UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
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(Mark One) |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the Quarter ended September 30, 2004 |
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OR |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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0-28252 |
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(Commission File Number) |
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BROADVISION, INC.
(Exact name of registrant as specified in its charter)
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Delaware |
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94-3184303 |
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(State or other jurisdiction of |
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(I.R.S. Employer |
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585 Broadway, |
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94063 |
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(Address of principal executive offices) |
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(Zip code) |
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(650) 542-5100 |
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(Registrant’s telephone number, including area code) |
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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 ý No o
As of October 31, 2004 there were 33,757,341 shares of the Registrant’s Common Stock issued and outstanding.
BROADVISION, INC. AND SUBSIDIARIES
FORM 10-Q
Quarter Ended September 30, 2004
TABLE OF CONTENTS
2
BROADVISION, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
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September 30, |
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December 31, |
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(unaudited) |
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ASSETS |
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Cash and cash equivalents |
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$ |
28,144 |
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$ |
78,776 |
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Accounts receivable, less allowance for doubtful accounts and reserves of $1,295 as of September 30, 2004 and $3,022 as of December 31, 2003 |
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12,100 |
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15,380 |
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Restricted cash |
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19,163 |
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— |
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Prepaids and other |
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4,098 |
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5,346 |
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Total current assets |
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63,505 |
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99,502 |
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Property and equipment, net |
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4,383 |
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15,400 |
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Restricted cash, net of current portion |
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1,797 |
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19,827 |
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Equity investments |
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574 |
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1,565 |
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Goodwill |
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53,421 |
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53,421 |
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Other intangibles, net |
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3,013 |
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3,013 |
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Other assets |
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1,753 |
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2,354 |
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Total assets |
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$ |
128,446 |
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$ |
195,082 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Bank borrowings and current portion of long-term debt |
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$ |
15,774 |
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$ |
27,977 |
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Accounts payable |
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6,730 |
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9,186 |
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Accrued expenses |
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39,858 |
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34,761 |
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Unearned revenue |
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4,297 |
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7,596 |
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Deferred maintenance |
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16,429 |
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19,234 |
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Total current liabilities |
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83,088 |
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98,754 |
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Long-term debt, net of current portion |
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503 |
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969 |
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Other noncurrent liabilities |
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14,100 |
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87,409 |
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Total liabilities |
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97,691 |
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187,132 |
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Commitments and Contingencies (Note 4) |
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Stockholders’ equity: |
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Preferred stock, $0.0001 par value; 10,000 shares authorized; none issued and outstanding |
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— |
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— |
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Common stock, $0.0001 par value; 2,000,000 shares authorized; 33,743 shares issued and outstanding as of September 30, 2004 and 33,198 shares issued and outstanding as of December 31, 2003 |
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3 |
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3 |
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Additional paid-in capital |
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1,214,273 |
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1,212,727 |
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Accumulated other comprehensive income (loss), net of tax |
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133 |
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(105 |
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Accumulated deficit |
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(1,183,654 |
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(1,204,675 |
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Total stockholders’ equity |
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30,755 |
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7,950 |
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Total liabilities and stockholders’ equity |
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$ |
128,446 |
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$ |
195,082 |
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See Accompanying Notes to Condensed Consolidated Financial Statements
3
BROADVISION, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share data; unaudited)
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Three Months Ended |
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Nine Months Ended |
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2004 |
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2003 |
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2004 |
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2003 |
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Revenues: |
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Software licenses |
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$ |
4,654 |
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$ |
5,076 |
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$ |
19,591 |
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$ |
19,875 |
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Services |
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12,570 |
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13,493 |
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38,650 |
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44,954 |
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Total revenues |
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17,224 |
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18,569 |
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58,241 |
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64,829 |
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Cost of revenues: |
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Cost of software licenses |
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256 |
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666 |
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1,147 |
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1,549 |
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Cost of services |
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6,391 |
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5,915 |
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18,970 |
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19,650 |
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Total cost of revenues |
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6,647 |
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6,581 |
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20,117 |
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21,199 |
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Gross profit |
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10,577 |
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11,988 |
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38,124 |
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43,630 |
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Operating expenses: |
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Research and development |
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4,600 |
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4,467 |
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13,997 |
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16,681 |
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Sales and marketing |
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6,020 |
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6,710 |
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20,365 |
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19,585 |
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General and administrative |
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2,335 |
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2,885 |
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7,152 |
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7,586 |
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Litigation settlement costs |
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— |
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4,250 |
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— |
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4,250 |
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Goodwill and intangible amortization |
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— |
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— |
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— |
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887 |
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Restructuring charge (credit) |
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(25,454 |
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4,509 |
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(24,205 |
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13,361 |
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Total operating expenses (benefit) |
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(12,499 |
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22,821 |
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17,309 |
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62,350 |
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Operating income (loss) |
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23,076 |
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(10,833 |
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20,815 |
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(18,720 |
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Interest income, net |
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77 |
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81 |
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288 |
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673 |
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Other income, net |
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238 |
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574 |
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59 |
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1,780 |
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Income (loss) before provision for income taxes |
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23,391 |
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(10,178 |
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21,162 |
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(16,267 |
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Provision for income taxes |
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(11 |
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(87 |
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(141 |
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(256 |
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Net income (loss) |
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$ |
23,380 |
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$ |
(10,265 |
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$ |
21,021 |
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$ |
(16,523 |
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Basic earnings (loss) per share |
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$ |
0.70 |
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$ |
(0.31 |
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$ |
0.63 |
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$ |
(0.51 |
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Diluted earnings (loss) per share |
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$ |
0.69 |
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$ |
(0.31 |
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$ |
0.61 |
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$ |
(0.51 |
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Shares used in computing: |
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Basic shares |
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33,599 |
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32,906 |
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33,459 |
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32,706 |
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Diluted shares |
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34,052 |
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32,906 |
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34,322 |
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32,706 |
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Comprehensive gain/(loss): |
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Net income (loss) |
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$ |
23,380 |
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$ |
(10,265 |
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$ |
21,021 |
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$ |
(16,523 |
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Other comprehensive gain (loss), net of tax |
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188 |
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(46 |
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238 |
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(83 |
) |
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Total comprehensive gain (loss) |
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$ |
23,568 |
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$ |
(10,311 |
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$ |
21,259 |
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$ |
(16,606 |
) |
See Accompanying Notes to Condensed Consolidated Financial Statements
4
BROADVISION, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands; unaudited)
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Nine Months Ended September 30, |
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2004 |
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2003 |
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Cash flows from operating activities: |
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Net income (loss) |
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$21,021 |
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$(16,523 |
) |
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Adjustments to reconcile net loss to net cash used for operating activities: |
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Depreciation and amortization |
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3,129 |
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9,337 |
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Credit for doubtful accounts and reserves |
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(1,722 |
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(386 |
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Amortization of prepaid royalties |
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494 |
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973 |
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Gain on disposal of assets |
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(96 |
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(36 |
) |
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Unrealized (gain) loss on investments |
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50 |
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(46 |
) |
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Loss on cost method investments |
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517 |
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326 |
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Amortization of other intangible assets |
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— |
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887 |
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Stock-based compensation expense (income) |
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(15 |
) |
279 |
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Non-cash consideration in connection with facilities buyout |
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9,300 |
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(382 |
) |
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Loss on revaluation of warrant |
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272 |
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— |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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5,002 |
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12,224 |
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Prepaids and other |
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754 |
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3,458 |
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Accounts payable and accrued expenses |
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1,128 |
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(16,242 |
) |
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Unearned revenue and deferred maintenance |
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(6,105 |
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(14,908 |
) |
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Other noncurrent assets |
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735 |
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390 |
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Other noncurrent liabilities |
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(73,308 |
) |
1,841 |
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Net cash used for operating activities |
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(38,844 |
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(18,808 |
) |
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Cash flows from investing activities: |
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Purchase of property and equipment |
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(489 |
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(131 |
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Transfer to restricted cash |
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(1,132 |
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(4,254 |
) |
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Proceeds from sale of assets |
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— |
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186 |
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Purchase of long-term investments |
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(100 |
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(2,729 |
) |
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Sales/maturity of long-term investments |
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574 |
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3,403 |
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Purchase of short-term investments |
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— |
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(2,917 |
) |
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Proceeds from dividends |
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277 |
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— |
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Sales/maturity of short-term investments |
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— |
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26,288 |
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Net cash provided by (used for) investing activities |
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(870 |
) |
19,846 |
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Cash flows from financing activities: |
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Proceeds from issuance of common stock, net |
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1,561 |
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1,166 |
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Proceeds from borrowings |
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69,076 |
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2,000 |
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Repayments of borrowings |
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(81,744 |
) |
(970 |
) |
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Net cash provided by (used for) financing activities |
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(11,107 |
) |
2,196 |
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Effect of change in exchange rates on cash and cash equivalents |
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189 |
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— |
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Net increase (decrease) in cash and cash equivalents |
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(50,632 |
) |
3,234 |
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Cash and cash equivalents at beginning of period |
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78,776 |
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77,386 |
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Cash and cash equivalents at end of period |
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$28,144 |
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$80,620 |
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Supplemental disclosures of cash flow information: |
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Cash paid for interest |
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$87 |
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$170 |
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Cash paid for income taxes |
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$227 |
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$849 |
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See Accompanying Notes to Condensed Consolidated Financial Statements
5
BROADVISION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All quarterly data herein is unaudited)
Note 1. Organization and Summary of Significant Accounting Policies
Nature of Business
BroadVision, Inc. (collectively with its subsidiaries, the “Company”) was incorporated in the state of Delaware on May 13, 1993 and has been a publicly traded corporation since 1996. BroadVision develops, markets and supports self-service web applications that enable companies to unify their e-business infrastructure and conduct both interactions and transactions with employees, partners and customers through a personalized self-service model that increases revenues, reduces costs and improves productivity.
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 reporting period. Actual results could differ from estimates. The financial results and related information as of September 30, 2004 and for the three and nine months ended September 30, 2004 and 2003 are unaudited. The consolidated balance sheet at December 31, 2003 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 the machine on which the product is installed. Licenses for software whereby fees charged are based upon the number of persons registered to use the product are differentiated between licenses for development use and licenses for use in deployment of the customer’s website. Licenses for software whereby fees charged are on a per-CPU basis do not differentiate between development and deployment usage. The Company’s revenue recognition policies are in accordance with Statement of Position (“SOP”) 97-2, as amended, SOP 98-9 and the Securities and Exchange Commission’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 and 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 case of electronic delivery, delivery occurs when the customer is given access to the licensed programs. For products that cannot be used without a licensing key, the delivery requirement is met when the licensing key is made available to the customer. 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.
6
The Company recognizes revenue using the residual method pursuant to the requirements of SOP 97-2, as amended by SOP 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 unearned 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 the BroadVision Global Services (“BVGS”) organization. Services that the Company provides are not essential to the functionality of the software. The Company records reimbursement from its customers for out-of-pocket expenses as an increase to services revenues.
