(1) Includes money market funds.
(2) Includes held-to-maturity bonds and certificates of deposit.
Our financial instruments consist of cash equivalents, short-term investments, accounts receivable, and accounts payable. We do not have any derivative financial instruments. We believe the reported carrying amounts of our financial instruments approximates fair value, based upon the short maturity of cash equivalents, accounts receivable and payable, and based on the current rates available to us on short-term investments.
Foreign Currency
We license our products and maintain significant operations in foreign countries. Fluctuations in the value of foreign currencies, principally the Euro, British Pound and Japanese Yen, 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 licenses, 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 equity investments in public and non-public companies that are accounted for under either the cost method of accounting or the equity 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 Consolidated Statement of Operations. Equity investments are accounted for under the equity method of accounting when we have a minority interest and have the ability to exercise significant influence. These investments are classified as available for sale and are carried at cost with periodic adjustments to carrying value for equity in net income (loss) of the equity investee. Such adjustments are recorded as a component of other income, net. Any decline in value of our investments, which is other than a temporary decline, is charged to earnings during the period in which the impairment occurs. These investments were either liquidated or written-off in 2005 and a net gain of $17,000 was recorded. In 2006, we received approximately $426,000 cash related to investments we made in prior years. There was no net gain or loss in 2007. In 2008, we received approximately $35,000 cash related to investments we made in prior years. Those investments were accounted for under the lower of cost or market method and were written off in prior years. The gain is reported under "Other Income , net" in the accompanying Consolidated Statements of Operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following Consolidated Financial Statements and the related notes thereto of BroadVision, Inc. and the Report of the Company’s Independent Registered Public Accounting Firm are filed as a part of this Form 10-K.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
BroadVision, Inc.
We have audited the accompanying consolidated balance sheets of BroadVision, Inc. and its subsidiaries as of December 31, 2008 and 2007, the related statements of operations, stockholders' equity (deficit) and comprehensive income (loss), and cash flows for each of the years in the three-year period ended December 31, 2008. Our audits also included the financial statement schedule listed in the accompanying index at item 15(a)2. We also have audited BroadVision, Inc.'s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control -- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). BroadVision, Inc.'s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these financial statements and financial statement schedule and an opinion on the Company's internal control over financial reporting based on our integrated audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of BroadVision, Inc. as of December 31, 2008 and 2007, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2008 in conformity with U.S. generally accepted accounting principles. In addition, in our opinion, the financial statement schedule listed in the accompanying index at Item 15(a)2 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, BroadVision, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control -- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
/s/ Odenberg, Ullakko, Muranishi & Co. LLP
San Francisco, California
February 24, 2009
BROADVISION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value amounts)
| | December 31, | |
| | | 2008 | | | 2007 | |
| ASSETS | |
| Current assets: | | | | | | |
| Cash and cash equivalents | | $ | 52,884 | | | $ | 53,973 | |
| Short-term investments | | | 9,004 | | | | - | |
| Accounts receivable, net of reserves of $366 and $585 as of December 31, 2008 and 2007, respectively | | | 8,167 | | | | 7,614 | |
| Restricted cash | | | 20 | | | | 20 | |
| Prepaids and other | | | 2,585 | | | | 1,410 | |
| Total current assets | | | 72,660 | | | | 63,017 | |
| Property and equipment, net | | | 514 | | | | 688 | |
| Restricted cash, net of current portion | | | 1,000 | | | | 1,000 | |
| Goodwill | | | - | | | | 25,066 | |
| Other assets | | | 563 | | | | 541 | |
| Total assets | | $ | 74,737 | | | $ | 90,312 | |
| | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS' EQUITY | |
| Current liabilities: | | | | | | | | |
| Accounts payable | | $ | 1,251 | | | $ | 1,359 | |
| Accrued expenses | | | 5,415 | | | | 6,386 | |
| Warrant liability | | | 155 | | | | 4,195 | |
| Unearned revenue | | | 5,810 | | | | 2,857 | |
| Deferred maintenance | | | 8,959 | | | | 7,726 | |
| Total current liabilities | | | 21,590 | | | | 22,523 | |
| Other non-current liabilities | | | 2,429 | | | | 3,024 | |
| Total liabilities | | | 24,019 | | | | 25,547 | |
| Commitments and contingencies (Note 7) | | | | | | | | |
| Stockholders' equity: | | | | | | | | |
Convertible preferred stock, $0.0001 par value; 1,000 shares authorized; none issued and outstanding | | | - | | | | - | |
Common stock, $0.0001 par value; 11,200 shares authorized; 4,376 and 4,357 shares issued and outstanding as of December 31, 2008 and 2007, respectively | | | - | | | | - | |
| Additional paid-in capital | | | 1,258,604 | | | | 1,257,142 | |
| Accumulated other comprehensive (loss) income | | | (483 | ) | | | 16 | |
| Accumulated deficit | | | (1,207,403 | ) | | | (1,192,393 | ) |
| Total stockholders' equity | | | 50,718 | | | | 64,765 | |
| Total liabilities and stockholders' equity | | $ | 74,737 | | | $ | 90,312 | |
The accompanying notes are an integral part of these Consolidated Financial Statements
BROADVISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
| | Years Ended December 31, | |
| | | 2008 | | | 2007 | | | 2006 | |
| Revenues: | | | | | | | | | |
| Software licenses | | $ | 12,137 | | | $ | 21,127 | | | $ | 15,215 | |
| Services | | | 23,766 | | | | 28,891 | | | | 36,769 | |
| Total revenues | | | 35,903 | | | | 50,018 | | | | 51,984 | |
| Cost of revenues: | | | | | | | | | | | | |
| Cost of software licenses | | | 26 | | | | 45 | | | | 258 | |
| Cost of services | | | 8,885 | | | | 8,961 | | | | 12,456 | |
| Total cost of revenues | | | 8,911 | | | | 9,006 | | | | 12,714 | |
| Gross profit | | | 26,992 | | | | 41,012 | | | | 39,270 | |
| Operating expenses: | | | | | | | | | | | | |
| Research and development | | | 9,183 | | | | 9,668 | | | | 10,510 | |
| Sales and marketing | | | 7,772 | | | | 8,131 | | | | 8,653 | |
| General and administrative | | | 6,412 | | | | 6,293 | | | | 8,019 | |
| Goodwill impairment | | | 25,066 | | | | - | | | | - | |
| Restructuring (credits), charges | | | (26 | ) | | | 649 | | | | (3,369 | ) |
| Total operating expenses | | | 48,407 | | | | 24,741 | | | | 23,813 | |
| Operating (loss) income | | | (21,415 | ) | | | 16,271 | | | | 15,457 | |
| Other income: | | | | | | | | | | | | |
Interest income, net | | | 1,628 | | | | 1,906 | | | | 638 | |
Income (expense) from revaluation of warrants | | | 4,040 | | | | (3,147 | ) | | | (1,333 | ) |
Other income, net | | | 1,257 | | | | 2,175 | | | | 888 | |
Total other income | | | 6,925 | | | | 934 | | | | 193 | |
| (Loss) income before income taxes | | | (14,490 | ) | | | 17,205 | | | | 15,650 | |
| Income taxes (expense) benefit | | | (520 | ) | | | 73 | | | | (634 | ) |
| Net (loss) income | | $ | (15,010 | ) | | $ | 17,278 | | | $ | 15,016 | |
| Basic net (loss) income per share | | $ | (3.43 | ) | | $ | 4.01 | | | $ | 5.71 | |
| Diluted net (loss) income per share | | $ | (3.43 | ) | | $ | 3.90 | | | $ | 5.71 | |
| Shares used in computing basic net (loss) income per share | | | 4,374 | | | | 4,310 | | | | 2,629 | |
| Shares used in computing diluted net (loss) income per share | | | 4,374 | | | | 4,430 | | | | 2,629 | |
The accompanying notes are an integral part of these Consolidated Financial Statements
BROADVISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AND COMPREHENSIVE INCOME (LOSS)
(In thousands)
| | Common Stock | | | | | | | | | | | | | |
| | | | | | | | | | | | Accumulated | | | | | | | | | Total | |
| | | | | | | | | Additional | | | Other | | | | | | | | | Stockholders' | |
| | | | | | | | | Paid-in | | | Comprehensive | | | Accumulated | | | Comprehensive | | | Equity | |
| | | Shares | | | Amount | | | Capital | | | Income (Loss) | | | Deficit | | | Income (Loss) | | | (Deficit) | |
| Balances as of January 1, 2006 | | | 1,381 | | | $ | - | | | $ | 1,215,259 | | | $ | 93 | | | $ | (1,225,075 | ) | | | | | $ | (9,723 | ) |
| Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | - | | | | - | | | | - | | | | - | | | | 15,016 | | | $ | 15,016 | | | | 15,016 | |
| Foreign currency translations | | | - | | | | - | | | | - | | | | 75 | | | | - | | | | 75 | | | | 75 | |
Total comprehensive income | | | | | | | | | | | | | | | | | | | | | | $ | 15,091 | | | | | |
| Exchange of debt to common stock | | | 1,380 | | | | - | | | | 20,701 | | | | - | | | | - | | | | | | | | 20,701 | |
| Stock-based compensation | | | - | | | | - | | | | 950 | | | | - | | | | - | | | | | | | | 950 | |
| Issuance of common stock under employee stock purchase plan | | | 37 | | | | - | | | | 383 | | | | - | | | | - | | | | | | | | 383 | |
| Issuance of common stock from rights offering, net of issuance costs | | | 1,455 | | | | - | | | | 15,826 | | | | - | | | | - | | | | | | | | 15,826 | |
| Issuance of common stock from exercise of options | | | 8 | | | | - | | | | 26 | | | | - | | | | - | | | | | | | | 26 | |
| Balances as of December 31, 2006 | | | 4,261 | | | | - | | | | 1,253,145 | | | | 168 | | | | (1,210,059 | ) | | | | | | | 43,254 | |
| Cumulative-effect adjustments from the adoption of FIN No. 48 (Note 6) | | | - | | | | - | | | | - | | | | - | | | | 388 | | | | | | | | 388 | |
| Adjusted Balance as of December 31, 2006 | | | 4,261 | | | | - | | | | 1,253,145 | | | | 168 | | | | (1,209,671 | ) | | | | | | | 43,642 | |
| Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | - | | | | - | | | | | | | | | | | | 17,278 | | | $ | 17,278 | | | | 17,278 | |
| Foreign currency translations | | | - | | | | - | | | | | | | | (152 | ) | | | | | | | (152 | ) | | | (152 | ) |
Total comprehensive income | | | | | | | | | | | | | | | | | | | | | | $ | 17,126 | | | | | |
| Stock-based compensation | | | | | | | - | | | | 1,447 | | | | | | | | | | | | | | | | 1,447 | |
| Issuance of common stock from restricted stock awards | | | 1 | | | | - | | | | - | | | | | | | | | | | | | | | | - | |
| Issuance of common stock under employee stock purchase plan | | | 46 | | | | - | | | | 863 | | | | | | | | | | | | | | | | 863 | |
| Issuance of common stock from exercise of warrants | | | 13 | | | | - | | | | 1,066 | | | | | | | | | | | | | | | | 1,066 | |
| Issuance of common stock from exercise of options | | | 36 | | | | - | | | | 621 | | | | | | | | | | | | | | | | 621 | |
| Balances as of December 31, 2007 | | | 4,357 | | | | - | | | | 1,257,142 | | | | 16 | | | | (1,192,393 | ) | | | | | | | 64,765 | |
| Comprehensive loss: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | - | | | | - | | | | | | | | | | | | (15,010 | ) | | $ | (15,010 | ) | | | (15,010 | ) |
| Foreign currency translations | | | - | | | | - | | | | | | | | (499 | ) | | | | | | | (499 | ) | | | (499 | ) |
Total comprehensive loss | | | | | | | | | | | | | | | | | | | | | | $ | (15,509 | ) | | | | |
| Stock-based compensation | | | | | | | - | | | | 1,130 | | | | | | | | | | | | | | | | 1,130 | |
| Issuance of common stock from restricted stock awards | | | 2 | | | | - | | | | - | | | | | | | | | | | | | | | | 0 | |
| Issuance of common stock under employee stock purchase plan | | | 32 | | | | - | | | | 586 | | | | | | | | | | | | | | | | 586 | |
| Retirement of fractional shares due to reverse stock split | | | (20 | ) | | | - | | | | (325 | ) | | | | | | | | | | | | | | | (325 | ) |
| Issuance of common stock from exercise of options | | | 5 | | | | - | | | | 71 | | | | | | | | | | | | | | | | 71 | |
| Balances as of December 31, 2008 | | | 4,376 | | | $ | - | | | $ | 1,258,604 | | | $ | (483 | ) | | $ | (1,207,403 | ) | | | | | | $ | 50,718 | |
The accompanying notes are an integral part of these Consolidated Financial Statements
BROADVISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| | Years Ended December 31, | |
| | | 2008 | | | 2007 | | | 2006 | |
| Cash flows from operating activities: | | | | | | | | | |
| Net (loss) income | | $ | (15,010 | ) | | $ | 17,278 | | | $ | 15,016 | |
| Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | | | | | | | | | | | |
| Depreciation and amortization | | | 378 | | | | 969 | | | | 1,385 | |
| Stock-based compensation charge | | | 1,130 | | | | 1,447 | | | | 950 | |
| Provision for receivable reserves | | | 72 | | | | 248 | | | | 487 | |
| Amortization of prepaid royalties | | | - | | | | 7 | | | | 36 | |
| Gain on cost method investments | | | (35 | ) | | | - | | | | (426 | ) |
| (Gain) loss on sale or abandonment of fixed assets | | | - | | | | (78 | ) | | | 51 | |
| Goodwill impairment | | | 25,066 | | | | - | | | | - | |
| Restructuring (credit) charge | | | (26 | ) | | | 649 | | | | (3,369 | ) |
| (Income) expense on revaluation of warrants | | | (4,040 | ) | | | 3,147 | | | | 1,333 | |
| Changes in operating assets and liabilities: | | | | | | | | | | | | |
| Accounts receivable | | | (625 | ) | | | 2,244 | | | | 2,047 | |
| Prepaids and other | | | (1,175 | ) | | | (304 | ) | | | 787 | |
| Other non-current assets | | | (61 | ) | | | (27 | ) | | | 607 | |
| Accounts payable and accrued expenses | | | (937 | ) | | | (2,828 | ) | | | (4,272 | ) |
| Restructuring accrual | | | (463 | ) | | | (1,877 | ) | | | (1,323 | ) |
| Unearned revenue and deferred maintenance | | | 4,186 | | | | (6,278 | ) | | | 3,274 | |
| Other non-current liabilities | | | (248 | ) | | | (6 | ) | | | (530 | ) |
