If the economic environment continues to decline or if the current global slowdown worsens or becomes prolonged, our future results may be significantly impacted. We believe that the current economic decline has increased the average length of our sales cycle and our operating results could suffer and our stock price could decline if we do not achieve the level of revenues we expect.  Financial comparisons discussed herein may not be indicative of future performance.

 

Like other U.S. companies, our business and operating results are subject to uncertainties arising out of the terrorist attacks on the United States, including the economic consequences of military actions or additional terrorist activities and associated political instability, and the impact of heightened security concerns on domestic and international travel and commerce. Such uncertainties could also lead to delays or cancellations of customer orders, a general decrease in corporate spending or our inability to effectively market and sell our products. Any of these results could substantially harm our business and results of operations, causing a decrease in our revenues.

 

Related Party Transactions

 

Mr. Pehong Chen, our CEO and Chairman of the Board, served as a director of Brience, Inc. (“Brience”) a provider of software products.  From February 2001 to February 2002, we had a reseller relationship with Brience whereby we agreed to resell the Brience product licenses with our product.  One end-customer installation that resulted from the reseller relationship was not concluded until the three months ended September 30, 2002.  During the three and nine months ended September 30, 2002, we paid to Brience approximately $175,000 in license fees for the resell of the Brience product to that end-customer.  During the three and nine months ended September 30, 2003, we paid no royalties to Brience.  Mr. Chen resigned from the Brience board of directors on September 12, 2002.

 

We also have an investment of 19.9% in Roundarch, a CRM services company. We have a reseller relationship with Roundarch whereby Roundarch is an implementation partner who integrates our software products with other third-party software products into CRM customer installations.  During the three months ended September 30, 2003 and 2002, transactions involving Roundarch comprised $17,000 and $330,000 of our revenue, respectively.  For the nine months ended September 30, 2003 and 2002, revenues were $219,000 and $383,000, respectively.

 

33

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

 

Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. We had no derivative financial instruments as of September 30, 2003 and December 31, 2002. We place our investments in instruments that meet high credit quality standards and the amount of credit exposure to any one issue, issuer and type of instrument is limited.

 

Cash and Cash Equivalents, Short-Term Investments, Long-Term Investments

 

We consider all debt and equity securities with maturities of three months or less at the date of purchase to be cash equivalents. Our short-term investments consist of debt and equity securities that are classified as available-for-sale. Our debt securities are carried at fair value with related unrealized gains or losses reported as other comprehensive income (loss), net of tax. Our long-term investments include debt securities that are classified as available-for-sale. These securities have remaining maturities greater than one year from September 30, 2003. These investments are carried at fair value with related unrealized gains or losses reported as other comprehensive income, net of tax.

 

All short-term investments have a remaining maturity of twelve months or less. Total short-term and long-term investment unrealized gains (losses) were approximately $5,000 and ($1.5 million) for the nine months ended September 30, 2003 and 2002, respectively.

 

Our cash and cash equivalents, short-term investments and long-term investments consisted of the following as of September 30, 2003 (in thousands):

 

		Amortized costs			Unrealized gains			Unrealized losses			Fair value
Cash		$	67,319		$	—		$	—		$	67,319
Money market		33,900			—			—			33,900
Corporate notes/bonds		1,005			5			—			1,010
Government notes/bonds		408			—			—			408
		102,632			5			—			102,637
Cash and cash equivalents		101,578			—			—			101,578
Short-term investments		1,054			5			—			1,059
Long-term investments		—			—			—			—
		$	102,632		$	5		$	—		$	102,637

 

Included in the table above in cash and cash equivalents are $21.0 million of non-current restricted cash and investments.

 

Our cash and cash equivalents, short-term investments and long-term investments consisted of the following as of December 31, 2002 (in thousands):

 

		Amortized costs			Unrealized gains			Unrealized losses			Fair value
Cash		$	36,070		$	—		$	—		$	36,070
Money market		36,232			—			—			36,232
Corporate notes/bonds		23,369			50			(1		)	23,418
Government notes/bonds		23,430			11			—			23,441
		$	119,101		$	61		$	(1	)	$	119,161
Cash and cash equivalents		$	94,090		$	—		$	—		$	94,090
Short-term investments		24,428			57			(1		)	24,484
Long-term investments		583			4			—			587
		$	119,101		$	61		$	(1	)	$	119,161

 

Included in the table above in short-term investments are non-current restricted cash and investments of $16.7 million.

 

34

 

Concentrations of Credit Risk

 

Financial assets that potentially subject us to significant concentrations of credit risk consist principally of cash, cash equivalents, short-term investments, and trade accounts receivable. We maintain our cash and cash equivalents and short-term investments with four separate financial institutions. We market and sell our products throughout the world and perform ongoing credit evaluations of our customers. We maintain reserves for potential credit losses. For the three months and nine months ended September 30, 2003 and 2002, no one customer accounted for more than 10% of total revenue.  For the three months and nine months ended September 30, 2003, no one customer accounted for more than 10% of accounts receivable. For the three months and nine months ended September 30, 2002, one customer accounted for more than 10% of accounts receivable.

 

Fair Value of Financial Instruments

 

Our financial instruments consist of cash equivalents, short-term investments, accounts receivable, long-term investments, accounts payable and debt. We do not have any derivative financial instruments. We believe the reported carrying amounts of its financial instruments approximates fair value, based upon the short maturity of cash equivalents, short-term investments, long-term investments, accounts receivable and payable, and based on the current rates available to it on similar debt issues.