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 25, Financial Accounting Standards Board Interpretation No. 44 (FIN 44), Accounting for Certain Transactions Involving Stock Compensation—an Interpretation of APB Opinion 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. Pursuant to Statement of Financial Accounting Standards (“SFAS 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 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 25 and related interpretations when accounting for its stock option and stock purchase plans. In accordance with APB Opinion 25, we apply 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, 2004, the Company recorded net compensation income of $15,000 as a result of a vesting modification for a stock option grant to a consultant. During the nine months ended September 30, 2003, the Company recorded compensation expense of $279,000 as a result of granting a consultant common stock in the Company and a vesting modification to a stock option grant for a terminated employee. These charges were calculated based upon the market value of the underlying stock. The charges were calculated using the Black-Scholes model and recorded in sales and marketing expense.
We have determined pro forma information regarding net income and earnings per share as if we had accounted for employee stock options under the fair value method as required by SFAS No. 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 our stock option plan and employee stock purchase plan been determined consistent with SFAS 123, our reported net loss and net loss per share would have been changed to the amounts indicated below (in thousands except per share data):
7
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
|
2004 |
|
2003 |
|
2004 |
|
2003 |
|
||||
|
Net income (loss) as reported |
|
$ |
23,380 |
|
$ |
(10,265) |
|
$ |
21,021 |
|
$ |
(16,523) |
|
|
Add: Stock-based compensation expense (income) included in reported net loss, net of related tax effects |
|
— |
|
231 |
|
(15 |
) |
279 |
|
||||
|
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects |
|
(3,466 |
) |
(2,734 |
) |
(4,271 |
) |
(6,739 |
) |
||||
|
Pro forma net income (loss) |
|
$ |
19,914 |
|
$ |
(12,768 |
) |
$ |
16,735 |
|
$ |
(22,983 |
) |
|
|
|
|
|
|
|
|
|
|
|
||||
|
Income (loss) per share: |
|
|
|
|
|
|
|
|
|
||||
|
Basic—as reported |
|
$ |
0.70 |
|
$ |
(0.31 |
) |
$ |
0.63 |
|
$ |
(0.51 |
) |
|
Basic—pro forma |
|
$ |
0.59 |
|
$ |
(0.39 |
) |
$ |
0.50 |
|
$ |
(0.70 |
) |
|
|
|
|
|
|
|
|
|
|
|
||||
|
Diluted—as reported |
|
$ |
0.69 |
|
$ |
(0.31 |
) |
$ |
0.61 |
|
$ |
(0.51 |
) |
|
Diluted—pro forma |
|
$ |
0.58 |
|
$ |
(0.39 |
) |
$ |
0.49 |
|
$ |
(0.70 |
) |
Earnings Per Share Information
Basic earnings (loss) per share is computed using the weighted-average number of shares of common stock outstanding less shares subject to repurchase. Diluted earnings (loss) per share is computed using the weighted-average number of shares of common stock outstanding and, when dilutive, common equivalent shares from outstanding stock options and warrants using the treasury stock method and shares subject to repurchase. The following table sets forth the basic and diluted earnings (loss) per share computational data for the periods presented.
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.
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
|
2004 |
|
2003 |
|
2004 |
|
2003 |
|
||||
|
Net income (loss) |
|
$ |
23,380 |
|
$ |
(10,265 |
) |
$ |
21,021 |
|
$ |
(16,523 |
) |
|
|
|
|
|
|
|
|
|
|
|
||||
|
Weighted average common shares outstanding utilized for basic net earnings (loss) per share |
|
33,599 |
|
32,906 |
|
33,459 |
|
32,706 |
|
||||
|
Potential common shares |
|
453 |
|
— |
|
863 |
|
— |
|
||||
|
Weighted average common shares outstanding utilized for diluted net earnings (loss) per share |
|
34,052 |
|
32,906 |
|
34,322 |
|
32,706 |
|
||||
|
Basic net earnings (loss) per share |
|
$ |
0.70 |
|
$ |
(0.31 |
) |
$ |
0.63 |
|
$ |
(0.51 |
) |
|
Diluted net earnings (loss) per share |
|
$ |
0.69 |
|
$ |
(0.31 |
) |
$ |
0.61 |
|
$ |
(0.51 |
) |
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 120 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.
8
Restructuring
Through September 30, 2004, we have approved certain restructuring plans to, among other things, reduce our workforce and consolidate facilities. Restructuring and asset impairment charges were taken to align our cost structure with changing market conditions and to create a more efficient organization. Our restructuring charges comprise primarily: (i) severance and benefits termination costs related to the reduction of our workforce; (ii) lease termination costs and/or costs associated with permanently vacating our 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. We account for each of these costs in accordance with Staff Accounting Bulletin No. 100, Restructuring and Impairment Charges.
Severance and Termination Costs. We account for severance and benefits termination costs as follows:
• For exit or disposal activities initiated on or prior to December 31, 2002, we account for 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). Accordingly, we record 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 us 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
• For exit or disposal activities initiated after December 31, 2002, we account for costs in accordance with SFAS No. 146, Accounting for Costs Associated with Exit Activities. SFAS 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.
Excess Facilities Costs. We account for excess facilities costs as follows:
• For exit or disposal activities initiated on or prior to December 31, 2002, we account for lease termination and/or abandonment costs in accordance with EITF 88-10, Costs Associated with Lease Modification or Termination. Accordingly, we recorded the costs associated with lease termination and/or abandonment when the leased property had no substantive future use or benefit to us.
• For exit or disposal activities initiated after December 31, 2002, we account for lease termination and/or abandonment costs in accordance with SFAS No. 146, which requires that a liability for such costs be recognized and measured initially at fair value on the cease use date of the facility.
Severance and termination costs and excess facilities costs we record under these provisions are not associated with nor do they benefit continuing activities.
Inherent in the estimation of the costs related to our 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 restructurings to date, the majority of estimates made by management have related to charges for excess facilities. In determining the charges for excess facilities, we were 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 have related to the timing and extent of future sublease income in which to reduce our lease obligations. We based our 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. The Company has recorded the low-end of a range of assumptions modeled for restructuring charges, in accordance with SFAS No. 5, Accounting for Contingencies. Further adjustments to the facilities accrual will be required in future periods if actual lease exit costs or sublease income differ from amounts currently expected. We will review the status of restructuring activities on a quarterly basis and, if appropriate, record changes to our 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
9
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.
Metropolitan Life Insurance Company, as landlord under a lease for facilities located in EL Segundo, CA, filed a lawsuit against the Company for breach of the lease and is seeking recovery of lost rent and other damages. Trial has been set for May 2005.
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. The Company maintains its cash and cash equivalents and short-term investments with four separate financial institutions. The Company markets and sells its products throughout the world and performs ongoing credit evaluations of its customers. The Company maintains reserves for potential credit losses. For the three and nine month periods ended September 30, 2004 and 2003, no single customer accounted for more than 10% of total revenue. At September 30, 2004, one customer accounted for 13% of accounts receivable.
Equity Investment
In January 2000, the Company entered into a limited partnership agreement with Chengwei Ventures Fund I, L.P. (“Chengwei”), a venture capital firm, under which it was obligated to contribute capital based upon the periodic funding requirements. The total capital commitment was $2.0 million, of which approximately $1.2 million had been contributed to date. In September 2004, the Company sold its interest in Chengwei for approximately $576,000 in cash and recorded a loss of approximately $230,000. That loss is included in “Other income, net” in the accompanying Condensed Consolidated Statement of Operations. As a result of this sale, the Company’s obligation to make further capital contributions has been extinguished.
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, net” in the Condensed Consolidated Statements of Operations.
Valuation of Long-Lived Assets
The Company periodically assesses the impairment of long-lived assets in accordance with the provisions of SFAS No. 144. The Company assesses the impairment of goodwill and identifiable intangible assets in accordance with SFAS No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. The Company adopted the provisions of SFAS No. 144 as of January 1, 2002.
Reclassification
Certain reclassifications have been made to prior year balances in order to conform to the current period presentation. These
reclassifications do not have an effect on BroadVision’s consolidated financial condition, results of operation or cash flows.
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 comprise 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 January 2003, the Financial Accounting Standards Board (“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
10
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. The adoption of SFAS 146 has not had 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. The adoption of SFAS 150 has not had a material impact on our consolidated financial position, results of operations or cash flows.
In November 2003, the EITF issued EITF No. 03-6 “Participating Securities and the Two-Class Method under FASB Statement No. 128,” which provides for a two-class method of calculating earnings per share computations that relate to certain securities that would be considered to be participating in conjunction with certain common stock rights. This guidance would be applicable to the Company starting with the third quarter beginning July 1, 2004. The adoption of EITF No. 03-6 has not had 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, |
|
December 31, |
|
||
|
|
|
(unaudited) |
|
|
|
||
|
Furniture and fixtures |
|
$ |
6,125 |
|
$ |
8,030 |
|
|
Computers and software |
|
49,119 |
|
49,041 |
|
||
|
Leasehold improvements |
|
9,506 |
|
20,842 |
|
||
|
|
|
64,750 |
|
77,913 |
|
||
|
Less accumulated depreciation and amortization |
|
(60,367 |
) |
(62,513 |
) |
||
|
|
|
$ |
4,383 |
|
$ |
15,400 |
|
Accrued expenses consisted of the following (in thousands):
|
|
|
September 30, |
|
December 31, |
|
||
|
|
|
(unaudited) |
|
|
|
||
|
Employee benefits |
|
$ |
1,541 |
|
$ |
1,511 |
|
|
Commissions and bonuses |
|
748 |
|
1,519 |
|
||
|
Sales and other taxes |
|
5,888 |
|
7,983 |
|
||
|
Restructuring (See Note 6) |
|
23,953 |
|
18,549 |
|
||
|
Warrant liability |
|
1,512 |
|
— |
|
||
|
Other |
|
6,216 |
|
5,199 |
|
||
|
|
|
$ |
39,858 |
|
$ |
34,761 |
|
Other noncurrent liabilities consisted of the following (in thousands):
|
|
|
September 30, |
|
December 31, |
|
||
|
|
|
(unaudited) |
|
|
|
||
|
Restructuring (See Note 6) |
|
$ |
13,707 |
|
$ |
86,831 |
|
|
Other |
|
393 |
|
578 |
|
||
|
|
|
$ |
14,100 |
|
$ |
87,409 |
|
11
Note 3. Commercial Credit Facilities
The Company has various credit facilities with a commercial lender which include a revolving line of credit, term debt in the form of notes payable, and an equipment line of credit.
The Company maintains a revolving line of credit, which is collateralized by all of the Company’s assets and under which borrowings bear interest at the bank’s prime rate. Interest is due monthly and principal is due at expiration in February 2005. At September 30, 2004 and December 31, 2003, $15.0 million and $27.0 million was outstanding under the line of credit, respectively. In September 2004, the Company entered into a renewed and amended loan and security agreement with the lender. The agreement requires the Company to maintain certain levels in unrestricted cash and cash equivalents (excluding equity investments), and to maintain certain levels on deposit with its commercial lender. The agreement also modified the financial covenants and reduced the revolving line of credit borrowing limit from $27.0 million to $15.0 million. As of September 30, 2004, the Company was not in compliance with the financial covenants of its commercial credit facilities and, as a result, cannot borrow funds under the revolving line of credit. Subsequent to September 30, 2004, the Company repaid the $15 million outstanding balance on the line of credit from existing cash.
As of September 30, 2004 and December 31, 2003, outstanding term debt borrowings were approximately $1.2 million and $1.9 million, respectively. Borrowings bear interest between the bank’s prime rate (4.75% as of September 30, 2004 and 4.00% as of December 31, 2003) and the bank’s 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 $244,000 are due through the remainder of 2004, $611,000 is due in 2005, and a final payment of $357,000 is due in 2006.