| Net cash provided by operating activities | | | 8,212 | | | | 14,591 | | | | 16,053 | |
| Cash flows from investing activities: | | | | | | | | | | | | |
| Purchase of property and equipment | | | (165 | ) | | | (517 | ) | | | (246 | ) |
| Dividends received from cost method investments | | | 35 | | | | - | | | | 426 | |
| Purchase of short-term investments | | | (9,004 | ) | | | - | | | | - | |
| Proceeds from sale of property and equipment | | | - | | | | 82 | | | | - | |
| Transfer from restricted cash | | | - | | | | 977 | | | | - | |
| Net cash (used for) provided by investing activities | | | (9,134 | ) | | | 542 | | | | 180 | |
| Cash flows from financing activities: | | | | | | | | | | | | |
| Proceeds from issuance of common stock, net | | | 657 | | | | 1,484 | | | | 409 | |
| Retirement of fractional shares due to reverse stock split | | | (325 | ) | | | - | | | | - | |
| Proceeds from issuance of common stock from warrant exercise | | | - | | | | 505 | | | | - | |
| Repayments of bank line of credit and term debt borrowings | | | - | | | | - | | | | (389 | ) |
| Proceeds from rights offering, net | | | - | | | | - | | | | 15,826 | |
| Net cash provided by financing activities | | | 332 | | | | 1,989 | | | | 15,846 | |
| Effect of exchange rates on cash and cash equivalents | | | (499 | ) | | | (152 | ) | | | 75 | |
| Net (decrease) increase in cash and cash equivalents | | | (1,089 | ) | | | 16,970 | | | | 32,154 | |
| Cash and cash equivalents, beginning of year | | | 53,973 | | | | 37,003 | | | | 4,849 | |
| Cash and cash equivalents, end of year | | $ | 52,884 | | | $ | 53,973 | | | $ | 37,003 | |
| Supplemental cash flows disclosures: | | | | | | | | | | | | |
| Cash paid for interest | | $ | - | | | $ | - | | | $ | 364 | |
| Cash paid for income taxes | | $ | 525 | | | $ | 1 | | | $ | 502 | |
| Supplemental information of noncash financing and investing activities: | | | | | | | | | | | | |
| Exchange of convertible debt to common stock | | $ | - | | | $ | - | | | $ | 20,535 | |
| Conversion of accrued interest to common stock | | $ | - | | | $ | - | | | $ | 166 | |
| Retirement of fully depreciated property and equipment | | $ | 494 | | | $ | 13,598 | | | $ | 21,556 | |
| Cumulative effect adjustment from the adoption of FIN No.48 | | $ | - | | | $ | 388 | | | $ | - | |
| Conversion of warrant liability to equity | | $ | - | | | $ | 561 | | | $ | - | |
The accompanying notes are an integral part of these Consolidated Financial Statements
BROADVISION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1---Organization and Summary of Significant Accounting Policies
Nature of Business
BroadVision, Inc. (collectively with its subsidiaries, "BroadVision" or "we") was incorporated in the state of Delaware on May 13, 1993 and has been a publicly traded corporation since 1996. We develop, market, and support enterprise portal 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.
On September 9, 2008, we announced that our Board of Directors and requisite stockholders had approved a reverse stock split of our common stock on a one for twenty five ratio, effective October 24, 2008. Our common stock began trading on a post-split basis at the opening of trading on October 27, 2008. The accompanying consolidated financial statements and related financial information contained herein for all periods presented have been retroactively restated to give effect to the stock split in accordance with U.S. GAAP.
Our common stock began trading on a post-split basis at the opening of trading on October 27, 2008. Our stock was quoted under the trading symbol "BVIS.OB" on the OTC Bulletin Board from October 27, 2008 to November 7, 2008. Since November 10, 2008, we have transferred the quotation of our common stock from the OTC Bulletin Board to the NASDAQ Global Market under the trading symbol "BVSN".
Principles of Consolidation
The accompanying Consolidated Financial Statements include the accounts of our subsidiaries and us. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of Consolidated Financial Statements in conformity with U.S. generally accepted accounting principles 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 amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate our estimates, including those related to receivable reserves, stock-based compensation, investments, impairment assessments, 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 using the product or based on the number of CPUs on which the product is installed. Licenses for software for which fees are charged based upon the number of persons using the product include licenses for development use and licenses for use by registered users of the customer's website (deployment use). Licenses for software for which fees are charged on a per-CPU basis 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 ("SOP 97-2"), as amended by SOP No. 98-9, Software Revenue Recognition, With Respect to Certain Transactions ("SOP 98-9"), and Staff Accounting Bulletin ("SAB") 104, Revenue Recognition ("SAB 104"). We apply the separation criteria in Emerging Issues Task Force ("EITF"), Revenue Arrangements with Multiple Deliverables ("EITF 00-21") to determine whether our arrangements with multiple deliverables should be treated as separate units of accounting. EITF 00-21 indicates that revenue recognized for any multiple-element contract is to be allocated to each element of the arrangement based on the relative fair value of each element. The determination of the fair value of each element is based on our analysis of objective evidence from comparable sales of the individual element.
Revenues for consulting services are generally recognized as the services are performed. If there is a significant uncertainty about the project completion or receipt of payment for the consulting services, revenue is deferred until the uncertainty is sufficiently resolved. For the "fixed" or "not to exceed" fees contracts, revenues are recognized based on SOP No. 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts ("SOP 81-1"). We estimate the proportional performance on contracts on a basis of utilizing hours incurred to date as a percentage of total estimated hours to complete the project.
Software License Revenue
We license our products through our direct sales force and indirectly through resellers and Application Service Providers ("ASP"). 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 reasonably assured. 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 collectability is not reasonably assured, 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 prices. We do not grant 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 vendor-specific objective evidence, which is specific to us. We limit our assessment of objective evidence for each element to either the price charged when the same element is sold separately or the price established by management having the relevant authority to do so, for an element not yet sold separately. If evidence of fair value of all undelivered elements exists but evidence does not exist for one or more delivered elements, then revenue is recognized 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. In January 2008, we renamed BVGS to Worldwide E-Business Solution Organization ("WebSo"). In order to support our customers’ expanded needs relating to recently launched products, WebSo involves more internal departments than did the BVGS organization. The 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.
Cash and Cash Equivalents, Restricted Cash, and Short-term Investments
We consider all debt and equity securities with remaining maturities of three months or less at the date of purchase to be cash equivalents. Short-term investments consist of debt and equity securities that have a remaining maturity of less than one year as of the date of the balance sheet. Cash and cash equivalents that serve as collateral for financial instruments such as letters of credit are classified as restricted cash. Restricted cash in which the underlying instrument has a term of greater than twelve months from the balance sheet date are classified as non-current. At December 31, 2008, a letter of credit of $1.0 million secured by an equal amount of restricted cash is available to the landlord securing certain facilities leases as more fully described in Note 7.
Management determines the appropriate classification of short-term investments at the time of purchase and evaluates such designation as of each balance sheet date. All short-term investments to date have been classified as held-to-maturity and carried at amortized cost, which approximates fair market value, on our Consolidated Balance Sheet. Our short-term investments’ contractual maturities are between January 2009 and February 2009. Total realized gains during fiscal years 2008 and 2007 were $1,628,000 and $1,906,000, respectively, and are included in other income in the accompanying Consolidated Statements of Operations.
Our cash and cash equivalents, restricted cash, and short-term investments consisted of the following as of December 31, 2008 and 2007 (in thousands):
| | | | | | | | | | Classified on Consolidated Balance Sheet as: | |
| | | Purchase/ | | Gross | | Gross | | | | Cash and | | | | Restricted | | Restricted | |
| | | Amortized | | Unrealized | | Unrealized | | Aggregate | | Cash | | Short-Term | | Cash, | | Cash, | |
| | | Cost | | Gains | | Losses | | Fair Value | | Equivalents | | Investment | | Current | | Non-Current | |
| As of December 31, 2008: | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 16,776 | | $ | - | | $ | - | | $ | 16,776 | | $ | 15,756 | $ | - | | $ | 20 | | $ | 1,000 | |
| Money market | | | 37,128 | | | - | | | - | | | 37,128 | | | 37,128 | | - | | | - | | | - | |
| Held-to-maturity securities (Short-term Bonds and Certificates of deposit) | | | 9,004 | | | - | | | - | | | 9,004 | | | - | | 9,004 | | | - | | | - | |
| Total | | $ | 62,908 | | $ | - | | $ | - | | $ | 62,908 | | $ | 52,884 | | 9,004 | | $ | 20 | | $ | 1,000 | |
| As of December 31, 2007: | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash and certificates of deposit | | $ | 14,249 | | $ | - | | $ | - | | $ | 14,249 | | $ | 13,229 | $ | - | | $ | 20 | | $ | 1,000 | |
| Money market | | | 40,744 | | | - | | | - | | | 40,744 | | | 40,744 | | - | | | - | | | - | |
| Total | | $ | 54,993 | | $ | - | | $ | - | | $ | 54,993 | | $ | 53,973 | $ | - | | $ | 20 | | $ | 1,000 | |
Research and Development and Software Development Costs
Statement of Financial Accounting Standards ("SFAS") No. 86, Accounting for the Cost of Computer Software to be Sold, Leased or Otherwise Marketed, requires capitalization of certain software development costs subsequent to the establishment of technological feasibility. Based on our product development process, technological feasibility is established upon the completion of a working model. To date, costs incurred by us from the completion of the working model to the point at which the product is ready for general release have been insignificant. Accordingly, we have charged all such costs to research and development expense in the period incurred.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense, which is included in sales and marketing expense, amounted to $76,000, $146,000 and $33,000 in 2008, 2007 and 2006, respectively.
Prepaid Royalties
Prepaid royalties relating to purchased software to be incorporated and sold with our software products are amortized as a cost of software licenses either on a straight-line basis over the remaining term of the royalty agreement or on the basis of projected product revenues, whichever results in greater amortization.
Receivable Reserves
Occasionally, our customers experience financial difficulty after we record the revenue but before payment has been received. We maintain receivable reserves for estimated losses resulting from the inability of our customers to make required payments. Our normal payment terms are generally 30 to 90 days from the invoice date. If the financial condition of our customers were to deteriorate, resulting in their inability to make the contractual payments, additional reserves may be required. Losses from customer receivables in the three-year period ended December 31, 2008, have not been significant. If all efforts to collect a receivable fail, and the receivable is considered uncollectible, such receivable would be written off against the receivable reserve.
Concentrations of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents, short-term investments, and accounts receivable. We maintain our cash and cash equivalents and short-term investments with high-quality institutions. Our management performs ongoing credit evaluations of our customers and requires certain of these customers to provide security deposits or letters of credit.
Cash deposits in foreign countries of approximately $14.0 million and $14.2 million on December 31, 2008 and 2007, respectively, are subject to local banking laws and may bear higher or lower risk than cash deposited in the United States. As part of our cash and investment management processes, we perform periodic evaluations of the credit standing of the financial institutions and we have not sustained any credit losses from instruments held at these financial institutions. From time to time, our financial instruments maintained in our foreign subsidiaries may be subject to political risks or instability that may arise in foreign countries where we operate.
As of December 31, 2008, no customer accounted for more than 10% of our accounts receivable balance. At December 31, 2007, one customer accounted for 20% of our accounts receivable balance. For the years ended December 31, 2008, 2007 and 2006, no customer accounted for 10% or more of our total revenues.
Restructuring
Through December 31, 2008, 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 are comprised primarily of: (1) lease termination costs and/or costs associated with permanently vacating and sub-leasing our facilities; (2) other incremental costs incurred as a direct result of the restructuring plan; (3) impairment costs related to certain long-lived assets abandoned, and (4) severance and benefits termination costs related to the reduction of our workforce. We account for each of these costs in accordance with SAB 100, Restructuring and Impairment Charges.