 

Equity Investments

 

Our equity investments consist of investments in public and non-public companies that are accounted for under the cost method of accounting. Equity investments are accounted for under the cost method of accounting when we have a minority interest and do not have the ability to exercise significant influence. These investments are classified as available for sale and are carried at fair value when readily determinable market values exist or at cost when such market values do not exist. Adjustments to fair value are recorded as a component of other comprehensive income unless the investments are considered permanently impaired in which case the adjustment is recorded as a component of other income (expense), net in the condensed consolidated statement of operations.

 

The total fair value of our cost method long-term equity investments in public and non-public companies as of September 30, 2003 was $1.6 million. We recorded an other than temporary write-down of $298,000 during the three months ended September 30, 2003 related to long-term equity investments.

 

Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. We had no derivative financial instruments as of September 30, 2003 and December 31, 2002. We place our investments in instruments that meet high credit quality standards and the amount of credit exposure to any one issue, issuer and type of instrument is limited.  Our interest rate risk related to borrowings historically has been minimal as interest expense related to borrowings has been immaterial for the nine months ended September 30, 2003 and 2002.

 

During the third quarter of fiscal 2003, we drew down $27.0 million on our revolving line of credit.  Interest is payable monthly at the bank’s prime rate with a floor minimum of 4.25% (4.25% annually as of September 30, 2003) and principal is due in full in February 2004.  Additionally, we have two outstanding term loans as of September 30, 2003.  Interest on those term loans are at the bank’s prime rate (4.00% as of September 30, 2003) and prime rate plus 1.25%.

 

ITEM 4.  Controls and Procedures

 

Based on their evaluation of our disclosure controls and procedures (as defined in the rules promulgated under the Securities Exchange Act of 1934), our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report, subject to the improvement of our internal controls subsequent to the end of the third quarter as described below.

 

Changes in Internal Control Over Financial Reporting

 

Subsequent to the end of the quarter ended September 30, 2003, the Company implemented the following changes to our internal control over financial reporting:

•      We implemented more formal processes for the review of significant licensing contracts, and

•      We implemented additional procedures to ensure that transactions affecting common stock are properly documented and the appropriate accounting applied.

 

These additional procedures were implemented, in part, due to a material weakness letter we received from our independent accountants in October 2003.  Management believes the new controls address the key issues raised in the material weakness letter.  We will continue to monitor the effectiveness of our internal controls and procedures on an ongoing basis and will take further action, as appropriate.

 

Limitations on the Effectiveness of Controls

 

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, 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. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been

 

35

 

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. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon 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; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. The Company’s disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, and the Chief Executive Officer and the Chief Financial Officer have concluded that these controls and procedures are effective at the “reasonable assurance” level.

 

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PART II.  OTHER INFORMATION

 

Item 1.    Legal Proceedings

 

During Q2 2003, the Company settled a dispute with Avalon Partners, Inc., doing business as Cresa Partners (“Cresa”) with respect to broker commissions related to the Company’s termination and restructuring of certain facilities leases associated with the Company’s restructuring plans taken during the second quarter of 2002. Under the terms of the settlement the Company made a one-time payment of $2.2 million to Cresa in April 2003.

 

During the third quarter of 2003, the Company reached a confidential settlement with Verity, Inc. with respect to our outstanding litigation. The detailed terms and conditions of this settlement are confidential and cannot be disclosed without the consent of each party.  The settlement did not have a material effect on the Company’s business, financial condition or results of operations.

 

The Company is also subject to various other claims and legal actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the Company has adequate defenses for each of the claims and actions, and believes that their ultimate disposition is not expected to have a material effect on our business, financial condition or results of operations. Although management currently believes that the outcome of other outstanding legal proceedings, claims and litigation involving us will not have a material adverse effect on our business, results of operations or financial condition, litigation is inherently uncertain, and there can be no assurance that existing or future litigation will not have a material adverse effect on our business, results of operations or financial condition.

 

Item 2.    Changes in Securities and Use of Proceeds

Not applicable.

 

Item 3.    Defaults Upon Senior Securities

Not applicable.

 

Item 4.    Submission of Matters to a Vote of Security Holders

Not applicable.

 

Item 5.    Other Information

Not applicable.

 

Item 6.    Exhibits and Reports on Form 8-K

(a)           Exhibits

 

Exhibits		Description
3.4		Certificate of Correction of Certificate of Amendment of Amended and Restated Certificate of Incorporation
4.1		References are hereby made to Exhibits 3.1, 3.2, 3.3 and 3.4.
31.1		Certification of the Chief Executive Officer of BroadVision
31.2		Certification of the Chief Financial Officer of BroadVision
32.1		Certification of the Chief Executive Officer and Chief Financial Officer of BroadVision pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

(b)           Reports on Form 8-K

 

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On July 23, 2003, the Company filed a current report on Form 8-K related to the announcement of its financial results for the quarter ended June 30, 2003.

On October 22, 2003, the Company filed a current report on Form 8-K related to the announcement of its financial results for the quarter ended September 30, 2003.

 

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SIGNATURES

 

Pursuant to the requirements 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.

 

 

		BROADVISION, INC.
Date: November 14, 2003	By:	/s/  Pehong Chen
		Pehong Chen
		Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer)
Date: November 14, 2003	By:	/s/  William E. Meyer
		William E. Meyer
		Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

 

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BROADVISION, INC. QUARTERLY REPORT ON FORM 10-Q SEPTEMBER 30, 2003

 

INDEX TO EXHIBITS

 

Exhibit		Description
3.4		Certificate of Correction of Certificate of Amendment of Amended and Restated Certificate of Incorporation
4.1		References are hereby made to Exhibits 3.1, 3.2, 3.3 and 3.4.
31.1		Certification of the Chief Executive Officer of BroadVision
31.2		Certification of the Chief Financial Officer of BroadVision
32.1		Certification of the Chief Executive Officer and Chief Financial Officer of BroadVision pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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