During the first fiscal quarter of 2004, the Company entered into a $500,000 equipment line of credit with the commercial lender. Such line of credit is secured by all of the Company’s assets and under which borrowings bear interest at the banks prime rate (4.75% as of September 30, 2004) plus .75%. Principal payments are due in 36 monthly payments. Principal payments of $6,428 are due through the remainder of 2004, $25,715 is due in 2005 and 2006, and a final payment of $6,429 is due in 2007. As of September 30, 2004, $64,288 was outstanding under the equipment loan.
Commitments totaling $21.0 million and $19.8 million in the form of standby letters of credit were issued on the Company’s behalf from financial institutions as of September 30, 2004 and December 31, 2003, respectively, primarily in favor of the Company’s various landlords to secure obligations under the Company’s facility leases or future lease termination costs (see Note 6). Accordingly, $21.0 million and $19.8 million have been presented as restricted cash in the accompanying Condensed Consolidated Balance Sheets as of September 30, 2004 and December 31, 2003, respectively.
Note 4. Commitments and Contingencies
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, 2004 or December 31, 2003. 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 2010. Under the terms of the agreements, the Company is required to pay lease costs, property taxes, insurance and normal maintenance costs.
12
A summary of total future minimum lease payments as of September 30, 2004, under noncancelable operating lease agreements is as follows (in millions):
|
Years Ending December 31, |
|
Operating |
|
|
|
2004 |
|
$ |
2.3 |
|
|
2005 |
|
9.1 |
|
|
|
2006 |
|
6.5 |
|
|
|
2007 |
|
3.5 |
|
|
|
2008 and thereafter |
|
1.4 |
|
|
|
|
|
|
|
|
|
Total minimum lease payments |
|
$ |
22.8 |
|
As of September 30, 2004, the Company has accrued $36.7 million of estimated future facilities costs as a restructuring accrual (see Note 6). This accrual includes the above minimum lease payments that are related to excess and abandoned space under lease, a lease termination payment of $18.1 million due in January 2005 and certain lease related allowances, fees and expenses, partially offset by estimated future sublease income. 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, 2004 |
|
$ |
4.4 |
|
|
Estimated sublease income for sublease agreements yet to be negotiated |
|
2.8 |
|
|
|
Total estimated sublease income |
|
$ |
7.2 |
|
During the quarter ended September 30, 2004, the Company reached agreements with certain landlords to extinguish approximately $142 million of future real estate obligations, See Note 6.
Equity Investment
In January 2000, the Company entered into a limited partnership agreement with Chengwei Ventures Fund I, L.P. (“Chengwei”), a venture capital firm, under which it was obligated to contribute capital based upon the periodic funding requirements. The total capital commitment was $2.0 million, of which approximately $1.2 million had been contributed to date. In September 2004, the Company sold its interest in Chengwei for approximately $576,000 in cash and recorded a loss of approximately $230,000. That loss is included in “Other income, net” in the accompanying Condensed Consolidated Statement of Operations. As a result of this sale, the Company’s obligation to make future capital contributions has been extinguished.
Reclassification
Certain reclassifications have been made to prior year balances in order to conform to the current period presentation. These
reclassifications do not have an effect on BroadVision’s consolidated financial condition, results of operation or cash flows.
Standby Letter of Credit Commitments
As of September 30, 2004, the Company had $21.0 million of outstanding commitments in the form of standby letters of credit, primarily in favor of the Company’s various landlords to secure obligations under the Company’s facility leases.
Legal Proceedings
The Company is subject to various 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 these 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.
Metropolitan Life Insurance Company, as landlord under a lease for facilities located in EL Segundo, CA, filed a lawsuit against the Company for breach of the lease and is seeking recovery of lost rent and other damages. Trial has been set for May 2005.
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
13
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 |
|
Nine Months Ended |
|
|||||||||
|
|
|
2004 |
|
2003 |
|
2004 |
|
2003 |
|
|||||
|
Software licenses |
|
$ |
4,654 |
|
$ |
5,076 |
|
$ |
19,591 |
|
$ |
19,875 |
|
|
|
Consulting services |
|
5,013 |
|
4,692 |
|
15,105 |
|
17,038 |
|
|||||
|
Maintenance |
|
7,557 |
|
8,801 |
|
23,545 |
|
27,916 |
|
|||||
|
Total revenues |
|
$ |
17,224 |
|
$ |
18,569 |
|
$ |
58,241 |
|
$ |
64,829 |
|
|
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 geographic revenues and long-lived assets is as follows (in thousands):
|
|
|
Three months ended |
|
Nine Months Ended |
|
||||||||
|
|
|
2004 |
|
2003 |
|
2004 |
|
2003 |
|
||||
|
|
|
(unaudited) |
|
(unaudited) |
|
(unaudited) |
|
(unaudited) |
|
||||
|
Revenues: |
|
|
|
|
|
|
|
|
|
||||
|
Americas |
|
$ |
9,269 |
|
$ |
9,073 |
|
$ |
27,772 |
|
$ |
32,750 |
|
|
Europe |
|
6,134 |
|
7,997 |
|
25,210 |
|
25,966 |
|
||||
|
Asia/Pacific |
|
1,821 |
|
1,499 |
|
5,259 |
|
6,113 |
|
||||
|
Total Company |
|
$ |
17,224 |
|
$ |
18,569 |
|
$ |
58,241 |
|
$ |
64,829 |
|
|
|
|
September 30, |
|
December 31, |
|
||
|
|
|
(unaudited) |
|
|
|
||
|
Long-Lived Assets: |
|
|
|
|
|
||
|
Americas |
|
$ |
61,498 |
|
$ |
73,016 |
|
|
Europe |
|
558 |
|
537 |
|
||
|
Asia/Pacific |
|
514 |
|
635 |
|
||
|
Total Company |
|
$ |
62,570 |
|
$ |
74,188 |
|
During the three and nine month periods ended September 30, 2004 and 2003, no single customer accounted for more than 10% of the Company’s revenues.
Note 6. Restructuring Charges
Through September 30, 2004, the Company has approved certain restructuring plans to, among other things, reduce its workforce and consolidate facilities. Restructuring and asset impairment charges have been taken to align our cost structure with changing market conditions and to create a more efficient organization. Our restructuring charges comprise primarily: (i) severance and benefits termination costs related to the reduction of our workforce; (ii) lease termination costs and/or costs associated with permanently vacating our 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. We account for each of these costs in accordance with Staff Accounting Bulletin No. 100, Restructuring and Impairment Charges.
For each of the periods presented herein, restructuring charges consist solely of:
• Severance and Termination Benefits — These costs represent severance, payroll taxes and COBRA benefits related to restructuring plans implemented prior to the date recognized.
• Excess Facilities — These costs represent future minimum lease payments related to excess and abandoned space under lease, net of estimated sublease income and planned company occupancy.
14
Activity related to restructuring plans initiated prior to December 31, 2002 is accounted for in accordance with EITF 94-3. Plans initiated subsequent to December 31, 2002 are accounted for in accordance with FAS 146, with the exception of amounts that were the result of changes in estimates to restructuring plans that were initiated prior to December 31, 2002. As of September 30, 2004, the total restructuring accrual was $37.7 million under EITF 94-3 and FAS 146, consisting of the following (in millions):
|
|
|
Current |
|
Non-Current |
|
Total |
|
|||
|
Severance and Termination |
|
$ |
1.0 |
|
$ |
— |
|
$ |
1.0 |
|
|
Excess Facilities |
|
23.0 |
|
13.7 |
|
36.7 |
|
|||
|
Total |
|
$ |
24.0 |
|
$ |
13.7 |
|
$ |
37.7 |
|
The Company estimates that the $1.0 million severance and termination accrual will be paid in full by March 31, 2005. We expect to pay the excess facilities amounts related to restructured or abandoned leased space as follows (in millions):
|
Years ending December 31, |
|
|
|
|
|
2004 |
|
$ |
1.7 |
|
|
2005 |
|
23.6 |
|
|
|
2006 |
|
8.2 |
|
|
|
2007 |
|
2.2 |
|
|
|
2008 and thereafter (through October 2010) |
|
1.0 |
|
|
|
|
|
|
|
|
|
Total minimum facilities payments |
|
$ |
36.7 |
|
Of this excess facilities accrual, $11.5 million relates to future minimum lease payments, net of estimated sublease income and planned company occupancy, and the remaining $25.2 million relates to estimated allowances, fees and expenses. During the third quarter of 2004, the Company reached agreements with certain landlords to extinguish approximately $142 million of future real estate obligations. The Company made cash payments of $19.1 million during the third quarter, and is obligated to make an additional cash payment of $18.1 million in January 2005, which is included in the total restructuring accrual of $37.7 million.
As mentioned above, we have based our excess facilities accrual, in part, upon estimates of future sublease income. We have used the following factors, among others, in making such estimates: 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 facilities. 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, 2004 |
|
$ |
4.4 |
|
|
Estimated sublease income for sublease agreements yet to be negotiated |
|
2.8 |
|
|
|
Total estimated sublease income |
|
$ |
7.2 |
|
The Company has recorded the low-end of a range of assumptions modeled for restructuring charges, in accordance with SFAS No. 5, Accounting for Contingencies. Adjustments to the facilities accrual will be required if actual lease exit costs or sublease income differ from amounts currently expected. We will review the status of restructuring activities on a quarterly basis and, if appropriate, record changes to our restructuring obligations in current operations based on management’s most current estimates.