We account for severance and benefits termination costs in accordance with EITF 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring) ("EITF 94-3"), for exit or disposal activities initiated on or prior to December 31, 2002. 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. The termination costs recorded by us are not associated with nor do they benefit continuing activities. We account for severance and benefits termination costs for exit or disposal activities initiated after December 31, 2002 in accordance with SFAS 146, Accounting For Costs Associated with Exit Activities ("SFAS 146"). 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. This differs from EITF 94-3, which required that a liability for an exit cost be recognized at the date of an entity's commitment to an exit plan.
Prior to the adoption on January 1, 2003 of SFAS 146, we accounted for the costs associated with lease termination and/or abandonment in accordance with EITF 88-10, Costs Associated with Lease Modification or Termination ("EITF 88-10"). Accordingly, we recorded the costs associated with lease termination and/or abandonment when the leased property has no substantive future use or benefit to us. Under EITF 88-10, we record the liability associated with lease termination and/or abandonment as the sum of the total remaining lease costs and related exit costs, less probable sublease income. Under SFAS 146, we record a liability for lease termination and/or abandonment cost initially at fair value on the cease-use date of that facility. We account for costs related to long-lived assets abandoned in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, and, accordingly, charges to expense the net carrying value of the long-lived assets when we cease to use the assets.
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 charge related to the restructuring, the majority of estimates made by management related to the charge for excess facilities. In determining the charge 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 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.
We have recorded restructuring charges at the low-end of a range of assumptions modeled for restructuring charges in accordance with SFAS No.5, Accounting for Contingencies ("SFAS 5"). 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.
Property and Equipment
Property and equipment are stated at cost and depreciated on a straight-line basis over their estimated useful lives (generally two years for software, three years for computer equipment and four years for furniture and fixtures). Leasehold improvements are amortized over the lesser of the remaining life of the lease term or their estimated useful lives.
Maintenance and repairs are charged to operations as incurred. When assets are retired or otherwise disposed of, the cost and accumulated depreciation and amortization are removed from the accounts and any resulting gain or loss is reflected in operations in the period realized.
Valuation of Long-Lived Assets
We adopted SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS 142"), on January 1, 2002. Pursuant to SFAS 142, we are required to test our goodwill for impairment upon adoption and annually or more often if events or changes in circumstances indicate that our goodwill might be impaired. SFAS No. 142 provides for a two-step approach in determining whether, and by how much, goodwill has been impaired. The first step requires a comparison of our fair value to our 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 step must be completed to determine the amount, if any, of actual impairment (Note 3).
During the fourth quarter ended December 31, 2008, we recognized a goodwill impairment charge of $25.1 million, which represents a full write-off of our remaining goodwill balance in accordance with the requirements of SFAS 142. As of December 31, 2008, we performed Step 1 under the provisions of SFAS 142 by determining that we have a single reporting unit and then comparing our net book value to our market capitalization based upon the quoted market price of our stock. Based upon the results of Step 1, which showed impairment indicators of our goodwill balance, we completed Step 2 and recognized an impairment charge of $25.1 million in the quarter ended December 31, 2008.
The impairment charge was recorded as a component of operating expenses in our Consolidated Statements of Operations and was determined by comparing the implied fair value of the goodwill, with its carrying amount on the balance sheet. The decline in our fair value is attributed to continued competition and a decline in the revenues of current generation products due to weaker market conditions and the ongoing transition to next-generation software platforms. In addition, our stock price has been affected by the general deterioration in the capital markets caused by the ongoing financial crisis. Our fair value was determined using a weighted average of a discounted cash flows method as well as a market valuation method.
Fair Value of Financial Instruments
Effective January 1, 2008, we adopted SFAS 157, Fair Value Measurements ("SFAS 157"). SFAS 157 provides a definition of fair value, establishes a hierarchy for measuring fair value under generally accepted accounting principles, and requires certain disclosures about fair values used in the financial statements. SFAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under SFAS 157 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value, which are the following:
| · | Level 1 – Quoted prices in active markets for identical assets or liabilities. |
| · | Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
| · | Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
We measure the following financial assets at fair value on a recurring basis. The fair value of these financial assets as of December 31, 2008 (in thousands) were as follows:
| | | Fair Value Measurements at Reporting Date Using | |
| | | | | | | | | | | | | | | | |
| | | Balance at December 31, 2008 | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Input (Level 3) | | | Total Gains (Losses) | |
| Cash and cash equivalents (1) | | $ | 52,884 | | | $ | 52,884 | | | $ | - | | | $ | - | | | $ | - | |
| Short-term investments (2) | | | 9,004 | | | | - | | | | 9,004 | | | | - | | | | - | |
| Total | | $ | 61,888 | | | $ | 52,884 | | | $ | 9,004 | | | $ | - | | | $ | - | |
(1) Includes money market funds.
(2) Includes held-to-maturity bonds and certificates of deposit.
The fair value of cash and cash equivalents, short-term investments, accounts receivable and accounts payable for all periods presented approximates their respective carrying amounts due to the short-term nature of these balances.
Employee Stock Benefit Plans
2006 Equity Incentive Plan: At our 2006 annual meeting held on August 8, 2006, our stockholders approved the adoption of our 2006 Equity Incentive Plan (the "Equity Plan"), under which 140,000 shares of common stock are reserved for issuance. Our 1996 Equity Incentive Plan (the "Prior Equity Plan") was terminated and replaced by the Equity Plan. Under the Equity Plan, the Board of Directors may grant incentive or nonqualified stock options at prices not less than 100% of the fair market value of our common stock, as determined by the Board of Directors, at the date of grant. The vesting of individual options may vary but in each case at least 20% of the total number of shares subject to vesting will become exercisable per year. These options generally expire ten years after the grant date. When an employee option is exercised prior to vesting, any unvested shares so purchased are subject to repurchase by us at the original purchase price of the stock upon termination of employment. Our right to repurchase lapses at a minimum rate of 20% per year over five years from the date the option was granted or, for new employees, the date of hire. Such right is exercisable only within 90 days following termination of employment. During the years ended December 31, 2008, 2007, and 2006, no shares were repurchased since no options were exercised prior to vesting. We may grant options from plans not approved by security holders. The "2000 Non-Officer Plan" is our only plan that has not been approved by our stockholders. In addition, we have granted options outside of the plans, pursuant to arrangements that have not been approved by our stockholders.
2000 Non-Officer Plan: In February 2000, we adopted our 2000 Non-Officer Plan under which 240,000 shares of common stock were reserved for issuance to selected employees, consultants, and our affiliates who are not Officers or Directors. As of December 31, 2008, we had 40,549 shares available for issuance under the 2000 Non-Officer Plan. Under the 2000 Non-Officer Plan, we may grant non-statutory stock options at prices not less than 85% of the fair market value of our common stock at the date of grant. Options granted under the 2000 Non-Officer Plan generally vest over two years and are exercisable for not more than ten years.
Employee Stock Purchase Plan: We also have a compensatory Employee Stock Purchase Plan (the "Purchase Plan") that enables employees to purchase, through payroll deductions, shares of our common stock at a discount from the market price of the stock at the time of purchase. The Board of Directors has authorized sequential one-year offerings beginning on July 1 of each year and extending until June 30 of the following year. Commencing on the first day of the fiscal year that begins on January 1, 2004 and ending on (and including) the first day of the fiscal year that begins on January 1, 2014 (each such day, a "Calculation Date"), our Purchase Plan's reserved shares can be increased by a number equal to the lesser of (i) one and one-half percent (1.5%) of the shares of Common Stock outstanding on each such Calculation Date (rounded down to the nearest whole share); or (ii) thirty two thousand (32,000) shares of Common Stock.
As of December 31, 2008, we had 78,932 shares available for issuance under the Purchase Plan. The Purchase Plan permits eligible employees to purchase common stock with a value equivalent to a percentage of the employee's earnings, not to exceed the lesser of 15% of the employee's earnings or $25,000, at a price equal to the lesser of 85% of the fair market value of the common stock on the date of the offering or the date of purchase. Upon adoption of SFAS No. 123 (revised 2004), Share-Based Payment ("SFAS 123R") (effective January 1, 2006), we began recording stock-based compensation expense related to the fair value of the employee purchase rights in our Consolidated Statements of Operations.
Stock-Based Compensation
Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS 123R, using the modified-prospective transition method. Under the fair value recognition provisions of SFAS 123R, share-based compensation cost is estimated at the grant date based on the fair value of the award and is recognized as expense, net of estimated pre-vesting forfeitures, ratably over the vesting period of the award. In addition, the adoption of SFAS 123R requires additional accounting related to the income tax effects and disclosure regarding the cash flow effects resulting from share-based payment arrangements. In January 2005, the SEC issued SAB No. 107, Share-Based Payment ("SAB 107"), which provides supplemental implementation guidance for SFAS 123R. Calculating share-based compensation expense requires the input of highly subjective assumptions, including the expected term of the share-based awards, stock price volatility, dividend yield, risk free interest rates, and pre-vesting forfeitures. The assumptions used in calculating the fair value of stock-based awards represent our best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our share-based compensation expense could be materially different in the future. In addition, we are required to estimate the expected pre-vesting forfeiture rate and only recognize expense for those shares expected to vest. If our actual forfeiture rate is materially different from our estimate, our share-based compensation expense could be significantly different from what we have recorded in the current period. The total amount of stock-based compensation expense recognized during the year ended December 31, 2008, 2007 and 2006 are as the following:
| Years Ended December 31, | |
| | 2008 | | 2007 | | 2006 | |
| Cost of services | $ | 163,681 | | $ | 266,735 | | $ | 160,428 | |
| Research and development | | 311,564 | | | 567,041 | | | 381,664 | |
| Sales and marketing | | 309,323 | | | 319,145 | | | 229,906 | |
| General and administrative | | 345,095 | | | 294,166 | | | 178,150 | |
| | $ | 1,129,663 | | $ | 1,447,087 | | $ | 950,148 | |
For our reverse stock split effected in October 2008, we were not required to recognize any incremental compensation cost for this equity restructuring. Based on FAS 123(R), if an award is adjusted based on an existing antidilution provision that requires adjustment in the event of an equity restructuring, and is properly structured to preserve the value of the awards upon completion of the equity restructuring, incremental fair value generally should not result from the modification. Our equity restructuring did not result in any additional compensation expense related to our equity awards under SFAS 123R.
On November 10, 2005, the FASB issued FASB Staff Position No. FAS 123R-3 "Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards" ("FSP 123R-3"). We adopted the alternative transition method provided in this FASB Staff Position for calculating the tax effects of stock-based compensation pursuant to SFAS 123R in the fourth quarter of fiscal 2006. The alternative transition method includes simplified methods to establish the beginning balance of the additional paid-in capital pool (APIC pool) related to the tax effects of employee stock-based compensation, and to determine the subsequent impact on the APIC pool and Consolidated Statements of Cash Flows of the tax effects of employee stock-based compensation awards that are outstanding upon adoption of SFAS 123R. The adoption did not have a material impact on our consolidated results of operations and financial condition.
The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model based on the assumptions noted in the following table below. The expected term of options represents the period that our stock-based awards are expected to be outstanding based on the simplified method provided for in SAB 107, as amended by SAB No. 110, Share-Based Payment. Because we do not have sufficient historical exercise data, we used the simplified method for estimating the stock option expected term. The risk-free interest rate for periods related to the expected life of the options is based on the U.S. Treasury yield curve in effect at the time of grant. The expected volatility is based on historical volatilities of our stock over the expected life of the option. The expected dividend yield is zero, as we do not anticipate paying dividends in the near future. During the years ended December 31, 2008, 2007 and 2006, we used forfeiture rates of 12%, 9% and 11%, respectively, based on an analysis of historical data as we reasonably approximate the currently anticipated rate of forfeiture for granted and outstanding options that have not vested.
The following assumptions were used to determine stock-based compensation during the years ended December 31, 2008, 2007 and 2006:
| Years Ended December 31, | |
| | 2008 | | 2007 | | 2006 | |
| Weighted average expected volatility | 90 | % | 96 | % | 84 | % |
| Expected dividends | - | % | - | % | - | % |
| Expected term (in years) | 6 | year | 6 | year | 6 | year |
| Risk free interest rate | 3 | % | 4 | % | 5 | % |
| Forfeiture rate | 12 | % | 9 | % | 11 | % |
The following assumptions were used to determine the expense related to the Employee Stock Purchase Plan:
| Years Ended December 31, | |
| | 2008 | | 2007 | | 2006 | |
| Expected volatility | 81 | % | 90 | % | 107 | % |
| Weighted average volatility | 67 | % | 89 | % | 106 | % |
| Risk-free interest rate | 2 | % | 5 | % | 5 | % |
| Expected life (in years) | 1 | year | 1 | year | 1 | year |
| Expected dividend yield | - | % | - | % | - | % |
The weighted-average fair value of the purchase rights granted in the years ended December 31, 2008, 2007, and 2006, was $8.8, $19.5, and $5.5, respectively.
In anticipation of the reporting requirements under SFAS 123R, our Board of Directors on November 29, 2005 unanimously approved accelerating the vesting of the following out-of-the-money, unvested stock options held by current employees, including executive officers, and members of the Board of Directors. The acceleration applied only to those options with an exercise price of $28.25 per share or higher. The closing market price of our common stock on November 28, 2005, the last full trading day before the date of the acceleration, was $18.00 per share.
| | Aggregate | | | |
| | Number of | | | |
| | Common Shares | | | |
| | Issuable Under | | Weighted Average | |
| | Accelerated Stock | | Exercise Price | |
| | Options | | per Share | |
| Total Non-Employee Directors | 4,887 | | $ | 74.50 | |
| Total Named Executive Officers | 15,675 | | | 71.75 | |
| Total Directors and Named Executive Officers | 20,562 | | | 72.25 | |
| Total All Other Employees | 24,428 | | | 74.25 | |
| Total | 44,990 | | | 73.50 | |
The decision to accelerate vesting of these options was made to avoid recognizing compensation cost in our statements of operations as required under the provisions of SFAS 123R, which was effective as of January 1, 2006.
Earnings Per Share Information
We effected a one-for-twenty-five reverse stock split of our common stock, effective October 24, 2008. Our common stock began trading on a post-split basis at the opening of trading on October 27, 2008. The accompanying Consolidated Financial Statements and related financial information contained herein for all periods presented have been retroactively restated to give effect to the stock split in accordance with U.S. GAAP.
Basic (loss) income per share is computed using the weighted-average number of shares of common stock outstanding, less shares subject to repurchase. Diluted (loss) income 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. The following table sets forth the basic and diluted net (loss) income per share computational data for the periods presented (in thousands, except per share amounts):
| | Years Ended December 31, | |
| | | 2008 | | | 2007 | | | 2006 | |
| Net (loss) income | | $ | (15,010 | ) | | $ | 17,278 | | | $ | 15,016 | |
| Weighted-average common shares outstanding used to compute basic (loss) income per share | | | 4,374 | | | | 4,310 | | | | 2,629 | |
| Weighted-average common equivalent shares from outstanding common stock options and warrants | | | - | | | | 120 | | | | - | |
| Total weighted-average common and common equivalent shares outstanding used to compute diluted (loss) income per share | | | 4,374 | | | | 4,430 | | | | 2,629 | |
| Basic (loss) income per share | | $ | (3.43 | ) | | $ | 4.01 | | | $ | 5.71 | |
| Diluted (loss) income per share | | $ | (3.43 | ) | | $ | 3.90 | | | $ | 5.71 | |
In the years ended December 31, 2008, 2007, and 2006, there were 467,215, 180,097, and 476,640 common shares, respectively, issuable upon the exercise of stock options and warrants excluded from the above earnings per share calculations as their effect was anti-dilutive.
Foreign Currency Transactions
During fiscal 2004, we changed the functional currencies of all foreign subsidiaries from the U.S. dollar to the local currency of the respective countries. Assets and liabilities of these subsidiaries are translated into U.S. dollars at the balance sheet date. Income and expense items are translated at average exchange rates for the period. Foreign exchange gains and losses resulting from the remeasurement of foreign currency assets and liabilities are included as other income (expense) in the Consolidated Statements of Operations. During 2008 and 2006, we determined that one of our foreign subsidiaries' operations had substantially ceased and was effectively liquidated, and as a result, we wrote off $87,000 and $51,000, respectively, of related cumulative translation adjustments which were recorded as charges to other income, net in the accompanying Consolidated Statements of Operations. For the years ended December 31, 2008, 2007, and 2006, translation (loss) gain was ($499,000), ($152,000), and $75,000, respectively, and is included in the Comprehensive income (loss) account in the Consolidated Statement of Stockholder's Equity.
Comprehensive Income (Loss)
Comprehensive income (loss) includes net income (loss) and other comprehensive income (loss), which may consist of unrealized gains and losses on available-for-sale securities and cumulative translation adjustments. Total comprehensive income (loss) is presented in the accompanying Consolidated Statement of Stockholders' Equity (Deficit). Total accumulated other comprehensive income (loss) is displayed as a separate component of Consolidated Statement of Stockholder's Equity (Deficit) in the accompanying Consolidated Balance Sheets. The accumulated balance of other comprehensive income (loss) , consisting primarily of foreign currency translation, net of taxes is as follows (in thousands):
| | | | Accumulated | |
| | | | Other | |
| | | | Comprehensive | |
| | | | Income (Loss) | |
| Balance, December 31, 2005 | | | $ | 93 | |
| Net change during the year | | | | 75 | |
| Balance, December 31, 2006 | | | | 168 | |
| Net change during the year | | | | (152 | ) |
| Balance, December 31, 2007 | | | | 16 | |
| Net change during the year | | | | (499 | ) |
| Balance, December 31, 2008 | | | $ | (483 | ) |
Income Taxes
Income taxes are computed using an asset and liability approach in accordance with SFAS No. 109, Accounting for Income Taxes, which requires the recognition of taxes payable or refundable for the current year and deferred tax assets and liabilities for the future tax consequences of events that have been recognized in our Consolidated Financial Statements or tax returns. The measurement of current and deferred tax assets and liabilities is based on provisions of the enacted tax law; the effects of future changes in tax laws or rates are not anticipated. The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, is not expected to be realized.
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 management has determined that it is more likely than not that some portion or all of the deferred tax asset will not be realized based upon the uncertainty of their realization. We consider the effects of estimated future taxable income, current economic conditions and ongoing prudent and feasible tax planning strategies in assessing the amount of the valuation allowance.
Segment and Geographic Information
We operate in one segment, electronic commerce business solutions. Our chief operating decision maker is considered to be our Chief Executive Officer ("CEO"). The CEO reviews financial information presented on a consolidated basis accompanied by disaggregated information about revenues by geographic region and by product for purposes of making operating decisions and assessing financial performance.
Reclassifications
Certain prior period account balances have been reclassified to conform to the current period presentation.
Recent Accounting Pronouncements
In October 2008, the FASB issued FASB Staff Position FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active ("FSP 157-3"). FSP 157-3 clarifies the application of SFAS 157 in a market that is not active, and demonstrates how the fair value of a financial asset is determined when the market for the financial assets is inactive. FSP 157-3 was effective upon issuance, including prior periods for which financial statements had not been issued. The implementation of this standard did not have an impact on our Consolidated Financial Statements.
In May 2008, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 162, The Hierarchy of Generally Accepted Accounting Principles ("SFAS 162"). SFAS 162 defines the order in which accounting principles that are generally accepted should be followed. SFAS 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. We do not expect the adoption of SFAS 162 to have a material impact on our Consolidated Financial Statements.
In February 2008, the FASB issued FASB FSP 157-2, The Effective Date of FASB Statement No. 157 ("SFAS 157-2"), which delays the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. These nonfinancial items include assets and liabilities such as reporting units measured at fair value in a goodwill impairment test and nonfinancial assets acquired and liabilities assumed in a business combination. We do not expect the adoption of SFAS 157-2 to have a material impact on our Consolidated Financial Statements.
Effective January 1, 2008, we adopted the provisions of SFAS No. 157 for financial assets and liabilities and any other assets and liabilities carried at fair value. This pronouncement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. In February 2008, the FASB agreed to a one-year deferral for the implementation of SFAS 157 for other non-financial assets and liabilities. Our adoption of SFAS 157 did not have a material effect on our Consolidated Financial Statements for financial assets and liabilities and any other assets and liabilities carried at fair value.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations ("SFAS 141R"), which replaces FASB Statement No. 141. SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non controlling interest in the acquire and the goodwill acquired. The Statement also establishes disclosure requirements which will enable users to evaluate the nature and financial effects of the business combination. SFAS 141R is to be applied prospectively to business combinations for which the acquisition date is on or after an entity's fiscal year that begins after December 15, 2008. We will assess the impact of SFAS 141R if and when a future acquisition occurs.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements - an amendment of Accounting Research Bulletin No. 51 ("SFAS 160"), which establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent's ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. The Statement also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is effective as of the beginning of an entity's fiscal year that begins after December 15, 2008. We are currently evaluating the potential impact, if any, of the adoption of SFAS 160 on our Consolidated Financial Statements.
Note 2---Property and Equipment
Property and equipment consisted of the following (in thousands):
| December 31, | |
| | 2008 | | 2007 | |
| Furniture and fixtures | $ | 522 | | $ | 654 | |
| Computer and software | | 4,996 | | | 5,359 | |
| Leasehold improvements | | 1,277 | | | 1,296 | |
| | | 6,795 | | | 7,309 | |
| Less accumulated depreciation and amortization | | (6,281 | ) | | (6,621 | ) |
| Total property and equipment, net | $ | 514 | | $ | 688 | |
Depreciation and amortization expense for the years ended December 31, 2008, 2007, and 2006 was $0.4 million, $1.0 million, and $1.4 million, respectively. In 2008, we retired $495,000 in property and equipment and wrote off $495,000 in accumulated related depreciation. In 2007, we retired $13.6 million in property and equipment and wrote off $13.6 million in accumulated related depreciation. In 2007, we received $82,000 in proceeds from the sale of fixed assets and recorded a gain on sale or abandonment of property and equipment of $78,000. In 2006, we retired $21.6 million in property and equipment and wrote off $21.5 million in accumulated related depreciation.
Note 3---Goodwill
Goodwill is tested for impairment in the event of an impairment indicator or, in the absence of any impairment indicators, at least annually. As of December 31, 2007 and 2006, we performed a goodwill impairment analysis under the Step 1 provision of SFAS142. Because our fair value was determined to be greater than our book value, Step 2 under SFAS 142 was not required, and therefore no impairment was necessary at December 31, 2007 and 2006.
In the quarter ended December 31, 2008, we recognized a goodwill impairment charge of $25.1 million, which represents a full write-off of our remaining goodwill balance in accordance with the requirements SFAS 142. As of December 31, 2008, we performed Step 1 under the provisions of SFAS 142 by determining that we have a single reporting unit and then comparing our net book value to our market capitalization based upon the quoted market price of our stock. Based upon the results of Step 1, which showed impairment indicators of our goodwill balance, we completed Step 2 and recognized an impairment charge of $25.1 million in the quarter ended December 31, 2008.
The impairment charge was recorded as a component of operating expenses in our Consolidated Statements of Operations and was determined by comparing the implied fair value of the goodwill with its carrying amount on the balance sheet. The decline in our fair value is attributed to continued competition and a decline in the revenues of current generation products due to weaker market conditions and the ongoing transition to next-generation software platforms. In addition, our stock price has been affected by the general deterioration in the capital markets caused by the ongoing financial crisis. Our fair value was determined using a weighted average of a discounted cash flows method as well as a market valuation method.
The process of evaluating the potential impairment of goodwill is highly subjective and requires significant judgment. In estimating the fair value, we made estimates and judgments about future revenues and cash flows. Our forecasts were based on assumptions that are consistent with the plans and estimates we are using to manage the business.
From 2000 through 2008, we have amortized and written off the entire $767.0 million goodwill incurred as a result of a statutory merger involving a stock-for-stock exchange with another company.