The following table summarizes the activity related to the restructuring plans initiated subsequent to December 31, 2002, and accounted for in accordance with FAS 146 (in thousands):
|
|
|
Accrued |
|
Amounts charged to |
|
Amounts paid |
|
Accrued |
|
||||
|
Three months ended September 30, 2004 |
|
|
|
|
|
|
|
|
|
||||
|
Lease cancellations and commitments |
|
$ |
12,394 |
|
$ |
9,643 |
|
$ |
(340 |
) |
$ |
21,697 |
|
|
Termination payments to employees and related costs |
|
164 |
|
582 |
|
(175 |
) |
571 |
|
||||
|
Write-off on disposal of assets and related costs |
|
9,289 |
|
(1,193 |
) |
(8,096 |
) |
— |
|
||||
|
|
|
$ |
21,847 |
|
$ |
9,032 |
|
$ |
(8,611 |
) |
$ |
22,268 |
|
15
|
|
|
Accrued |
|
Amounts charged to |
|
Amounts paid |
|
Accrued |
|
||||
|
Nine months ended September 30, 2004 |
|
|
|
|
|
|
|
|
|
||||
|
Lease cancellations and commitments |
|
$ |
11,894 |
|
$ |
9,643 |
|
$ |
160 |
|
$ |
21,697 |
|
|
Termination payments to employees and related costs |
|
242 |
|
1,058 |
|
(729 |
) |
571 |
|
||||
|
Write-off on disposal of assets and related costs |
|
9,789 |
|
(1,193 |
) |
(8,596 |
) |
— |
|
||||
|
|
|
$ |
21,925 |
|
$ |
9,508 |
|
$ |
(9,165 |
) |
$ |
22,268 |
|
The following table summarizes the activity related to the restructuring plans initiated on or prior to December 31, 2002, and accounted for in accordance with EITF 94-3 (in thousands):
|
|
|
Accrued |
|
Amounts charged to |
|
Amounts reversed |
|
Amounts paid |
|
Accrued |
|
|||||
|
Three months ended September 30, 2003 |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Lease cancellations and commitments |
|
$ |
89,216 |
|
$ |
3,269 |
|
$ |
— |
|
$ |
(5,335 |
) |
$ |
87,150 |
|
|
Termination payments to employees and related costs |
|
1,000 |
|
1,240 |
|
— |
|
(979 |
) |
1,261 |
|
|||||
|
Write-off on disposal of assets and related costs |
|
40 |
|
— |
|
— |
|
(40 |
) |
— |
|
|||||
|
|
|
$ |
90,256 |
|
$ |
4,509 |
|
$ |
— |
|
$ |
(6,354 |
) |
$ |
88,411 |
|
|
|
|
Accrued |
|
Amounts charged to |
|
Amounts reversed |
|
Amounts paid |
|
Accrued |
|
|||||
|
Three months ended September 30, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Lease cancellations and commitments |
|
$ |
71,707 |
|
$ |
(34,477 |
) |
$ |
— |
|
$ |
(23,629 |
) |
$ |
13,601 |
|
|
Termination payments to employees and related costs |
|
429 |
|
— |
|
— |
|
— |
|
429 |
|
|||||
|
Write-off on disposal of assets and related costs |
|
1,486 |
|
(9 |
) |
— |
|
(115 |
) |
1,362 |
|
|||||
|
|
|
$ |
73,622 |
|
$ |
(34,486 |
) |
$ |
— |
|
$ |
(23,744 |
) |
$ |
15,392 |
|
|
|
|
Accrued |
|
Amounts charged to |
|
Amounts reversed |
|
Amounts paid |
|
Accrued |
|
|||||
|
Nine months ended September 30, 2003 |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Lease cancellations and commitments |
|
$ |
94,691 |
|
$ |
11,887 |
|
$ |
— |
|
$ |
(19,428 |
) |
$ |
87,150 |
|
|
Termination payments to employees and related costs |
|
1,425 |
|
1,500 |
|
— |
|
(1,664 |
) |
1,261 |
|
|||||
|
Write-off on disposal of assets and related costs |
|
79 |
|
(26 |
) |
— |
|
(53 |
) |
— |
|
|||||
|
|
|
$ |
96,195 |
|
$ |
13,361 |
|
$ |
— |
|
$ |
(21,145 |
) |
$ |
88,411 |
|
16
|
|
|
Accrued |
|
Amounts charged to |
|
Amounts reversed |
|
Amounts paid |
|
Accrued |
|
|||||
|
Nine months ended September 30, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Lease cancellations and commitments |
|
$ |
81,143 |
|
$ |
(33,704 |
) |
$ |
— |
|
$ |
(33,838 |
) |
$ |
13,601 |
|
|
Termination payments to employees and related costs |
|
429 |
|
— |
|
— |
|
— |
|
429 |
|
|||||
|
Write-off on disposal of assets and related costs |
|
1,883 |
|
(9 |
) |
— |
|
(512 |
) |
1,362 |
|
|||||
|
|
|
$ |
83,455 |
|
$ |
(33,713 |
) |
$ |
— |
|
$ |
(34,350 |
) |
$ |
15,392 |
|
During the third quarter of 2004, the Company reached agreements with certain landlords to extinguish approximately $142 million of future real estate obligations. The Company made cash payments of $19.1 million during the third quarter, and is obligated to make an additional cash payment of $18.1 million in January 2005. Standby letters of credit of $18.1 million were issued on our behalf from financial institutions as of September 30, 2004 in favor of our landlord to secure the January 2005 payment. Accordingly, $18.1 million has been included in restricted cash in the accompanying Condensed Consolidated Balance Sheets at September 30, 2004. The Company also transferred ownership of certain furniture, fixtures, and leasehold improvements with a net book value of $8.1 million to the previous landlord. The Company currently has a residual lease obligation beginning in 2007 and will make a further cash payment of $4.5 million if it exercises an option to terminate the residual lease obligation prior to the commencement of the lease term. This option to terminate the residual lease obligation is accounted for in accordance with SFAS 146 and is a part of our computation of the restructuring gain. In addition, the Company issued a warrant to purchase approximately 700,000 shares of our common stock at an exercise price of $5.00 per share after a one-year period. In connection with the lease termination agreements, the Company recorded a restructuring gain of $26.0 million in the quarter ended September 30, 2004. The total amount of the net restructuring gain, after inclusion of amounts accrued for employee termination costs, was $25.5 million for the quarter ended September 30, 2004.
The warrant issued in connection with the real estate agreements and the shares of the Company’s common stock issuable on the exercise of the warrant were initially not registered under federal securities laws. In accordance with EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock,” the warrants have been included as a short-term liability and valued at fair value on the date of issuance. The warrants are revalued each period until the warrants are exercised. The change in fair value from the date of issuance to September 30, 2004 of $272,000 has been recorded as a component of the restructuring charge. The warrants will be transferred to permanent equity when the warrants are exercised.
Note 7. Goodwill and Other Intangible Assets
Goodwill and other intangibles consist of the following (in thousands):
|
|
|
September 30, |
|
December 31, |
|
||
|
|
|
(unaudited) |
|
|
|
||
|
Goodwill |
|
$ |
437,206 |
|
$ |
437,206 |
|
|
Less: Accumulated amortization |
|
(383,785 |
) |
(383,785 |
) |
||
|
Goodwill, net |
|
53,421 |
|
53,421 |
|
||
|
|
|
|
|
|
|
||
|
Other intangibles |
|
22,732 |
|
22,732 |
|
||
|
Less: Accumulated amortization |
|
(19,719 |
) |
(19,719 |
) |
||
|
Other intangibles, net |
|
3,013 |
|
3,013 |
|
||
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
17
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, 2004 and December 31, 2003, 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, 2004.
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, 2004.
Note 8 Comprehensive Income (Loss)
SFAS No. 130, “Reporting Comprehensive Income,” requires the disclosure of comprehensive income to reflect changes in equity that result from transactions and economic events from non-owner sources. Other comprehensive income (loss) for the periods presented represents foreign currency translation items associated with the Company’s international operations. Comprehensive income (loss) includes net income (loss), unrealized gains (losses) on available-for-sale securities and foreign currency translation adjustments.
Comprehensive income (loss) is comprised of the following (in thousands):
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
|
2004 |
|
2003 |
|
2004 |
|
2003 |
|
||||
|
Net income (loss) |
|
$ |
23,380 |
|
$ |
(10,265 |
) |
$ |
21,021 |
|
$ |
(16,523 |
) |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
||||
|
Change in accumulated foreign currency translation adjustments |
|
189 |
|
|
|
189 |
|
|
|
||||
|
Change in accumulated unrealized gain (loss) on available-for-sale securities |
|
(1 |
) |
(46 |
) |
49 |
|
(83 |
) |
||||
|
Total comprehensive income (loss) |
|
$ |
23,568 |
|
$ |
(10,311 |
) |
$ |
21,259 |
|
$ |
(16,606 |
) |
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 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 most recently filed 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
We develop, market and support a suite of personalized self-service web applications that enable organizations to unify their e-business infrastructure and conduct both interactions and transactions with employees, partners and customers. Our integrated suite of process, commerce, portal and content solutions helps organizations rapidly increase revenues and reduce costs.
As of September 30, 2004, more than 1,000 companies and government entities around the globe are using our applications to power and personalize their mission-critical web initiatives.
Worldwide demand for enterprise software has declined significantly over the past several quarters. The decline in venture
18
capital spending has resulted in fewer new companies with funding to, among other things, build an on-line business. Established companies have scaled back, delayed or cancelled web-based initiatives. As a result, we have seen significant declines in our revenue over the past three fiscal years.
Recent Events
The Company has various credit facilities with a commercial lender which include term debt in the form of notes payable, a revolving line of credit and an equipment line of credit. In September 2004, the Company entered into a renewed and amended loan and security agreement with the lender. The agreement requires the Company to maintain certain levels in unrestricted cash and cash equivalents (excluding equity investments), and to maintain certain levels on deposit with its commercial lender. The agreement also modified the financial covenants and reduced the revolving line of credit borrowing limit from $27.0 million to $15.0 million. At September 30, 2004 and December 31, 2003, $15.0 million and $27.0 million was outstanding under the line of credit respectively. Borrowings under the line of credit are collateralized by all of our assets and bear interest at the bank’s prime rate. Interest is due monthly and principal is due at expiration in February 2005. As of September 30, 2004, the Company was not in compliance with the financial covenants of its commercial credit facilities and, as a result, cannot borrow funds under the revolving line of credit. Subsequent to September 30, 2004, the Company repaid the $15 million outstanding balance on the line of credit from existing cash.
During the third quarter of 2004, the Company reached agreements with certain landlords to extinguish approximately $142 million of future real estate obligations. The Company made cash payments of $19.1 million during the third quarter, and is obligated to make an additional cash payment of $18.1 million in January 2005. Standby letters of credit of $18.1 million were issued on our behalf from financial institutions as of September 30, 2004 in favor of our landlord to secure the January 2005 payment. Accordingly, $18.1 million has been included in restricted cash in the accompanying Condensed Consolidated Balance Sheets at September 30, 2004. The Company also transferred ownership of certain furniture, fixtures, and leasehold improvements with a net book value of $8.1 million to the previous landlord. In addition, the Company issued a warrant to purchase approximately 700,000 shares of our common stock at an exercise price of $5.00 per share after a one year period. The Company currently has a residual lease obligation beginning in 2007, and will make a further cash payment of $4.5 million if it exercises an option to terminate the residual real estate obligation. This option to terminate the residual lease obligation is accounted for in accordance with SFAS 146 and is part of our computation of the restructuring gain. In connection with these agreements, the Company recorded a restructuring gain of $26.0 million in the quarter ended September 30, 2004. The total amount of the net restructuring gain, after inclusion of amounts accrued for employee termination costs, was $25.5 million for the quarter ended September 30, 2004.
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 the machine on which the product is installed. Licenses for software whereby fees charged are based upon the number of persons registered to use the product are differentiated between licenses for development use and licenses for use in deployment of the customer’s website. Licenses for software whereby fees charged are on a per-CPU basis do not differentiate between development and deployment usage. 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 and 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
19
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 case of electronic delivery, delivery occurs when the customer is given access to the licensed programs. For products that cannot be used without a licensing key, the delivery requirement is met when the licensing key is made available to the customer. 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 its resellers the right of return.
We recognize revenue using the residual method pursuant to the requirements of SOP 97-2, as amended by SOP 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 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.
We record unearned revenue for software license agreements when cash has been received from the customer and the agreement does not qualify for revenue recognition under our revenue recognition policy. We record 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 our products, are deferred and recognized ratably over the related agreement period, generally twelve months.
Our consulting services, which consist of consulting, maintenance and training, are delivered through the BroadVision Global Services (“BVGS”) organization. Services that we provide are not essential to the functionality of the software. We record reimbursement from our customers for out-of-pocket expenses as an increase to services revenues.
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 120 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.
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, 2004 and December 31, 2003 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
20
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 impairment charge, for all or a portion of the goodwill balance at September 30, 2004. 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.