Note 4---Accrued Expenses
Accrued expenses consisted of the following (in thousands):
| December 31, | |
| | 2008 | | 2007 | |
| Employee benefits | $ | 1,041 | | $ | 1,076 | |
| Commissions and bonuses | | 667 | | | 656 | |
| Sales and other taxes | | 792 | | | 1,245 | |
| Income tax and tax contingency reserves | | 301 | | | 427 | |
| Restructuring | | 426 | | | 439 | |
| Customer advances | | 283 | | | 288 | |
| Royalty | | 1,376 | | | 1,376 | |
| Other | | 529 | | | 879 | |
| Total accrued expenses | $ | 5,415 | | $ | 6,386 | |
Note 5---Other Non-Current Liabilities
Other non-current liabilities consist of the following (in thousands):
| | December 31, | |
| | 2008 | | 2007 | |
| Restructuring | $ | 419 | | $ | 895 | |
| Deferred maintenance and unearned revenue | | 1,326 | | | 1,481 | |
| Other | | 684 | | | 648 | |
| Total other non-current liabilities | $ | 2,429 | | $ | 3,024 | |
The components of (expense) benefit for income taxes are as follows (in thousands):
| | Years Ended December 31, | |
| | | 2008 | | | 2007 | | | 2006 | |
| Current: | | | | | | | | | |
| Federal | | $ | (30 | ) | | $ | 440 | | | $ | (350 | ) |
| State | | | (94 | ) | | | (61 | ) | | | (75 | ) |
| Foreign | | | (396 | ) | | | (306 | ) | | | (209 | ) |
| Total current | | | (520 | ) | | | 73 | | | | (634 | ) |
| Deferred: | | | | | | | | | | | | |
| Federal | | | - | | | | - | | | | - | |
| State | | | - | | | | - | | | | - | |
| Total deferred | | | - | | | | - | | | | - | |
| Income tax (expense) benefit | | $ | (520 | ) | | $ | 73 | | | $ | (634 | ) |
The differences between the (expense) benefit for income taxes computed at the federal statutory rate of 35% and our actual income tax (expense) benefit for the periods presented are as follows (in thousands):
| | Years Ended December 31, | |
| | | 2008 | | | 2007 | | | 2006 | |
| Expected income tax (expense) benefit | | $ | 5,072 | | | $ | (6,022 | ) | | $ | (5,744 | ) |
| Expected state income taxes expense, net of federal tax benefit | | | (95 | ) | | | (39 | ) | | | (49 | ) |
| Research and development credit | | | 172 | | | | 89 | | | | - | |
| Foreign taxes and foreign loss not benefited | | | (848 | ) | | | (894 | ) | | | (793 | ) |
| Change in valuation allowance | | | 1,390 | | | | 7,116 | | | | 5,941 | |
| Stock based compensation and warrants revaluation | | | 1,406 | | | | (1,039 | ) | | | (91 | ) |
| True-ups | | | 883 | | | | 261 | | | | - | |
| Goodwill impairment | | | (8,773 | ) | | | - | | | | - | |
| Reserve release | | | - | | | | 424 | | | | - | |
| Tax credits and other permanent items | | | 67 | | | | 199 | | | | 114 | |
| Unrealized Gain/Loss | | | 206 | | | | - | | | | - | |
| Others | | | - | | | | (22 | ) | | | (12 | ) |
| Income tax (expense) benefit | | $ | (520 | ) | | $ | 73 | | | $ | (634 | ) |
The individual components of our deferred tax assets are as follows (in thousands):
| | December 31, | |
| | | 2008 | | | 2007 | |
| Deferred tax assets: | | | | | | |
| Depreciation and amortization | | $ | 1,768 | | | $ | 2,111 | |
| Accrued, allowance and others | | | 8,754 | | | | 2,967 | |
| Capitalized research and development | | | 808 | | | | 1,846 | |
| Net operating losses | | | 202,773 | | | | 206,477 | |
| Tax credits | | | 7,510 | | | | 6,547 | |
| Unrealized losses on marketable securities | | | 1,482 | | | | 1,589 | |
| Total deferred tax assets | | | 223,095 | | | | 221,537 | |
| Less: valuation allowance | | | (223,095 | ) | | | (221,537 | ) |
| Net deferred tax assets | | $ | - | | | $ | - | |
We have provided a valuation allowance for all of our deferred tax assets as of December 31, 2008 and 2007, due to the uncertainty regarding their future realization. The total valuation allowance increased $1,558,000 from December 31, 2007 to December 31, 2008 and decreased $14,457,000 from December 31, 2006 to December 31, 2007, respectively, due primarily to utilization of net operating loss carryovers as well as increase in accruals and allowances. As of December 31, 2008, we had federal and state net operating loss ("NOL") carryforwards of approximately $543,803,000 and $158,242,000, net of Section 382 of the Internal Revenue Code ("IRC") limitations respectively, available to offset future regular and alternative minimum taxable income. The NOLs include deductions for stock based compensation for which a benefit would be recorded in additional paid-in capital when realized of $1,799,000 and $1,447,000 respectively. In addition, we had federal and state research and development credit carryforwards of approximately $4,456,000 and $3,176,000 as of December 31, 2008, respectively, available to offset future tax liabilities. We had federal and state research and development credit carryforwards of approximately $4,290,000 and $2,854,000 as of December 31, 2007, respectively, available to offset future tax liabilities. Our federal net operating loss and tax credit carryforwards expire in the tax years 2011 through 2025, if not utilized. The state net operating loss carryforwards expire in the tax years 2014 through 2017. The state research and development credits can be carried forward indefinitely.
Federal and state tax laws impose substantial restrictions on the utilization of net operating loss and credit carryforwards in the event of an "ownership change" for tax purposes, as defined in IRC Section 382. Based on an IRC Section 382 study completed in February 2007, we determined that there were ownership changes during the year 1998. Consequently, a portion of our tax carryforwards will expire before they can be fully utilized. Therefore, in 2007, we reduced our reported available federal NOL carryforwards by approximately $5.3 million. Based on an updated study completed in January 2009, we determined that there were no additional ownership changes through December 2008.
Effective January 1, 2007, we adopted Financial Accounting Standards Interpretation, or FIN No.48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No.109 ("FIN No. 48"). Fin No. 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of uncertain tax positions taken or expected to be taken in our income tax return, and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN No. 48 utilizes a two-step approach for evaluating uncertain tax positions accounted for in accordance with SFAS No. 109, Accounting for Income Taxes ("SFAS No. 109"). Step one, Recognition, requires us to determine if the weight of available evidence indicates that a tax position is more likely than not to be sustained upon audit, including resolution of related appeals or litigation processes, if any. Step two, Measurement, is based on the largest amount of benefit, which is more likely than not to be realized on ultimate settlement. The cumulative effect of adopting FIN No. 48 on January 1, 2007 is recognized as a change in accounting principle, recorded as an adjustment to the opening balance of retained earnings on the adoption date.
Upon adoption of FIN No. 48, our policy to include interest and penalties related to unrecognized tax benefits within our provision for (benefit from) income taxes did not change.
Our total amount of unrecognized tax benefits as of December 31, 2007 and December 31, 2008 were $1,860,000 and $2,237,000, respectively. Also, our total amount of unrecognized tax benefits that, if recognized, would affect its effective tax rate were $160,000 and $329,000 as of December 31, 2007 and 2008, respectively.
The tax years 1993 to 2008 remain open in several jurisdictions, none of which have individual significance in our opinion.
| Balance at January 1, 2007 | | $ | 2,248,000 | |
| Reductions for tax positions of prior years | | | (388,000) | |
| Balance at December 31, 2007 | | $ | 1,860,000 | |
| Additions based on tax positions related to the current year | | | 291,000 | |
| Additions for tax positions of prior years | | | 86,000 | |
| Balance at December 31, 2008 | | $ | 2,237,000 | |
Note 7---Commitments and Contingencies
Warranties and Indemnification
We provide a warranty to our customers that our software will perform substantially in accordance with the documentation we provide with the software, typically for a period of 90 days following receipt of the software. Historically, costs related to these warranties have been immaterial. Accordingly, we have not recorded any warranty liabilities as of December 31, 2008 and December 31, 2007.
Our software license agreements typically provide for indemnification of customers for intellectual property infringement claims caused by use of a current release of our software consistent with the terms of the license agreement. The term of these indemnification clauses is generally perpetual. The potential future payments we could be required to make under these indemnification clauses is generally limited to the amount the customer paid for the software. Historically, costs related to these indemnification provisions have been immaterial. We also maintain liability insurance that limits our exposure. As a result, we believe the potential liability of these indemnification clauses is minimal. Accordingly, we have not recorded any liabilities for these agreements as of December 31, 2008 and 2007, respectively.
We entered into agreements whereby we indemnify our 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 we could be required to make under these indemnification agreements may be unlimited; however, we have a director and officer insurance policy that limits our exposure and enables us to recover a portion of any future amounts paid. As a result of our insurance policy coverage, we believe the estimated fair value of these indemnification agreements is insignificant. Accordingly, we have no liabilities recorded for these agreements as of either December 31, 2008 or December 31, 2007. We assess 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
We lease our headquarters facility and our other facilities under noncancelable operating lease agreements expiring through the year 2012. Under the terms of the agreements, we are required to pay property taxes, insurance and normal maintenance costs.
A summary of total future minimum lease payments under noncancelable operating lease agreements is as follows (in millions):
| Operating | |
| | Leases | |
| Years Ending December 31, | | |
| 2009 | $ | 2.2 | |
| 2010 | | 1.6 | |
| 2011 | | 1.2 | |
| 2012 | | 0.6 | |
| 2013 and thereafter | | - | |
| Total minimum lease payments | $ | 5.6 | |
These future minimum lease payments exclude approximately $2.3 million of sublease income to be received under non-cancelable sublease agreements. As of December 31, 2008, we have accrued $0.8 million of estimated future facilities costs as a restructuring accrual.
Rent expense for the years ended December 31, 2008, 2007 and 2006 was $1,605,000, $1,598,000, and $2,315,000, respectively.
Standby Letter of Credit Commitments
Commitments totaling $1.0 million as of December 31, 2008, and as of December 31, 2007, in the form of standby letters of credit, were issued on our behalf from financial institutions, in favor of our various landlords to secure obligations under our facility leases.
Legal Proceedings
We are subject from time to time to various legal actions and other claims arising in the ordinary course of business. We are not presently a party to any material legal proceedings.
Note 8---Restructuring
The following table summarizes the restructuring accrual activity recorded during the three-years ended December 31, 2008 (in thousands):
| Severance | | Facilities/ | | | |
| | and | | Excess | | | |
| | Benefits | | Assets | | Total | |
| Accrual balances, December 31, 2005 | $ | 416 | | $ | 6,839 | | $ | 7,255 | |
| Restructuring charges (credits) | | 348 | | | (3,717 | ) | | (3,369 | ) |
| Cash payments | | (417 | ) | | (907 | ) | | (1,324 | ) |
| Accrual balances, December 31, 2006 | | 347 | | | 2,215 | | | 2,562 | |
| Restructuring (credits), charges | | (347 | ) | | 996 | | | 649 | |
| Cash payments | | - | | | (1,877 | ) | | (1,877 | ) |
| Accrual balances, December 31, 2007 | | - | | | 1,334 | | | 1,334 | |
| Restructuring charges (credits) | | - | | | (26 | ) | | (26 | ) |
| Cash payments | | - | | | (463 | ) | | (463 | ) |
| Accrual balances, December 31, 2008 | $ | - | | $ | 845 | | $ | 845 | |
The severance and benefits accrual for each period includes severance, payroll taxes and COBRA benefits related to restructuring plans implemented prior to the balance sheet date. The facilities/excess assets accrual for each period includes future minimum lease payments, fees and expenses, net of estimated sublease income and planned company occupancy, and related leasehold improvement amounts payable subsequent to the balance sheet date for which the provisions of EITF 94-3 or SFAS 146, as applicable, were satisfied. See further discussion below. In determining estimated future sublease income, the following factors were considered, among others: 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.
In September 2006, we decided not to exercise a $4.5 million buy-out option for a 50,000 square foot lease for 66 months from January 1, 2007 through June 30, 2012 at Pacific Shores Center. We instead decided to occupy a portion of the new space and sub-lease the remaining excess space. In January 2007, we moved into our new worldwide headquarters at Pacific Shores Center, occupying approximately 27,000 square feet of office facilities used for research and development, technical support, sales, marketing, consulting, training and administration. We subleased approximately 22,500 square feet effective on January 8, 2007.
The nature of the charges and credits in 2008 were as follows:
| l | Severance and benefits -- In 2008, we did not incur any severance and benefits expense. |
| l | Facilities/excess assets -- During 2008, we recorded a facilities-related restructuring credit of $26,000 due to an excess of subleases income. |
The nature of the charges and credits in 2007 were as follows:
| l | Severance and benefits -- In 2007, we have reversed severance accruals due to the expiration of the relevant statute of limitations. This resulted into a reversal of the related accrual of $347,000. |
| l | Facilities/excess assets -- During 2007, one of the leases located in Redwood City, California expired. We incurred an asset retirement obligation of $40,000 before returning the property to the landlord. This amount was included in the restructuring charge of $996,000. |
The nature of the charges and credits in 2006 were as follows:
| l | Severance and benefits -- During the year ended December 31, 2006, we recorded $348,000 in severance charges related to the approved Work Reduction Plan. Due to European labor law we were not able to recognize severance charges for three employees until 2006. |
| l | Facilities/excess assets -- During the year ended December 31, 2006, we recorded a facilities-related restructuring credit of $3.7 million. In the third quarter of 2006, we did not exercise a $4.5 million option to buy out the residual lease obligation entered in 2004 and the buyout option expired. Therefore, we reversed the 2004 accrual in the third quarter of 2006. In the fourth quarter of 2006, we subleased 22,500 square feet of excess space and adjusted the restructuring accrual accordingly. We made cash payments of $0.9 million during the year ended December 31, 2006 related to these agreements. |
As of December 31, 2008, we have remaining lease obligation of approximately $5.6 million. As a component of the settlement of one of the previous leases, we have a residual lease obligation beginning in 2007 of approximately $9.0 million. We would have made an additional cash payment of $4.5 million had we exercised an option to terminate this residual real estate obligation prior to the commencement of the lease term (January 2007). This option to terminate the residual lease obligation is accounted for in accordance with SFAS 146 and is a part of the restructuring credit of $24.6 million recorded in fiscal 2004. As discussed above, in the third quarter of 2006, we did not exercise the $4.5 million option to buy out the residual lease obligation, and the buy-out option expired. In connection with one of the buyout transactions, we issued to the landlord a five-year warrant to purchase approximately 28,000 shares of our common stock at an exercise price of $125.00 per share, exercisable beginning in August 2005. See Note 9.
As of December 31, 2008, the total restructuring accrual of $0.8 million consisted of the following (in millions):
| | | | Non- | | | |
| | Current | | Current | | Total | |
| Excess facilities | $ | 0.4 | | $ | 0.4 | | $ | 0.8 | |
We no longer have excess facilities related to restructured or abandoned leased space.
The following table summarizes the activity related to the restructuring plans initiated after January 1, 2003, and accounted for in accordance with FAS 146 (in thousands):
| | | | Amounts | | Amounts | | | | | |
| | | | Charged to | | Reversed to | | | | | |
| | Accrued | | Restructuring | | Restructuring | | Amounts | | Accrued | |
| | Restructuring | | Costs and | | Costs and | | Paid or | | Restructuring | |
| | Costs, Beginning | | Other | | Other | | Written Off | | Costs, Ending | |
| Year Ended December 31, 2008: | | | | | | | | | | |
| Lease cancellations and commitments | $ | 8 | | $ | 24 | | $ | 33 | | $ | - | | $ | 65 | |
| | | | | | | | | | | | | | | | |
| Year Ended December 31, 2007: | | | | | | | | | | | | | | | |
| Lease cancellations and commitments | $ | 77 | | $ | 126 | | $ | - | | $ | (195 | ) | $ | 8 | |
| | | | | | | | | | | | | | | | |
| Year Ended December 31, 2006: | | | | | | | | | | | | | | 8 | |
| Lease cancellations and commitments | $ | 4,188 | | $ | 389 | | $ | (4,500 | ) | $ | - | | $ | 77 | |
| Termination payments to employees and related costs | | 105 | | | 348 | | | - | | | (453 | ) | | - | |
| | $ | 4,293 | | $ | 737 | | $ | (4,500 | ) | $ | (453 | ) | $ | 77 | |
The following table summarizes the activity related to the restructuring plans initiated prior to January 1, 2003, and accounted for in accordance with EITF 94-3 (in thousands):
| | | | Amounts | | Amounts | | | | | |
| | Accrued | | Charged to | | Reversed to | | Amounts | | | |
| | Restructuring | | Restructuring | | Restructuring | | Paid or | | Accrued | |
| | Costs, | | Costs and | | Costs and | | Written | | Restructuring | |
| | Beginning | | Other | | Other | | Off | | Costs, Ending | |
| Year Ended December 31, 2008: | | | | | | | | | | |
| Lease cancellations and commitments | | $ | 1,326 | | | $ | (51 | ) | | $ | - | | | $ | (495 | ) | | $ | 780 | |
| | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2007: | | | | | | | | | | | | | | | | | | | | |
| Lease cancellations and commitments | | $ | 2,138 | | | $ | 870 | | | $ | - | | | $ | (1,682 | ) | | $ | 1,326 | |
| Termination payments to employees and related costs | | | 347 | | | | - | | | | (347 | ) | | | - | | | | - | |
| | | $ | 2,485 | | | $ | 870 | | | $ | (347 | ) | | $ | (1,682 | ) | | $ | 1,326 | |
| Year Ended December 31, 2006: | | | | | | | | | | | | | | | | | | | | |
| Lease cancellations and commitments | | $ | 2,651 | | | $ | 394 | | | $ | - | | | $ | (907 | ) | | $ | 2,138 | |
| Termination payments to employees and related costs | | | 311 | | | | - | | | | - | | | | 36 | | | | 347 | |
| | | $ | 2,962 | | | $ | 394 | | | | - | | | $ | (871 | ) | | $ | 2,485 | |
Note 9---Stockholders' Equity
Convertible Preferred Stock
As of December 31, 2008, there were no outstanding shares of convertible preferred stock. Our Board of Directors and our stockholders have authorized 1,000,000 shares of convertible preferred stock that are available for issuance.
Common Stock
In November 2004, we entered into a definitive agreement for the private placement of the $16.0 million in aggregate principal amount of senior subordinated secured convertible notes (the "Notes") that were convertible, at the holders' option, into common stock at a conversion price of $69 per share. The Notes bore interest at a rate of six percent per annum, and we were originally obligated to repay the principal amount of the initial $16.0 million of notes in 15 equal monthly installments of $1.1 million beginning in June 2005. In November 2005, Dr. Pehong Chen, our Chief Executive Officer and largest stockholder, acquired all Notes then outstanding. Including interest, the Notes represented $15.5 million in debt obligations as of December 15, 2005. In order to relieve us from the liquidity challenges presented by the Notes, Dr. Chen agreed to cancel all amounts owed under the Notes in exchange for 1,380,000 shares of BroadVision common stock, at an effective price per share of $11.25, a 25% discount to the December 20, 2005 closing price of BroadVision common stock, and $180,000 in cash that represented the portion of the accrued interest on the Notes that was not paid in stock. That exchange was completed in March 2006 and was reported as an increase in additional paid-in capital of approximately $20.7 million.
In February 2006, we announced a subscription rights offering to existing stockholders to sell a total of 7 million shares, or 147.5 shares for each share of BroadVision common stock held as of the record date of December 20, 2005, at an effective price per share of $11.25. The primary purpose of the rights offering was to allow the holders of BroadVision common stock an opportunity to further invest in BroadVision in order to maintain their proportionate interest in BroadVision common stock, at the same price per share as the conversion price afforded to Dr. Chen in the Notes conversion. Dr. Chen waived any right to participate in the rights offering.
Our rights offering expired on November 28, 2006. Eligible participants exercised rights to purchase approximately 1.4 million shares, resulting in $15.8 million in net proceeds for us. Then we reduced our total number of authorized shares of common stock from 80,000,000 to 11,200,000 in February 2007. We deregistered the shares not sold in the rights offering and subject to the registration statement we filed in connection with the rights offering.
We effected a one-for-twenty-five reverse split of our common stock on October 24, 2008 Our common stock began trading on a post-split basis at the opening of trading on October 27, 2008. The accompanying consolidated financial statements and related financial information contained herein for all periods presented have been retroactively restated to give effect to the stock split in accordance with U.S. GAAP. We paid cash in lieu of issuing fractional shares, based upon the closing sales price of our stock as reported on the OTC Bulletin Board on October 24, 2008.
As of December 31, 2008, we had reserved 233,495 common shares for future issuance upon the exercise of stock options and warrants.
Our CEO has options to purchase 68,175 shares of common stock at a weighted average exercise price of $965 per share. The table below is a summary of shares granted through December 31, 2008:
| | | | | | | | | Vesting | |
| | | Options | | Options | | | | Period | |
| Date Granted | | Granted | | Price | | Vested | | (Months) | |
| 6/23/1999 | | | 19,999 | | $ | 1,500.00 | | | 19,999 | | | 60 | |
| 5/25/2001 | | | 20,000 | | | 1,662.75 | | | 20,000 | | | 48 | |
| 11/27/2001 | | | 177 | | | 875.25 | | | 177 | | | 24 | |
| 2/19/2002 | | | 2,222 | | | 465.75 | | | 2,222 | | | 48 | |
| 10/30/2002 | | | 25,777 | | | 54.00 | | | 25,777 | | | 48 | |
| Totals | | | 68,175 | | | | | | 68,175 | | | | |
Activity in the Equity Plan is as follows:
| Years Ended December 31, | |
| | 2008 | | 2007 | | 2006 | |
| | | | Weighted- | | Weighted- | | Aggregate | | | | Weighted- | | | | Weighted- | |
| | | | Average | | Average | | Intrinsic | | | | Average | | | | Average | |
| | Options | | Exercise | | Remaining | | Value | | Options | | Exercise | | Options | | Exercise | |
| | (000's) | | Price | | Contractual term | | | | (000's) | | Price | | (000's) | | Price | |
| Outstanding at beginning of period | | 233 | | $ | 353.54 | | | | | | | 249 | | $ | 336.39 | | | 147 | | $ | 596.70 | |
| Granted | | 98 | | | 29.32 | | | | | | | 24 | | | 42.47 | | | 155 | | | 14.66 | |
| Exercised | | (4 | ) | | 15.18 | | | | | | | (32 | ) | | 14.89 | | | (2 | ) | | 14.14 | |
| Forfeited | | (7 | ) | | 29.74 | | | | | | | (5 | ) | | 17.50 | | | (12 | ) | | 14.18 | |
| Expired | | (9 | ) | | 214.16 | | | | | | | (3 | ) | | 660.88 | | | (39 | ) | | 158.42 | |
| Outstanding at end of period | | 311 | | $ | 267.51 | | | 6.55 | | | - | | | 233 | | | 353.54 | | | 249 | | | 336.39 | |
| Options exercisable at end of period | | 226 | | $ | 357.50 | | | 5.55 | | | - | | | 193 | | $ | 421.66 | | | 156 | | $ | 528.80 | |
| Option vested and expected to vest at end of period | | 303 | | $ | 273.82 | | | 6.48 | | | - | | | 231 | | $ | 357.37 | | | 243 | | $ | 344.40 | |
| Weighted-average fair value of options granted during the period | | | | $ | 22.00 | | | | | | | | | | | $ | 33.32 | | | | | $ | 10.80 | |
| Aggregate Intrinsic Value: | | | | | | | | | | | | | | | | | | | | | | | | |
| Options exercised | | | | $ | 60,459 | | | | | | | | | | | $ | 1,303,673 | | | | | $ | 5,529 | |
| Options exercisable | | | | | - | | | | | | | | | | | $ | 2,616,812 | | | | | $ | 248,688 | |
We granted 933 shares of restricted stock to the non-employee members of our Board of Directors in June 2007, and recorded a stock-based compensation expense of $28,541. We granted 2,018 shares of restricted stock to the non-employee members of our Board of Directors in June 2008, and recorded a stock-based compensation expense of $51,950. These 2,018 shares of restricted stock will vest over a one-year period measured from the date of the annual meeting of stockholders held in June 2008, with one quarter of the shares included in such Director Grant vesting on each of the dates that are three months, six months, nine months and twelve months from the June 2008 annual meeting, so long as each board member continues to serve as a member of our board of directors on such vesting date.
The following table summarizes stock options outstanding under the Equity Plan as of December 31, 2008:
| | | | | | | | | | | Outstanding | | | | | | | | | | |
| | | | | | | | | | | Weighted- | | | | | | | | | | |
| | | | | | | | | | | Average | | | | | | | | | | |
| | | | | | | | | | | Remaining | | | Weighted | | | Exercisable | | | Weighted | |
| | | | | | | | Options | | | Contractual | | | Exercise | | | Options | | | Exercise | |
| Range of Exercise Prices | | | (000's) | | | Life in Years | | | Price | | | (000's) | | | Price | |
| $ | 14.25 | | | - | | $ | 14.25 | | | | 90 | | | | 7.17 | | | $ | 14.25 | | | | 90 | | | $ | 14.25 | |
| | 15.75 | | | - | | | 28.25 | | | | 24 | | | | 8.27 | | | | 22.24 | | | | 14 | | | | 21.93 | |
| | 29.25 | | | - | | | 29.25 | | | | 83 | | | | 9.29 | | | | 29.25 | | | | 17 | | | | 29.25 | |
| | 33.50 | | | - | | | 54.00 | | | | 42 | | | | 5.08 | | | | 49.98 | | | | 36 | | | | 50.59 | |
| | 55.25 | | | - | | | 1,500.01 | | | | 50 | | | | 3.18 | | | | 777.47 | | | | 46 | | | | 843.12 | |
| | 1,662.75 | | | - | | | 3,809.39 | | | | 22 | | | | 2.39 | | | | 1,681.09 | | | | 22 | | | | 1,681.09 | |
| | | | | | | | | | | | 311 | | | | 6.55 | | | $ | 267.51 | | | | 225 | | | $ | 357.50 | |
We grant options outside of our Equity Plan (2000 Non-Officer Plan and Non-Plan Grants). The terms of these options are generally identical to those granted under our Equity Plan. A summary of options granted outside of the plan is presented below:
| | Years Ended December 31, | |
| | | 2008 | | | 2007 | | | 2006 | |
| | | | | | Weighted- | | | Weighted | | | Aggregate | | | | | | Weighted- | | | | | | Weighted- | |
| | | | | | Average | | | Average | | | Intrinsic | | | | | | Average | | | | | | Average | |
| | | Options | | | Exercise | | | Remaining | | | Value | | | Options | | | Exercise | | | Options | | | Exercise | |
| | | (000's) | | | Price | | | Contractual Term | | | | | | (000's) | | | Price | | | (000's) | | | Price | |
| Outstanding at beginning of period | | | 25 | | | $ | 274.42 | | | | | | | | | | 30 | | | $ | 241.58 | | | | 23 | | | $ | 416.27 | |
| Granted | | | 26 | | | | 26.71 | | | | | | | | | | - | | | | - | | | | 17 | | | | 13.13 | |
| Exercised | | | (1 | ) | | | 14.25 | | | | | | | | | | (5 | ) | | | 31.57 | | | | - | | | | - | |
| Forfeited | | | (5 | ) | | | 29.25 | | | | | | | | | | - | | | | - | | | | (3 | ) | | | 14.25 | |
| Expired | | | (1 | ) | | | 860.35 | | | | | | | | | | - | | | | 470.30 | | | | (6 | ) | | | 393.26 | |
| Outstanding at end of period | | | 44 | | | | 150.61 | | | | 7.30 | | | | - | | | | 25 | | | $ | 274.42 | | | | 31 | | | | 235.06 | |
| Options exercisable at end of period | | | 28 | | | $ | 224.01 | | | | 6.07 | | | | - | | | | 23 | | | $ | 300.98 | | | | 19 | | | $ | 367.50 | |
| Option vested and expected to vest at end of period | | | 43 | | | $ | 155.80 | | | | 7.21 | | | | - | | | | 25 | | | $ | 274.84 | | | | 31 | | | $ | 240.08 | |
| Weighted-average fair value of options granted during the period | | | | | | $ | 20.14 | | | | | | | | | | | | | | | $ | - | | | | | | | $ | 0.65 | |
| Aggregate Intrinsic Value: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Options exercised | | | | | | $ | 3,420 | | | | | | | | | | | | | | | $ | 150,998 | | | | | | | $ | - | |
| Options exercisable | | | | | | | - | | | | | | | | | | | | | | | $ | 380,744 | | | | | | | $ | 14,175 | |
The following table summarizes stock options, granted outside the Equity Plan (2000 Non-Officer Plan and non-plan grants), outstanding as of December 31, 2008:
| | | | | | | | | | | | Outstanding | | | | | | | | | | |
| | | | | | | | | | | | | Weighted- | | | | | | | | | | |
| | | | | | | | | | | | | Average | | | | | | | | | | |
| | | | | | | | | | | | | Remaining | | | Weighted | | | Exercisable | | | Weighted | |
| | | | | | | | | | Options | | | Contractual | | | Exercise | | | Options | | | Exercise | |
| Range of Exercise Prices | | | (000's) | | | Life in Years | | | Price | | | (000's) | | | Price | |
| $ | 11.38 | | | | - | | | $ | 11.38 | | | | 6 | | | | 7.39 | | | $ | 11.38 | | | | 6 | | | $ | 11.38 | |
| | 12.00 | | | | - | | | | 12.75 | | | | 6 | | | | 9.07 | | | | 12.61 | | | | 2 | | | | 12.25 | |
| | 14.25 | | | | - | | | | 14.25 | | | | 4 | | | | 7.17 | | | | 14.25 | | | | 4 | | | | 14.25 | |
| | 29.25 | | | | - | | | | 29.25 | | | | 17 | | | | 9.29 | | | | 29.25 | | | | 5 | | | | 29.25 | |
| | 37.50 | | | | - | | | | 37.50 | | | | 8 | | | | 3.81 | | | | 37.50 | | | | 8 | | | | 37.50 | |
| | 52.50 | | | | - | | | | 1,500.01 | | | | 3 | | | | 3.66 | | | | 437.89 | | | | 3 | | | | 437.89 | |
| | | | | | | | | | | | | | 44 | | | | 7.30 | | | $ | 150.61 | | | | 28 | | | $ | 224.01 | |
As of December 31, 2008, total unrecognized compensation cost related to unvested stock options was $2,494,918, which is expected to be recognized over the remaining weighted-average vesting periods of 1.1 year. During the year ended December 31, 2008 and 2007, we have received cash of $657,000 and $1,484,000, respectively from the exercise of stock options and employee stock purchases.