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 three month period ended September 30, 2004, the Company did not record compensation expense as a result of granting common stock to consultants. During the three months ended September 30, 2003, the Company recorded compensation expense of $231,000. During the nine months ended September 30, 2004, and 2003, the Company recorded compensation (income) expense of ($15,000) and $279,000. The compensation in all periods came as a result of granting common stock options to consultants. The charges were calculated based upon the fair market value of the underlying stock.
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 income (loss) and net income (loss) per share would have been changed to the amounts indicated below (in thousands, except per share data):
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
|
2004 |
|
2003 |
|
2004 |
|
2003 |
|
||||
|
Net income (loss) as reported |
|
$ |
23,380 |
|
$ |
(10,265 |
) |
$ |
21,021 |
|
$ |
(16,523 |
) |
|
Add: Stock-based employee compensation expense included in reported net loss, net of related tax effects |
|
— |
|
231 |
|
(15 |
) |
279 |
|
||||
|
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects |
|
(3,466 |
) |
(2,734 |
) |
(4,271 |
) |
(6,739 |
) |
||||
|
Pro forma net income (loss) |
|
$ |
19,914 |
|
$ |
(12,768 |
) |
$ |
16,735 |
|
$ |
(22,983 |
) |
|
|
|
|
|
|
|
|
|
|
|
||||
|
Earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
||||
|
Basic—as reported |
|
$ |
0.70 |
|
$ |
(0.31 |
) |
$ |
0.63 |
|
$ |
(0.51 |
) |
|
Basic—pro forma |
|
$ |
0.59 |
|
$ |
(0.39 |
) |
$ |
0.50 |
|
$ |
(0.70 |
) |
|
|
|
|
|
|
|
|
|
|
|
||||
|
Diluted—as reported |
|
$ |
0.69 |
|
$ |
(0.31 |
) |
$ |
0.61 |
|
$ |
(0.51 |
) |
|
Diluted—pro forma |
|
$ |
0.58 |
|
$ |
(0.39 |
) |
$ |
0.49 |
|
$ |
(0.70 |
) |
Restructuring Charges
Through September 30, 2004, the Company has approved certain restructuring plans to, among other things, reduce its workforce and consolidate facilities. Restructuring and asset impairment charges have been taken to align our cost structure with changing market conditions and to create a more efficient organization. Our restructuring charges have been comprised primarily of: (i) severance and benefits termination costs related to the reduction of our workforce; (ii) lease termination costs and/or costs associated with permanently vacating our facilities; (iii) other incremental costs incurred as a direct result of the restructuring plan;
21
and (iv) impairment costs related to certain long-lived assets abandoned. We account for each of these costs in accordance with Staff Accounting Bulletin No. 100, Restructuring and Impairment Charges.
For each of the periods presented herein, restructuring charges consist solely of:
• Severance and Termination Benefits — These costs represent severance, payroll taxes and COBRA benefits related to restructuring plans implemented prior to the date recognized.
• Excess Facilities — These costs represent future minimum lease payments related to excess and abandoned space under lease, net of estimated sublease income and planned company occupancy.
Activity related to restructuring plans initiated prior to December 31, 2002 is accounted for in accordance with EITF 94-3. Plans initiated subsequent to December 31, 2002 are accounted for in accordance with FAS 146, with the exception of amounts that were the result of changes in estimates to restructuring plans that were initiated prior to December 31, 2002. As of September 30, 2004, the total restructuring accrual was $37.7 million under EITF 94-3 and FAS 146, consisting of the following (in millions):
|
|
|
Current |
|
Non- |
|
Total |
|
|||
|
Severance and Termination |
|
$ |
1.0 |
|
$ |
— |
|
$ |
1.0 |
|
|
Excess Facilities |
|
23.0 |
|
13.7 |
|
36.7 |
|
|||
|
Total |
|
$ |
24.0 |
|
$ |
13.7 |
|
$ |
37.7 |
|
The Company estimates that the $1.0 million severance and termination accrual will be paid in full by March 31, 2005. We expect to pay the excess facilities amounts related to restructured or abandoned leased space as follows (in millions):
|
Years Ending December 31, |
|
|
|
|
|
2004 |
|
$ |
1.7 |
|
|
2005 |
|
23.6 |
|
|
|
2006 |
|
8.2 |
|
|
|
2007 |
|
2.2 |
|
|
|
2008 and thereafter (through October 2010) |
|
1.0 |
|
|
|
|
|
|
|
|
|
Total minimum facilities payments |
|
$ |
36.7 |
|
Of this excess facilities accrual, $11.5 million relates to future minimum lease payments, net of estimated sublease income and planned company occupancy, and the remaining $25.2 million relates to estimated allowances, fees and expenses. Actual future cash requirements may differ materially from the accrual at September 30, 2004, particularly if actual sublease income is significantly different from prospective estimates.
As mentioned above, we have based our excess facilities accrual, in part, upon estimates of future sublease income. We have used the following factors, among others, in making such estimates: 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 facilities. 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, 2004 |
|
$ |
4.4 |
|
|
Estimated sublease income for sublease agreements yet to be negotiated |
|
2.8 |
|
|
|
Total estimated sublease income |
|
$ |
7.2 |
|
The Company has recorded the low-end of a range of assumptions modeled for restructuring charges, in accordance with SFAS No. 5, Accounting for Contingencies. Adjustments to the facilities accrual will be required if actual lease exit costs or sublease income differ from amounts currently expected. We will review the status of restructuring activities on a quarterly basis and, if appropriate, record changes to our restructuring obligations in current operations based on management’s most current estimates.
The following table summarizes the activity related to the restructuring plans initiated subsequent to December 31, 2002, and accounted for in accordance with FAS 146 (in thousands):
22
|
|
|
Accrued |
|
Amounts charged to |
|
Amounts paid |
|
Accrued |
|
||||
|
Three months ended September 30, 2004 |
|
|
|
|
|
|
|
|
|
||||
|
Lease cancellations and commitments |
|
$ |
12,394 |
|
$ |
9,643 |
|
$ |
(340 |
) |
$ |
21,697 |
|
|
Termination payments to employees and related costs |
|
164 |
|
582 |
|
(175 |
) |
571 |
|
||||
|
Write-off on disposal of assets and related costs |
|
9,289 |
|
(1,193 |
) |
(8,096 |
) |
— |
|
||||
|
|
|
$ |
21,847 |
|
$ |
9,032 |
|
$ |
(8,611 |
) |
$ |
22,268 |
|
|
|
|
Accrued |
|
Amounts charged to |
|
Amounts paid |
|
Accrued |
|
||||
|
Nine months ended September 30, 2004 |
|
|
|
|
|
|
|
|
|
||||
|
Lease cancellations and commitments |
|
$ |
11,894 |
|
$ |
9,643 |
|
$ |
160 |
|
$ |
21,697 |
|
|
Termination payments to employees and related costs |
|
242 |
|
1,058 |
|
(729 |
) |
571 |
|
||||
|
Write-off on disposal of assets and related costs |
|
9,789 |
|
(1,193 |
) |
(8,596 |
) |
— |
|
||||
|
|
|
$ |
21,925 |
|
$ |
9,508 |
|
$ |
(9,165 |
) |
$ |
22,268 |
|
The following table summarizes the activity related to the restructuring plans initiated on or prior to December 31, 2002, and accounted for in accordance with EITF 94-3 (in thousands):
|
|
|
Accrued |
|
Amounts charged to |
|
Amounts reversed |
|
Amounts paid |
|
Accrued |
|
|||||
|
Three months ended September 30, 2003 |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Lease cancellations and commitments |
|
$ |
89,216 |
|
$ |
3,269 |
|
$ |
— |
|
$ |
(5,335 |
) |
$ |
87,150 |
|
|
Termination payments to employees and related costs |
|
1,000 |
|
1,240 |
|
— |
|
(979 |
) |
1,261 |
|
|||||
|
Write-off on disposal of assets and related costs |
|
40 |
|
— |
|
— |
|
(40 |
) |
— |
|
|||||
|
|
|
$ |
90,256 |
|
$ |
4,509 |
|
$ |
— |
|
$ |
(6,354 |
) |
$ |
88,411 |
|
|
|
|
Accrued |
|
Amounts charged to |
|
Amounts reversed |
|
Amounts paid |
|
Accrued |
|
|||||
|
Three months ended September 30, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Lease cancellations and commitments |
|
$ |
71,707 |
|
$ |
(34,477 |
) |
$ |
— |
|
$ |
(23,629 |
) |
$ |
13,601 |
|
|
Termination payments to employees and related costs |
|
429 |
|
— |
|
— |
|
— |
|
429 |
|
|||||
|
Write-off on disposal of assets and related costs |
|
1,486 |
|
(9 |
) |
— |
|
(115 |
) |
1,362 |
|
|||||
|
|
|
$ |
73,622 |
|
$ |
(34,486 |
) |
$ |
— |
|
$ |
(23,744 |
) |
$ |
15,392 |
|
|
|
|
Accrued |
|
Amounts charged to |
|
Amounts reversed |
|
Amounts paid |
|
Accrued |
|
|||||
|
Nine months ended September 30, 2003 |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Lease cancellations and commitments |
|
$ |
94,691 |
|
$ |
11,887 |
|
$ |
— |
|
$ |
(19,428 |
) |
$ |
87,150 |
|
|
Termination payments to employees and related costs |
|
1,425 |
|
1,500 |
|
— |
|
(1,664 |
) |
1,261 |
|
|||||
|
Write-off on disposal of assets and related costs |
|
79 |
|
(26 |
) |
— |
|
(53 |
) |
— |
|
|||||
|
|
|
$ |
96,195 |
|
$ |
13,361 |
|
$ |
— |
|
$ |
(21,145 |
) |
$ |
88,411 |
|
23
|
|
|
Accrued |
|
Amounts charged to |
|
Amounts reversed |
|
Amounts paid |
|
Accrued |
|
|||||
|
Nine months ended September 30, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Lease cancellations and commitments |
|
$ |
81,143 |
|
$ |
(33,704 |
) |
$ |
— |
|
$ |
(33,838 |
) |
$ |
13,601 |
|
|
Termination payments to employees and related costs |
|
429 |
|
— |
|
— |
|
— |
|
429 |
|
|||||
|
Write-off on disposal of assets and related costs |
|
1,883 |
|
(9 |
) |
— |
|
(512 |
) |
1,362 |
|
|||||
|
|
|
$ |
83,455 |
|
$ |
(33,713 |
) |
$ |
— |
|
$ |
(34,350 |
) |
$ |
15,392 |
|
During the third quarter of 2004, the Company reached agreements with certain landlords to extinguish approximately $142 million of future real estate obligations. The Company made cash payments of $19.1 million during the third quarter, and is obligated to make an additional cash payment of $18.1 million in January 2005. Standby letters of credit of $18.1 million were issued on our behalf from financial institutions as of September 30, 2004 in favor of our landlord to secure the January 2005 payment. Accordingly, $18.1 million has been included in restricted cash in the accompanying Condensed Consolidated Balance Sheets at September 30, 2004. The Company also transferred ownership of certain furniture, fixtures, and leasehold improvements with a net book value of $8.1 million to the previous landlord. In addition, the Company issued a warrant to purchase approximately 700,000 shares of our common stock at an exercise price of $5.00 per share after a one-year period. The Company currently has a residual lease obligation beginning in 2007 and will make a further cash payment of $4.5 million if it exercises an option to terminate the residual lease obligation prior to the commencement of the lease term. This option to terminate the residual lease obligation is accounted for in accordance with SFAS 146 and is a part of our computation of the restructuring gain. In connection with these agreements, the Company recorded a restructuring gain of $26.1 million in the quarter ended September 30, 2004. The total amount of the net restructuring gain, after inclusion of amounts accrued for employee termination costs, was $25.5 million for the quarter ended September 30, 2004.