Warrants
Effective January 1, 2007, we adopted Financial Accounting Standards Board ("FASB") Staff Position No. EITF 00-19-2, Accounting for Registration Payment Arrangements ("FSP"). This FSP addresses how to account for registration payment arrangements and clarifies that a financial instrument subject to a registration payment arrangement should be accounted for in accordance with other generally accepted accounting principles ("GAAP") without regard to the contingent obligation to transfer consideration pursuant to the registration payment arrangement. This accounting pronouncement further clarifies that a liability for liquidated damages resulting from registration payment obligations should be recorded in accordance with SFAS No. 5, Accounting for Contingencies ("SFAS No. 5"), when the payment of liquidated damages becomes probable and can be reasonably estimated. We do not believe that we have any SFAS No. 5 contingencies as of December 31, 2008 relating to our registration payment arrangements, nor do we believe that there is a material impact on our Consolidated Financial Statements as a result of implementing this FSP.
As of December 31, 2008, the following warrants to purchase our common stock were outstanding (dollars in thousands, except shares and per share data):
| | | Shares at | | | | | | Fair Value at | |
| | | December 31, | | | Price per | | | December 31, | |
| Description | | 2008 | | | 2007 | | | Share | | | 2008 | | | 2007 | |
| Issued to landlord in real estate buyout transaction in August 2004 | | | 28,000 | | | | 28,000 | | | $ | 125.00 | | | $ | 1 | | | $ | 167 | |
| Issued to convertible debenture investors in November 2004 | | | 154,631 | | | | 154,631 | | | | 37.00 | | | | 154 | | | | 4,028 | |
| Others issued in connection with revenue transactions in 1997 and 2000 | | | - | | | | 25 | | | Various | | | | - | | | | - | |
| Total | | | 182,631 | | | | 182,656 | | | | | | | $ | 155 | | | $ | 4,195 | |
The warrant issued in connection with the real estate transaction has a term of five years, and is exercisable beginning in August 2005. The warrant issued in connection with the convertible debentures also has a term of five years and is exercisable beginning in May 2005. Under an anti-dilution provision of the debt warrants and as triggered by the debt to equity exchange of the Notes and the rights offering (Note 9), the debt warrant was reissued in March 2006 and November 2006, respectively. All our outstanding warrants have been retroactively restated to give effect to our reverse stock-split transaction effective October 2008.
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 were originally valued at fair value on the date of issuance. During year 2008, we recorded credits related to the change in the fair value of warrants of approximately $4.0 million. During year 2007, we recorded charges related to the change in fair value of the warrants of approximately $3.1 million. During year 2007, certain convertible debenture investors exercised 13,640 warrants to purchase an equivalent number of Company common shares for total cash proceeds of $505,000. During year 2006, we recorded charges related to the change in fair value of the warrants of approximately $1.3 million.
Note 10---Employee Benefit Plan
We provide for a defined contribution employee retirement plan in accordance with section 401(k) of the Internal Revenue Code. Eligible employees are entitled to contribute up to 50% of their annual compensation, subject to certain limitations. The Plan allows for discretionary contributions by us. We made no contributions during the three years ended December 31, 2008.
Note 11---Geographic, Segment and Significant Customer Information
We operate in one segment, electronic business commerce solutions. Our reportable segment includes our facilities in North and South America (Americas), Europe and Asia Pacific and the Middle East (Asia/Pacific). Our chief operating decision maker is considered to be the CEO. The CEO reviews financial information presented on a consolidated basis accompanied by disaggregated information about revenues by geographic region and by product for purposes of making operating decisions and assessing financial performance. The disaggregated revenue information reviewed by the CEO is as follows (in thousands):
| Years Ended December 31, | |
| | 2008 | | | 2007 | | | 2006 | |
| Software licenses | $ | 12,137 | | | $ | 21,127 | | | $ | 15,215 | |
| Services | | 6,051 | | | | 6,204 | | | | 12,099 | |
| Maintenance | | 17,715 | | | | 22,687 | | | | 24,670 | |
| Total revenues | $ | 35,903 | | | $ | 50,018 | | | $ | 51,984 | |
We sell our products and provide services worldwide through a direct sales force and through a channel of independent distributors, value-added resellers ("VARs") and Application Service Providers ("ASPs"). In addition, the sales of our products are promoted through independent professional consulting organizations known as systems integrators ("SIs"). We provide services worldwide through our BroadVision WEBSO and indirectly through distributors, VARs, ASPs, and SIs. We currently operate in three primary geographical territories.
Disaggregated financial information regarding our products and services and geographic revenues is as follows (in thousands):
| Years Ended December 31, | |
| | 2008 | | | 2007 | | | 2006 | |
| Revenues: | | | | | | | | | | | |
| Americas | $ | 16,893 | | | $ | 31,714 | | | $ | 30,976 | |
| Europe | | 13,500 | | | | 12,092 | | | | 14,530 | |
| Asia/ Pacific | | 5,510 | | | | 6,212 | | | | 6,479 | |
| Total Company | $ | 35,903 | | | $ | 50,018 | | | $ | 51,984 | |
During the years ended December 31, 2008, 2007 and 2006, no customer accounted for 10% or more of our revenues.
In 2008, license sales through independent distributors, VARs, ASPs, and SIs became significant. Although it was immaterial in Americas, license sales via these channels accounted for 32% in Europe and 42% Asia Pacific in 2008.
The following represents property and equipment and goodwill (long-lived assets) by geographic region (in thousands):
| December 31, | |
| | 2008 | | | 2007 | | | 2006 | |
| | | | | | | | | | | |
| Americas | $ | 359 | | | $ | 25,581 | | | $ | 26,025 | |
| Europe | | 16 | | | | 62 | | | | 104 | |
| Asia/ Pacific | | 139 | | | | 111 | | | | 81 | |
| Total Company | $ | 514 | | | $ | 25,754 | | | $ | 26,210 | |
The long-lived assets at December 31, 2008 compared to 2007 decreased by $25.2 million, primarily due to an impairment of the goodwill balance recognized in the quarter ended December 31, 2008.
Note 12---Related Party Transactions
On November 14, 2008, BroadVision (Delaware) LLC, a Delaware limited liability company ("BVD"), which was then our wholly owned subsidiary, entered into a Share Purchase Agreement with CHRM LLC, a Delaware limited liability company, that is controlled by Dr. Pehong Chen, our CEO and largest stockholder. We and CHRM LLC then entered into an Amended and Restated Operating Agreement of BroadVision (Delaware) LLC dated as of November 14, 2008 (the "BVD Operating Agreement"). Under these agreements, CHRM LLC received, in exchange for the assignment of certain intellectual property rights, 20 Class B Shares of BVD, representing the right to receive 20% of any "net profit" from a "capital transaction" (as such terms are defined in the BVD Operating Agreement) of BroadVision (Barbados) Limited ("BVB"), an entity wholly owned by BVD. A "capital transaction" under that agreement is any merger or sale of substantially all of the assets of BVB as a result of which the members of BVB will no longer have an interest in BVB or the assets of BVB will be distributed to its members.
In 2008, we executed a renewal contract with a third party in which Dr. Pehong Chen, our CEO and largest stockholder, is a board member. The total renewal license value $73,000. For the year ended December 31, 2008, $64,109 was recognized as license revenue and $17,835 as consulting revenue. We have received payment of $73,000 for the renewal contract as December 31, 2008. We incurred $70,000 in direct costs and expenses relating to this contract.
In June 2007, we executed a software license agreement with a third party in which Dr. Pehong Chen, our CEO and largest stockholder, is a board member. The total contract value is $132,000. We recognized $112,000 and $20,000 revenue for year 2007 and year 2008, respectively. We have received payment of $126,000 and $6,000 for the contract for year 2007 and year 2008, respectively. We incurred $50,000 in direct costs and expenses relating to this contract.
In 2006, we executed a consulting agreement with a third party in which the CEO is a passive owner and convertible note holder. The total contract value is $365,000. For the year ended December 31, 2006, we recognized $365,000 as revenue. We received payment for the entire contract in the third quarter of 2006. We incurred $99,000 in costs and expenses relating to this contract.
Note 13---Quarterly Results of Operations (Unaudited)
The following tables set forth certain unaudited Consolidated Statement of Operations data for the eight quarters ended December 31, 2008, as well as that data expressed as a percentage of total revenues for the periods indicated.
This data has been derived from unaudited Consolidated Financial Statements that, in the opinion of management, include all adjustments consisting only of normal recurring adjustments necessary for a fair presentation of such information when read in conjunction with the Consolidated Financial Statements and Notes thereto. We believe that period-to-period comparisons of our financial results are not necessarily meaningful and should not be relied upon as an indication of future performance.
| | Three Months Ended | |
| | | Dec 31, | | | Sep 30, | | | Jun 30, | | | Mar 31, | | | Dec 31, | | | Sep 30, | | | Jun 30, | | | Mar 31, | |
| | | 2008 | | | 2008 | | | 2008 | | | 2008 | | | 2007 | | | 2007 | | | 2007 | | | 2007 | |
| | | (In thousands) | |
| | | (Unaudited) | |
| Statement of Operations Data: | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenues: | | | | | | | | | | | | | | | | | | | | | | | | |
| Software licenses | | $ | 3,616 | | | $ | 2,096 | | | $ | 2,448 | | | $ | 3,977 | | | $ | 4,620 | | | $ | 5,280 | | | $ | 5,494 | | | $ | 5,733 | |
| Services | | | 6,036 | | | | 6,095 | | | | 5,582 | | | | 6,053 | | | | 6,629 | | | | 7,476 | | | | 7,774 | | | | 7,012 | |
| Total revenues | | | 9,652 | | | | 8,191 | | | | 8,030 | | | | 10,030 | | | | 11,249 | | | | 12,756 | | | | 13,268 | | | | 12,745 | |
| Cost of revenues: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cost of software licenses | | | 6 | | | | 7 | | | | 6 | | | | 7 | | | | 8 | | | | 3 | | | | 22 | | | | 12 | |
| Cost of services | | | 2,259 | | | | 2,218 | | | | 2,155 | | | | 2,253 | | | | 2,251 | | | | 2,102 | | | | 2,215 | | | | 2,393 | |
| Total cost of revenues | | | 2,265 | | | | 2,225 | | | | 2,161 | | | | 2,260 | | | | 2,259 | | | | 2,105 | | | | 2,237 | | | | 2,405 | |
| Gross profit | | | 7,387 | | | | 5,966 | | | | 5,869 | | | | 7,770 | | | | 8,990 | | | | 10,651 | | | | 11,031 | | | | 10,340 | |
| Operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Research and development | | | 2,320 | | | | 2,217 | | | | 2,309 | | | | 2,337 | | | | 2,247 | | | | 2,283 | | | | 2,483 | | | | 2,655 | |
| Sales and marketing | | | 1,989 | | | | 1,937 | | | | 1,961 | | | | 1,885 | | | | 2,383 | | | | 1,898 | | | | 1,781 | | | | 2,069 | |
| General and administrative | | | 1,452 | | | | 1,659 | | | | 1,603 | | | | 1,698 | | | | 2,042 | | | | 1,705 | | | | 1,479 | | | | 1,067 | |
| Goodwill impairment | | | 25,066 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Restructuring (credits), charges | | | (9 | ) | | | 6 | | | | (5 | ) | | | (18 | ) | | | (195 | ) | | | 260 | | | | 306 | | | | 278 | |
| Total operating expenses | | | 30,818 | | | | 5,819 | | | | 5,868 | | | | 5,902 | | | | 6,477 | | | | 6,146 | | | | 6,049 | | | | 6,069 | |
| Operating (loss) income | | | (23,431 | ) | | | 147 | | | | 1 | | | | 1,868 | | | | 2,513 | | | | 4,505 | | | | 4,982 | | | | 4,271 | |
| Income (expense) from revaluation of warrants | | | 380 | | | | 581 | | | | 625 | | | | 2,454 | | | | 1,771 | | | | (680 | ) | | | 3,104 | | | | (7,343 | ) |
| Other income (expense), net | | | 1,148 | | | | (398 | ) | | | 813 | | | | 1,322 | | | | 1,648 | | | | 1,218 | | | | 584 | | | | 632 | |
| Income taxes (expense) benefit | | | (192 | ) | | | (41 | ) | | | (4 | ) | | | (283 | ) | | | (60 | ) | | | 419 | | | | (230 | ) | | | (56 | ) |
| Net (loss) income | | $ | (22,095 | ) | | $ | 289 | | | $ | 1,435 | | | $ | 5,361 | | | $ | 5,872 | | | $ | 5,462 | | | $ | 8,440 | | | $ | (2,496 | ) |
| Basic net (loss) income per share | | $ | (5.04 | ) | | $ | 0.07 | | | $ | 0.33 | | | $ | 1.23 | | | $ | 1.35 | | | $ | 1.27 | | | $ | 1.97 | | | $ | (0.58 | ) |
| Diluted net (loss) income per share | | $ | (5.04 | ) | | $ | 0.06 | | | $ | 0.33 | | | $ | 1.21 | | | $ | 1.33 | | | $ | 1.24 | | | $ | 1.91 | | | $ | (0.58 | ) |
| Shares used in computing basic net (loss) income per share | | | 4,382 | | | | 4,431 | | | | 4,372 | | | | 4,358 | | | | 4,346 | | | | 4,330 | | | | 4,297 | | | | 4,267 | |
| Shares used in computing diluted net (loss) income per share | | | 4,382 | | | | 4,466 | | | | 4,412 | | | | 4,413 | | | | 4,476 | | | | 4,463 | | | | 4,441 | | | | 4,267 | |
BroadVision's quarterly operating results have fluctuated in the past and may fluctuate significantly in the future as a result of a variety of factors, many of which are outside of our control. It is likely that our operating results in one or more future quarters may be below the expectations of securities analysts and investors. In that event, the trading price of our common stock almost certainly would decline.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
| (a) | Evaluation of Disclosure Controls and Procedures |
An evaluation as of December 31, 2008 was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our "disclosure controls and procedures," which are defined under SEC rules as controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Securities Exchange Act of 1934, as amended, (Exchange Act) is recorded, processed, summarized and reported within required time periods. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2008.