The warrant issued in connection with the real estate agreements and the shares of the Company’s common stock issuable on the exercise of the warrant were initially not registered under federal securities laws. In accordance with EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock,” the warrants have been included as a short-term liability and valued at fair value on the date of issuance. The warrants are revalued each period until the warrants are exercised. The change in fair value from the date of issuance to September 30, 2004 of $272,000 has been recorded as a component of the restructuring charge. The warrants will be transferred to permanent equity when the warrants are exercised..
Legal Matters
The Company is party to various litigation matters in the normal course of its business. For each pending matter for which the Company can estimate the amount and range of potential loss, the minimum estimated liability has been recorded. For the remaining matters, the Company is unable to make a reasonable estimate of the liability that could result 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. 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
Revenues
Total revenues decreased 7% during the quarter ended September 30, 2004 to $17.2 million as compared to $18.6 million for the quarter ended September 30, 2003. Total revenues decreased 10% during the nine months ended September 30, 2004 to $58.2 million as compared to $64.8 million for the nine months ended September 30, 2003. A summary of our revenues by geographic region is as follows (dollars in thousands, unaudited):
24
|
|
|
Software |
|
% |
|
Services |
|
% |
|
Total |
|
% |
|
|||
|
Three Months Ended: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
September 30, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Americas |
|
$ |
2,111 |
|
45 |
% |
$ |
7,159 |
|
57 |
% |
$ |
9,270 |
|
54 |
% |
|
Europe |
|
1,884 |
|
41 |
|
4,250 |
|
34 |
|
6,134 |
|
36 |
|
|||
|
Asia Pacific |
|
659 |
|
14 |
|
1,161 |
|
9 |
|
1,820 |
|
10 |
|
|||
|
Total |
|
$ |
4,654 |
|
100 |
% |
$ |
12,570 |
|
100 |
% |
$ |
17,224 |
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
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 |
% |
|
|
|
Software |
|
% |
|
Services |
|
% |
|
Total |
|
% |
|
|||
|
Nine Months Ended: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
September 30, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Americas |
|
$ |
6,711 |
|
34 |
% |
$ |
21,061 |
|
54 |
% |
$ |
27,772 |
|
48 |
% |
|
Europe |
|
10,598 |
|
54 |
|
14,612 |
|
38 |
|
25,210 |
|
43 |
|
|||
|
Asia Pacific |
|
2,282 |
|
12 |
|
2,977 |
|
8 |
|
5,259 |
|
9 |
|
|||
|
Total |
|
$ |
19,591 |
|
100 |
% |
$ |
38,650 |
|
100 |
% |
$ |
58,241 |
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
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 |
% |
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 8% during the quarter ended September 30, 2004 to $4.7 million as compared to $5.1 million for the quarter ended September 30, 2003. Software license revenue decreased 1% during the nine months ended September 30, 2004 to $19.6 million as compared to $19.9 million for the nine months ended September 30, 2003.
Americas license revenues increased 3% for the three months ended September 30, 2004 to slightly in excess of $2.1 million as compared to slightly below $2.1 million for the three months ended September 30, 2003. Americas license revenues decreased 24% for the nine months ended September 30, 2004 to $6.7 million as compared to $8.9 million for the nine months ended September 30, 2003. Americas license revenues declined in the nine month period due to a North American sales force reorganization and continued softness in the North American market for enterprise software.
European license revenues decreased 22% for the three months ended September 30, 2004 to $1.9 million as compared to $2.4 million for the three months ended September 30, 2003. European license revenues decreased for the three month period mainly due to a decline in license transactions and related revenue from new customers and increased customer controls over the purchasing approval processes. European license revenues increased 41% for the nine months ended September 30, 2004 to $10.6 million as compared to $7.5 million for the nine months ended September 30, 2003. European license revenue increased for the nine month period mainly due to a larger number of follow-on licenses with European customers that are expanding the use of our technology.
Asia Pacific license revenue increased 7% for the three months ended September 30, 2004 as compared to the three months ended September 30, 2003 due to an increased focus on sales in this region, which included adding headcount within the sales department. Asia Pacific license revenue decreased 35% for the nine months ended September 30, 2004 to $2.3 million as compared to $3.5 million for the nine months ended September 30, 2003 primarily due to a single large license transaction in fiscal 2003 that did not recur in fiscal 2004.
25
Services revenues consisting of consulting revenues, customer training revenues, maintenance revenues and consulting training expense revenue decreased 7% during the quarter ended September 30, 2004 to $12.6 million as compared to $13.5 million for the quarter ended September 30, 2003. Services revenues decreased 14% during the nine months ended September 30, 2004 to $38.7 million as compared to $45.0 million for the nine months ended September 30, 2003.
Consulting services revenues increased 7% for the three months ended September 30, 2004 to $5.0 million as compared to $4.7 million for the three months ended September 30, 2003. The increase during the current quarter was due to additional consulting services being performed for customers. Consulting services revenues decreased 11% for the nine months ended September 30, 2004 to $15.1 million as compared to $17.0 million for the nine months ended September 30, 2003. The decline in the nine month period was attributable to declines in license transactions and related revenues from new customers.
Maintenance revenues decreased 14% for the three months ended September 30, 2004 to $7.6 million as compared to $8.8 million for the three months ended September 30, 2003. Maintenance revenues decreased 16% for the nine months ended September 30, 2004 to $23.5 million as compared to $27.9 million for the nine months ended September 30, 2003. The declines in both periods were primarily due to certain existing customers declining the renewal of annual maintenance services.
Cost of Revenues
Cost of software license revenues includes 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, consultant fees incurred on consulting projects, post-contract customer support and instructional training services.
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
||||||||||||||||
|
|
|
2004 |
|
% |
|
2003 |
|
% |
|
2004 |
|
% |
|
2003 |
|
% |
|
||||
|
Cost of software licenses (1) |
|
$ |
256 |
|
6 |
% |
$ |
666 |
|
13 |
% |
$ |
1,147 |
|
6 |
% |
$ |
1,549 |
|
8 |
% |
|
Cost of services (2) |
|
6,391 |
|
51 |
|
5,915 |
|
44 |
|
18,970 |
|
49 |
|
19,650 |
|
44 |
|
||||
|
Total cost of revenues (3) |
|
$ |
6,647 |
|
39 |
% |
$ |
6,581 |
|
35 |
% |
$ |
20,117 |
|
35 |
% |
$ |
21,199 |
|
33 |
% |
(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 7% as a percentage of software license revenues during the three months ended September 30, 2004 to 6% as compared to 13% for the three months ended September 30, 2003. The cost of software licenses decreased 2% as a percentage of software license revenues during the nine months ended September 30, 2004 to 6% as compared to 8% for the nine months ended September 30, 2003. The declines for both periods were due to fewer royalty-bearing, third-party products being incorporated into the Company’s products in 2004.
Cost of services as a percentage of revenue remained between 44% and 51% of services revenue for both the three and nine months ended September 30, 2004 and September 30, 2003. The year-over-year increases in cost of services as a percentage of services revenue were due to lower maintenance revenue due to customer attrition.
Operating Expenses and Other Income, net
Operating expenses consists of the following:
• 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 such time that 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
26
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.
• Other intangible amortization represents costs to amortize other intangible assets, generally on a straight-line basis. As described in Note 7 in the Notes to Consolidated Financial Statements, as of January 1, 2002, 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 a recognizable intangible asset as defined by SFAS 142.
• Restructuring charges represent costs incurred to restructure company operations. These charges, including charges for excess facilities, severance and certain non-cash items, were recorded under the provisions of EITF 94-3, and SFAS 146.
A summary of operating expenses (benefit) is set forth in the following table. The percentage of expenses (benefit) is calculated based on total revenues (in thousands):
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
||||||||||||||||
|
|
|
2004 |
|
% (1) |
|
2003 |
|
% (1) |
|
2004 |
|
% (1) |
|
2003 |
|
% (1) |
|
||||
|
Research and development |
|
$ |
4,600 |
|
27 |
% |
$ |
4,467 |
|
24 |
% |
$ |
13,997 |
|
24 |
% |
$ |
16,681 |
|
26 |
% |
|
Sales and marketing |
|
6,020 |
|
35 |
|
6,710 |
|
36 |
|
20,365 |
|
35 |
|
19,585 |
|
30 |
|
||||
|
General and administrative |
|
2,335 |
|
13 |
|
2,885 |
|
16 |
|
7,152 |
|
12 |
|
7,586 |
|
12 |
|
||||
|
Litigation settlement costs |
|
— |
|
— |
|
4,250 |
|
23 |
|
— |
|
— |
|
4,250 |
|
6 |
|
||||
|
Goodwill and intangible amortization |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
887 |
|
1 |
|
||||
|
Restructuring charge |
|
(25,454 |
) |
(142 |
) |
4,509 |
|
24 |
|
(24,205 |
) |
(42 |
) |
13,361 |
|
21 |
|
||||
|
Impairment of assets |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
||||
|
Total operating expenses (benefit) |
|
$ |
(12,499 |
) |
(73 |
%) |
$ |
22,821 |
|
123 |
% |
$ |
17,309 |
|
30 |
% |
$ |
62,350 |
|
96 |
% |
(1) Expressed as a percent of total revenues for the period indicated
Research and development expenses increased 3% during the quarter ended September 30, 2004 to $4.6 million as compared to $4.5 million for the quarter ended September 30, 2003. This increase was due to the Company recording 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, offset by lower depreciation costs in the quarter ended September 30, 2004 as assets had been fully depreciated in prior quarters.
Research and development decreased 16% during the nine months ended September 30, 2004 to $14.0 million as compared to $16.7 million for the nine months ended September 30, 2003. The decrease for the nine month period was primarily attributable to lower depreciation costs for fully depreciated assets and headcount reductions as a result of our cost-cutting efforts. Partially offsetting these declines were incremental engineering and quality assurance spending in the first quarter of fiscal 2004 related to the launch of the Company’s BroadVision Process™ product.
Sales and marketing expenses decreased 10% during the quarter ended September 30, 2004 to $6.0 million as compared to $6.7 million for the quarter ended September 30, 2003. The decrease during the three month period was attributable to lower commissions paid as a result of lower license revenues. Sales and marketing increased 4% during the nine months ended September 30, 2004 to $20.4 million as compared to $19.6 million for the nine months ended September 30, 2003. The increase for the nine month period was due to costs associated with the launch of BroadVision’s newest product, BroadVision Process including the Energizing E-Business World Tour completed during the second quarter of 2004.
General and administrative expenses decreased 19% during the quarter ended September 30, 2004 to $2.3 million as compared to $2.9 million for the quarter ended September 30, 2003. General and administrative expenses decreased 6% during the nine months ended September 30, 2004 to $7.2 million as compared to $7.6 million for the nine months ended September 30, 2003. The decrease during the nine month period was due to lower legal services, offset by higher accounting costs related to the implementation of certain provisions of the Sarbanes-Oxley Act of 2002.
Litigation Settlement Costs 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. As of September 30, 2004, all payments due under the settlement agreement have been made.
27
Other intangible amortization. As described in Note 7 in the Notes to the Condensed Consolidated Financial Statements above, we no longer amortize goodwill on 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, 2004. 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 have 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. Through September 30, 2004, the Company has approved restructuring plans to, among other things, reduce its workforce and consolidate facilities. Restructuring and asset impairment charges were taken to align the Company’s cost structure with changing market conditions and to create a more efficient organization. Our restructuring charges comprise primarily: (i) severance and benefits termination costs related to the reduction of our workforce; (ii) lease termination costs and/or costs associated with permanently vacating our 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. We account for each of these costs in accordance with Staff Accounting Bulletin No. 100, Restructuring and Impairment Charges.
Restructuring charges (gains) consisted of the following (in thousands):
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
|
2004 |
|
2003 |
|
2004 |
|
2003 |
|
||||
|
Facilities |
|
$ |
(26,036 |
) |
$ |
3,269 |
|
$ |
(25,263 |
) |
$ |
11,887 |
|
|
Severance and other |
|
582 |
|
1,240 |
|
1,058 |
|
1,474 |
|
||||
|
Total |
|
$ |
(25,454 |
) |
$ |
4,509 |
|
$ |
(24,205 |
) |
$ |
13,361 |
|
The facilities gain for the three and nine months ended September 30, 2004, related primarily to settlements reached between the Company and certain landlords for elimination of future lease obligations (see Note 6 of the Notes to Condensed Consolidated Financial Statements). The excess facilities charge for the three and nine month period ended September 30, 2003, related to adjustments to underlying sublease assumptions. The severance and termination costs for all periods reflect severance, payroll taxes and COBRA benefits related to restructuring plans implemented prior to the end of the period. The Company recorded these charges at 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 and circumstances.
Interest income, net. Interest income, net decreased 5% to $77,000 for the three months ended September 30, 2004 as compared to $81,000 for the three months ended September 30, 2003. Interest income decreased 57% during the nine months ended September 30, 2004 to $288,000 as compared to $673,000 for the nine months ended September 30, 2003. Interest income has declined year-over-year due to lower cash balances and lower interest rates being earned on invested funds.
Other income, net. We recorded other income of $238,000 for the three months ended September 30, 2004 as compared to other income of $574,000 for the three months ended September 30, 2003. During the nine months ended September 30, 2004 we recorded other income of $59,000 as compared to income of $1.8 million for the nine months ended September 30, 2003. The decrease for the three and nine month period was primarily due to foreign currency gains in the periods ended September 30, 2003 and foreign currency losses in the periods ended September 30, 2004. Our preliminary results announced by a press release dated October 20, 2004, classified warrants issued as a part of a lease termination agreement as equity based upon the valuation on the date of issuance. The charge associated with the issuance of these warrants was included in other income, net. Pursuant to certain accounting provisions, we have reclassified the warrants as debt, resulting in a charge of $272,000 included in the restructuring charges in the quarter ended September 30, 2004, related to the revaluation of the debt from the date of issuance to September 30, 2004.
Income taxes. During the three months ended September 30, 2004, we recorded a tax provision of $11,000 as compared to a provision of $87,000 for the three months ended September 30, 2003. During the nine months ended September 30, 2004 we recorded a tax provision of $141,000 as compared to a provision of $256,000 for the nine months ended September 30, 2003. Amounts consist primarily of estimates for income taxes in our foreign jurisdictions. The decreases in tax provisions from the prior year were due to reduced foreign revenues during the periods ended September 30, 2004.
28
Liquidity and Capital Resources
Overview
As of September 30, 2004, cash, cash equivalents, and restricted cash totaled $49.1 million, which represents a decrease of $49.5 million as compared to a balance of $98.6 million on December 31, 2003. This decrease was primarily attributable to net cash used for operations, payments related to settlement of outstanding lease obligations, and payment of a portion of the outstanding balance of our revolving line of credit.
|
|
|
September 30, |
|
December 31, |
|
||
|
|
|
|
|
|
|
||
|
Cash and cash equivalents |
|
$ |
28,144 |
|
$ |
78,776 |
|
|
Restricted cash |
|
$ |
20,960 |
|
$ |
19,827 |
|
|
Working capital (deficit) |
|
$ |
(19,583 |
) |
$ |
748 |
|
|
Working capital ratio |
|
0.8 |
|
1.0 |
|
||
We had various credit facilities with a commercial lender that include a revolving line of credit, term debt in the form of notes payable, and an equipment line of credit.
We maintain a revolving line of credit, which is collateralized by all of our assets and under which borrowings bear interest at the bank’s prime rate. Interest is due monthly and principal is due at expiration in February 2005. During the third quarter of 2004, we repaid a net $12.0 million on the line of credit as a part of our entering into an amended loan agreement with the lender. At September 30, 2004 and December 31, 2003, $15.0 million and $27.0 million was outstanding under the line of credit, respectively. In September 2004, we entered into a renewed and amended loan and security agreement with the lender. The agreement requires us to maintain certain levels in unrestricted cash and cash equivalents (excluding equity investments), and to maintain certain levels on deposit with our commercial lender. The agreement also modified the financial covenants and reduced the borrowing limit for the revolving line of credit from $27.0 to $15.0 million. As of September 30, 2004, we were not in compliance with the financial covenants of the commercial credit facility and, as a result, we cannot borrow funds under the revolving line of credit. Subsequent to September 30, 2004, we repaid the $15 million outstanding balance on the line of credit from existing cash.
As of September 30, 2004 and December 31, 2003, outstanding term debt borrowings were approximately $1.2 million and $1.9 million, respectively. Borrowings bear interest between the bank’s prime rate (4.75% as of September 30, 2004 and 4.00% as of December 31, 2003) and the bank’s 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 $244,000 are due through the remainder of 2004, $611,000 is due in 2005, and a final payment of $357,000 is due in 2006.
During the first quarter of 2004, we entered into a $500,000 equipment line of credit with the commercial lender. Such line of credit is secured by all of our assets and under which borrowings bear interest at the banks prime rate (4.75% as of September 30, 2004) plus .75%. Principal payments are due in 36 monthly payments. Principal payments of $6,428 are due through the remainder 2004, $25,715 is due in 2005 and 2006, and a final payment of $6,429 is due in 2007. As of September 30, 2004, $64,288 was outstanding under the equipment loan.
Commitments totaling $21.0 million and $19.8 million in the form of standby letters of credit were issued on our behalf from financial institutions as of September 30, 2004 and December 31, 2003, respectively, primarily in favor of our various landlords to secure obligations under our facility leases or future lease termination costs. Accordingly, $21.0 million and $19.8 million have been presented as restricted cash in the accompanying Condensed Consolidated Balance Sheets at September 30, 2004 and December 31, 2003, respectively.
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, 2004 and December 31, 2003. 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 and nine months ended September 30, 2004 and 2003.
Cash Flows from Operating Activities
Net cash used for operating activities was $38.8 million for the nine months ended September 30, 2004. Net cash used for operating activities for the nine month period ended September 30, 2004 was primarily attributable to the net loss of $3.5 million (before extraordinary gains related to real estate transactions) and changes in balance sheet accounts related to the settlement of long term lease obligations. The accrued liabilities related to restructuring costs for excess leased facilities decreased from $104.7 million
29
at December 31, 2003 to $36.7 million as of September 30, 2004. As a result of the settlement of future lease obligations during the third quarter, we recorded a $26.0 million gain and paid $19.1 million in cash to extinguish future real estate obligations, and agreed to pay a further $18.1 million in January 2005, and were granted an option to terminate the remaining lease obligations for $4.5 million. Offsetting these activities related to the lease settlements during the period were several non-cash items, including non-cash depreciation and amortization expense of $3.1 million, and changes to balance sheet accounts, including a decrease in accounts receivable of $5.0 million due to reduced revenues, offset by a decrease in unearned revenue and deferred maintenance of $6.1 million.
Net cash used for operating activities during the nine months ended September 30, 2003 was $18.8 million, primarily due to the net loss of $16.5 million, decreases in accounts payable and accrued expenses of $16.2 million, and a decrease in unearned revenue and deferred maintenance of $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, as well as other changes in balance sheet accounts, including a decrease in accounts receivable of $12.2 million and a decrease in prepaids and other assets of $3.5 million.
Cash Flows from Investing Activities
Net cash used for investing activities was $0.9 million for the nine months ended September 30, 2004 and was primarily due to transfers to restricted cash. Net 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 $24.0 million. Capital expenditures were $489,000 and $131,000 during the nine months ended September 30, 2004 and 2003, respectively. Our capital expenditures consisted of purchases of operating resources to manage our operations and consisted primarily of computer hardware and software.
Cash Flows from Financing Activities
Net cash used in financing activities was $11.1 million for the nine months ended September 30, 2004, consisting of $1.6 million in proceeds from the issuance of common stock and $12.7 million used for repayment of borrowings, net of new borrowings. Net 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 in addition to $1.0 million provided by new borrowings, net of repayments of borrowings.
Leases and Other Contractual Obligations
We lease our headquarters facility and our other facilities under non-cancelable operating lease agreements expiring through the year 2010. Under the terms of the agreements, we are required to pay lease costs, property taxes, insurance and normal maintenance costs.
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, 2004, under non-cancelable operating lease agreements, together with amounts included in restructuring reserves is as follows (in millions):
|
Years Ending December 31, |
|
Operating |
|
|
|
2004 |
|
$ |
2.3 |
|
|
2005 |
|
9.1 |
|
|
|
2006 |
|
6.5 |
|
|
|
2007 |
|
3.5 |
|
|
|
2008 and thereafter |
|
1.4 |
|
|
|
|
|
|
|
|
|
Total minimum lease payments |
|
$ |
22.8 |
|
As of September 30, 2004, we have accrued $36.7 million of estimated future facilities costs as a restructuring accrual. This accrual includes the above minimum lease payments that are related to excess and abandoned space under lease, a lease termination payment of $18.1 million due in January 2005 and certain lease related allowances fees and expenses, partially offset by estimated future sublease income (See Note 6 in the Notes to Condensed Consolidated Financial Statements).
The estimated sublease income netted against the restructuring accrual consists of the following (unaudited, in millions):
30
|
Sublease income to be received under non-cancelable sublease agreements signed prior to September 30, 2004 |
|
$ |
4.4 |
|
|
Estimated sublease income for sublease agreements yet to be negotiated |
|
2.8 |
|
|
|
Total estimated sublease income |
|
$ |
7.2 |
|
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 |
|
$ |
19,163 |
|
|
1-3 years |
|
— |
|
|
|
4-5 years |
|
797 |
|
|
|
Over 5 years |
|
1,000 |
|
|
|
Total |
|
$ |
20,960 |
|
Restricted cash represents collateral for these letters of credit.
During the third quarter of 2004, the Company reached agreements with certain landlords to extinguish approximately $142 million of future real estate obligations. The Company made cash payments of $19.1 million during the third quarter, and is obligated to make an additional cash payment of $18.1 million in January 2005. Standby letters of credit of $18.1 million were issued on our behalf from financial institutions as of September 30, 2004 in favor of our landlord to secure the January 2005 payment. Accordingly, $18.1 million has been included in restricted cash in the accompanying Condensed Consolidated Balance Sheets at September 30, 2004. The Company also transferred ownership of certain furniture, fixtures, and leasehold improvements with a net book value of $8.1 million to the previous landlord. In addition, the Company issued a warrant to purchase approximately 700,000 shares of our common stock at an exercise price of $5.00 per share exercisable after a one-year period. The Company currently has a residual lease obligation beginning in 2007 and will make a further cash payment of $4.5 million if it exercises an option to terminate the residual real estate obligation prior to the commencement of the lease term. This option to terminate the residual lease obligation is accounted for in accordance with SFAS 146 and is part of our computation of the restructuring gain.
Factors That May Affect Future Liquidity
The following table summarizes our contractual obligations and the effect such obligations are expected to have on our liquidity and cash flows in future years. Restricted cash represents the collateral for our letters of credit.
|
|
|
Total |
|
Less than |
|
1-3 years |
|
4-5 years |
|
Over |
|
|||||
|
|
|
(in millions) |
|
|||||||||||||
|
|
|
|
|
|||||||||||||
|
Letters of credit |
|
$ |
21.0 |
|
$ |
19.2 |
|
$ |
— |
|
$ |
0.8 |
|
$ |
1.0 |
|
|
Long-term debt |
|
1.3 |
|
0.7 |
|
0.6 |
|
— |
|
— |
|
|||||
|
SVB Facility |
|
15.0 |
|
15.0 |
|
— |
|
— |
|
— |
|
|||||
|
Non-cancelable operating leases |
|
22.8 |
|
11.4 |
|
10.0 |
|
1.4 |
|
— |
|
|||||
|
|
|
$ |
60.1 |
|
$ |
46.3 |
|
$ |
10.6 |
|
$ |
2.2 |
|
$ |
1.0 |
|
We anticipate that future operating expenses and capital expenditures, will constitute a material use of our existing cash resources. As a result, our net cash flows will depend heavily on the level of future revenues, our ability to further restructure operations successfully and our ability to manage infrastructure costs.
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 our need to obtain additional financing. Also, we may find it necessary to obtain additional equity or debt financing in order to support a more rapid expansion, develop new or enhanced products or services, respond to competitive pressures, acquire complementary businesses or technologies or respond to unanticipated requirements.
31
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, 2003 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, non-renewal of maintenance agreements, 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 our commercial line of credit during the third quarter of fiscal 2004. The SVB Facility is secured by substantially all of our owned assets. At September 30, 2004 $15.0 million was outstanding under the line of credit. Interest is due monthly and principal is due at expiration in February 2005. 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, 2004, we were not in compliance with certain financial covenants of the commercial credit facilities and, as a result, cannot borrow funds under the SVB Facility. Subsequent to September 30, 2004, we repaid the $15 million outstanding balance on the line of credit from existing cash.
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 face a number of 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
32
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 for the past several years. If the economic environment continues to decline or if the current global slowdown worsens or becomes more 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
BroadVision has an investment of 19.9% in Roundarch, a Customer Relationship Management, or 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, transactions involving Roundarch represented $17,000 of our revenue. For the nine months ended September 30, 2004 and 2003, revenues from Roundarch were $6,900 and $219,000, respectively.
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, 2004 and December 31, 2003. 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 and nine-month periods ended September 30, 2004 and 2003.
As of September 20, 2004, we had $15.0 million outstanding on our revolving line of credit. Interest is payable monthly at the bank’s prime rate and principal is due in full in February 2005. Additionally, we have two outstanding term loans as of September 30, 2004 totaling $1.2 million in principal. Interest on those term loans are between the bank’s prime rate (4.75% as of September 30, 2004) and the banks prime rate plus 1.25%.
Cash and Cash Equivalents, Short-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.
All short-term investments have a remaining maturity of twelve months or less. Total short-term and investment unrealized gains (losses) were $49,000 and $(83,000) for the nine months ended September 30, 2004 and 2003, respectively.
Our cash and cash equivalents consisted of the following as of September 30, 2004 (in thousands):
|
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
|
||||
|
Cash |
|
$ |
49,101 |
|
$ |
— |
|
$ |
— |
|
$ |
49,101 |
|
|
Money market |
|
3 |
|
— |
|
— |
|
3 |
|
||||
|
Corporate notes/bonds |
|
— |
|
— |
|
— |
|
— |
|
||||
|
|
|
49,104 |
|
— |
|
— |
|
49,104 |
|
||||
Included in the table above in cash and cash equivalents are $21.0 million of restricted cash and investments.
Our cash and cash equivalents consisted of the following as of December 31, 2003 (in thousands):
33
|
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
|
||||
|
Cash |
|
$ |
65,592 |
|
$ |
— |
|
$ |
— |
|
$ |
65,592 |
|
|
Money market |
|
32,602 |
|
— |
|
— |
|
32,602 |
|
||||
|
Corporate notes/bonds |
|
458 |
|
— |
|
(49 |
) |
409 |
|
||||
|
|
|
$ |
98,652 |
|
$ |
— |
|
$ |
(49 |
) |
$ |
98,603 |
|
Included in the table above in cash and cash equivalents are restricted cash and investments of $19.8 million.
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 and nine month periods ended September 30, 2004 and 2003, no single customer accounted for more than 10% of total revenue. At September 30, 2004, one customer accounted for 13% 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.
Foreign Currency
We license our products and maintain significant operations in foreign countries. Fluctuations in the value of foreign currencies, principally the Euro, relative to the United States dollar have impacted our operating results in the past and may do so in the future. We expect that international license, maintenance and consulting revenues will continue to account for a significant portion of our total revenues in the future. We pay the expenses of our international operations in local currencies and do not currently engage in hedging transactions with respect to such obligations.
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, 2004 was approximately $574,000.
ITEM 4. Controls and Procedures
Our Chief Executive Officer and our Chief Financial Officer are responsible for establishing and maintaining “disclosure controls and procedures” (as defined in the rules promulgated under the Securities Exchange Act of 1934, as amended) for our company. 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 September 30, 2004, the end of the period covered by this report.
Changes in Internal Control Over Financial Reporting
The Company is currently undergoing a comprehensive effort to ensure compliance with Section 404 of the Sarbanes-Oxley Act of 2002 for the year ending December 31, 2004. This effort includes internal control documentation and review under the direction of senior management. During the course of these activities, the Company has identified certain internal control issues which management believes need to be improved. The review has not identified any material weakness in internal control as defined
34
by the Public Company Accounting Oversight Board. However, the Company has made improvements in its internal controls over financial reporting as a result of its review efforts. These improvements include additional documentation of policies and procedures, implementation of analytical review procedures, additional calendar scheduling and checklists for the preparation of consolidated financial statements and other consolidated financial information, in-depth review to determine the adequacy of the accounting organization to meet the needs of the Company, improved segregation of duties, and additional monitoring controls. Management intends to continue to review, revise, and improve our internal controls over financial reporting.
Limitations on the Effectiveness of Controls
Section 404 of the Sarbanes-Oxley Act of 2002 requires that management document and test internal controls over financial reporting and to assert in our Annual Report on Form 10-K for the year ending December 31, 2004 whether the internal controls over financial reporting at December 31, 2004 are effective. Any material weakness in internal controls over financial reporting existing at that date will preclude management from making a positive assertion. At this time, there is some degree of uncertainty regarding whether management will be able to implement new policies and procedures to improve the internal controls over financial reporting and to sufficiently document and test the revised internal controls procedures in order to make a positive assertion as to the effectiveness of internal controls over financial reporting by December 31, 2004.
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 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 controls. 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, controls 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. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, and our Chief Executive Officer and the Chief Financial Officer have concluded that these controls and procedures are effective at the “reasonable assurance” level.
35
|
|
Legal Proceedings |
|||
|
|
|
|
||
|
|
|
The Company is subject to various claims and legal actions arising from time to time 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 we do not expect their ultimate disposition 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. |
||
|
|
|
|
||
|
|
|
Metropolitan Life Insurance Company, as landlord under a lease for facilities located in EL Segundo, CA, filed a lawsuit against the Company for breach of the lease and is seeking recovery of lost rent and other damages. Trial has been set for May 2005. |
||
|
|
|
|
||
|
|
Unregistered Sales of Equity Securities and Use of Proceeds |
|||
|
|
|
|
||
|
|
|
Not applicable. |
||
|
|
|
|
||
|
|
Defaults Upon Senior Securities |
|||
|
|
|
|
||
|
|
|
Not applicable. |
||
|
|
|
|
||
|
|
Submission of Matters to a Vote of Security Holders |
|||
|
|
|
|
||
|
|
|
Not applicable. |
||
|
|
|
|
||
|
|
Other Information |
|||
|
|
|
|
||
|
|
|
Not applicable. |
||
|
|
|
|
||
|
|
Exhibits |
|||
|
|
|
|
||
|
|
|
Exhibits |
|
Description |
|
|
|
|
|
|
|
|
|
3.1 (1) |
|
Amended and Restated Certificate of Incorporation |
|
|
|
3.2 (2) |
|
Certificate of Amendment of Certificate of Incorporation |
|
|
|
3.3 (1) |
|
Amended and Restated Bylaws |
|
|
|
4.1 (1) |
|
References are hereby made to Exhibits 3.1 to 3.2 |
|
|
|
4.3 (1) |
|
Seconded Amended and Restates Investor’s Rights Agreement dated April 15, 1996 among the Company and certain of its stockholders |
|
|
|
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 |
|
|
|
|
|
|
|
|
|
(1) Incorporated by reference to the Company’s Registration Statement on Form S-1 filed on April 19, 1996 as amended by Amendment No. 1 filed on May 9, 1996, Amendment No. 2 filed on May 29, 1996 and Amendment No. 3 filed on June 17, 1996. |
|
|
|
|
|
|
|
(2) Incorporated by reference to the Company’s Proxy Statement filed on May 14, 2002. |
36
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 9, 2004 |
|
By: |
/s/ Pehong Chen |
|
|
|
|
|
|
Pehong Chen |
||
|
|
|
|
Chairman
of the Board, President and Chief Executive Officer |
||
|
|
|
|
|
||
|
Date: November 9, 2004 |
|
By: |
/s/ William E. Meyer |
|
|
|
|
|
|
William E. Meyer |
||
|
|
|
|
Executive
Vice President and Chief Financial Officer |
||
37
BROADVISION, INC. QUARTERLY REPORT ON FORM 10-Q SEPTEMBER 30, 2004
INDEX TO EXHIBITS
|
Exhibits |
|
Description |
|
|
|
|
|
3.1 (1) |
|
Amended and Restated Certificate of Incorporation |
|
3.2 (2) |
|
Certificate of Amendment of Certificate of Incorporation |
|
3.3 (1) |
|
Amended and Restated Bylaws |
|
4.1 (1) |
|
References are hereby made to Exhibits 3.1 to 3.2 |
|
4.3 (1) |
|
Seconded Amended and Restates Investor’s Rights Agreement dated April 15, 1996 among the Company and certain of its stockholders |
|
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 |
(1) Incorporated by reference to the Company’s Registration Statement on Form S-1 filed on April 19, 1996 as amended by Amendment No. 1 filed on May 9, 1996, Amendment No. 2 filed on May 29, 1996 and Amendment No. 3 filed on June 17, 1996.
(2) Incorporated by reference to the Company’s Proxy Statement filed on May 14, 2002.
38