(b) Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Our internal control system is designed to provide reasonable assurance regarding the preparation and fair presentation of financial statements for external purposes in accordance with generally accepted accounting principles. All internal control systems, no matter how well designed, have inherent limitations and can provide only reasonable assurance that the objectives of the internal control system are met.
Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our evaluation, we concluded that our internal control over financial reporting was effective as of December 31, 2008.
Our independent registered public accounting firm, Odenberg, Ullakko, Muranishi & Co. LLP, has audited our Consolidated Financial Statements for two years ended December 31, 2008 included in this Annual Report on Form 10-K and has issued a report on the effectiveness of our internal control over financial reporting as of December 31, 2008.
(c) Changes in Internal Control over Financial Reporting
Our management, including our Chief Executive Officer and Chief Financial Officer, has evaluated any changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2008, and has concluded that there was no change during such quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Not applicable.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERANCE
The information required by this Item is incorporated by reference to sections of our Definitive Proxy Statement to be filed with the SEC pursuant to Regulation 14A in connection with the Annual Meeting of Stockholders to be held in April 2009 (the Proxy Statement) under the sections captioned "Proposal 1 -- Election of Directors", "Executive Compensation", "Information about the Board of Directors -- Code of Business Ethics and Conduct", "Board Committees and Meetings" and "Section 16(a) Beneficial Ownership Reporting Compliance".
The information required by this Item is incorporated by reference to the Proxy Statement under the sections captioned "Executive Compensation", "Compensation Committee Interlocks and Insider Participation", "Compensation Committee Report" and "Overview of Director Compensation and Procedures".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this Item is incorporated by reference to the Proxy Statement under the sections captioned "Security Ownership of Certain Beneficial Owners and Management" and "Equity Compensation Plan Information".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item is incorporated by reference to the Proxy Statement under the sections captioned "Certain Relationships and Related Party Transactions" and "Information about the Board of Directors".
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is incorporated by reference to the Proxy Statement under the section captioned "Principal Accountant Fees and Services".
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as a part of this Report.
1. Consolidated Financial Statements. The following Consolidated Financial Statements are included at Part II, Item 8, of this Annual Report on Form 10-K
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2008 and 2007
Consolidated Statements of Operations for each of the three years in the period ended December 31, 2008
Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss) for each of the years in the three-year period ended December 31, 2008
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2008
Notes to Consolidated Financial Statements
2. Financial Statement Schedule. Attached to this Annual Report on Form 10-K.
Schedule II---Valuation and Qualifying Accounts
3. Exhibits. The exhibits listed on the accompanying Index to Exhibits immediately following the consolidated financial statement schedule are filed as part of, or incorporated by reference into, this Annual Report on Form 10-K.
Pursuant to the requirements of Section 13 or 15(d) 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, in Redwood City, State of California, on this 25th day of February 2009.
BROADVISION, INC.
| | By: | /s/ PEHONG CHEN | |
| | | Pehong Chen | |
| | | Chairman of the Board, President, and Chief Executive Officer |
| | | | |
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Pehong Chen to sign any amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that the said attorney-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | | Title | | Date |
| | | | | |
| /s/ Pehong Chen | | | | February 25, 2009 |
| Pehong Chen | | Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer) | | |
| | | | | |
| /s/ Shin-Yuan Tzou | | | | |
| Shin-Yuan Tzou | | Chief Financial Officer (Principal Financial and Accounting Officer) | | February 25, 2009 |
| | | | | |
| /s/ Francois Stieger | | | | February 25, 2009 |
| Francois Stieger | | Director | | |
| | | | | |
| /s/ James D. Dixon | | | | February 25, 2009 |
| James D. Dixon | | Director | | |
| | | | | |
| /s/ Robert Lee | | | | February 25, 2009 |
| Robert Lee | | Director | | |
BROADVISION, INC. AND SUBSIDIARIES
SCHEDULE II---VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
| | | | | Charged | | | | | | | |
| | | Balance at | | | (Credited) to | | | | | | Balance at | |
| | | Beginning of | | | Costs and | | | | | | End of | |
| | | Period | | | Expenses | | | Deductions(1) | | | Period | |
| Receivable reserves: | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2008 | | $ | 585 | | | $ | 72 | | | $ | (291 | ) | | $ | 366 | |
| Year Ended December 31, 2007 | | $ | 1,141 | | | $ | 248 | | | $ | (804 | ) | | $ | 585 | |
| Year Ended December 31, 2006 | | $ | 731 | | | $ | 487 | | | $ | (77 | ) | | $ | 1,141 | |
(1) Represents net charge-offs of specific receivables.
BROADVISION, INC. ANNUAL REPORT ON FORM 10-K DECEMBER 31, 2008
INDEX TO EXHIBITS
| Exhibit | Description |
| 3.1(1) | Amended and Restated Certificate of Incorporation. |
| 3.2(20) | Certificate of Amendment of Certificate of Incorporation. |
| 3.3(6) | Certificate of Amendment of Certificate of Incorporation. |
| 3.4(16) | Amended and Restated Bylaws. |
| 4.1(1) | References are hereby made to Exhibits 3.1 to 3.4. |
| 4.2(18) | Registration Rights Agreement, dated November 10, 2004, among the Company and certain investors listed on Exhibit A thereto. |
| 4.3(23) | Registration Rights Agreement, dated March 8, 2006, between the Company and Honu Holdings LLC. |
| 10.1(8)(a) | Equity Incentive Plan, as amended (the "2000 Equity Incentive Plan"). |
| 10.2(1)(a) | Form of Incentive Stock Option under the 2000 Equity Incentive Plan. |
| 10.3(1)(a) | Form of Nonstatutory Stock Option under the 2000 Equity Incentive Plan. |
| 10.4(1)(a) | Form of Nonstatutory Stock Option (Performance-Based) under 2000 Equity Incentive Plan. |
| 10.5(2)(a) | 1996 Employee Stock Purchase Plan, as amended. |
| 10.6(1)(b) | Terms and Conditions, dated January 1, 1995, between the Company and IONA Technologies LTD. |
| 10.7(5) | BroadVision, Inc. Severance Benefit Plan, established effective March 26, 2007. |
| 10.8(11) | Lease Termination Agreement, dated November 6, 2007, by and between the Company and The Board of Trustees of The Leland Stanford Junior University. |
| 10.9(3)(a) | 2000 Non-Officer Equity Incentive Plan, as amended. |
| 10.10(4)(b) | Independent Software Vendor Agreement, effective January 1, 1998, between the Company and IONA Technologies, PLC, as amended. |
| 10.11(7) | Form of Indemnity Agreement between the Company and each of its directors and executive officers. |
| 10.12(9) | Offer letter, dated March 4, 2003, by and between the Company and William Meyer. |
| 10.13(10) | BroadVision, Inc. Change of Control Severance Benefit Plan, established effective May 22, 2003. |
| 10.14(10) | BroadVision, Inc. Executive Severance Benefit Plan, established effective May 22, 2003. |
| 10.15(13) | Assignment and Assumption of Master Lease, Partial Termination of Master Lease and Assignment and Assumption of Subleases, dated July 7, 2004, between Pacific Shores Investors, LLC and the Company. |
| 10.16(13) | Warrant to Purchase up to 28,000 share of common stock, dated July 7, 2004, issued to Pacific Shores Investors, LLC. |
| 10.17(13) | Triple Net Space Lease, dated as of July 7, 2004, between Pacific Shores Investors, LLC and the Company. |
| 10.18(14) | Securities Purchase Agreement, dated as of November 10, 2004, by and among the Company and the investors listed on Exhibit A thereto. |
| 10.19(22) | Agreement to Restructure Lease and To Assign Subleases, dated as of October 1, 2004, between VEF III Funding, LLC and the Company. |
| 10.20(17) | Amendment No. 5 to IONA Independent Software Vendor Agreement, dated December 20, 2004, between IONA Technologies, Inc. and the Company. |
| 10.21(15) | Debt Conversion Agreement, dated as of December 20, 2005, between the Company and Honu Holdings, LLC. |
| 10.22(12) | 2006 Equity Incentive Plan, as amended ("2006 Equity Incentive Plan"). |
| 10.23(19) | Sublease, dated as of December 21, 2006, between the Company and Dexterra, Inc. |
| 10.24(21) | Share Purchase Agreement, dated November 14, 2008, between BroadVision (Delaware) LLC and CHRM LLC. |
| 10.25(24) | Form of Restricted Stock Bonus Agreement under the 2006 Equity Incentive Plan. |
| 10.26(25) | Form of Option Grant Notice under the 2006 Equity Incentive Plan. |
| 10.27(25) | Form of Stock Option Agreement under the 2006 Equity Incentive Plan. |
| 21.1 | Subsidiaries of the Company. |
| 23.1 | Consent of Odenberg, Ullakko, Muranishi & Co. LLP, an independent registered public accounting firm. |
| 24.1 | Power of Attorney, pursuant to which amendments to this Annual Report on Form 10-K may be filed, is included on the signature pages hereto. |
| 31.1 | Certification of the Chief Executive Officer of the Company. |
| 31.2 | Certification of the Chief Financial Officer of the Company. |
| 32.1 | Certification of the Chief Executive Officer and Chief Financial Officer of the Company pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | (a) Represents a management contract or compensatory plan or arrangement. |
| | ((b) Confidential treatment requested |
| | (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 Registration Statement on Form S-8 filed on August 29, 2007. |
| | (3) Incorporated by reference to the Company's Registration Statement on Form S-8 filed on October 15, 2003. |
| | (4) Incorporated by reference to the Company's Form 10-Q for the quarter ended June 30, 2001 filed on August 14, 2001. |
| | (5) Incorporated by reference to the Company's Current Report on Form 8-K filed on March 30, 2007. |
| | (6) Incorporated by reference to the Company's Current Report on Form 8-K filed on October 16, 2008. |
| | (7) Incorporated by reference to the Company's Form 10-Q for the quarter ended September 30, 2002 filed on November 14, 2002. |
| | (8) Incorporated by reference to the Company's Registration Statement on Form S-8 filed on August 1, 2002. |
| | (9) Incorporated by reference to the Company's Form 10-Q for the quarter ended March 31, 2003 filed on May 14, 2003. |
| | (10) Incorporated by reference to the Company's Form 10-Q for the quarter ended June 30, 2003 filed on August 14, 2003. |
| | (11) Incorporated by reference to the Company's Current Report on Form 8-K filed on November 09, 2007. |
| | (12) Incorporated by reference to the Company's Proxy Statement filed on April 25, 2008. |
| | (13) Incorporated by reference to the Company's Current Report on Form 8-K filed on August 9, 2004. |
| | (14) Incorporated by reference to the Company's Current Report on Form 8-K filed on November 10, 2004. |
| | (15) Incorporated by reference to the Company's Current Report on Form 8-K filed on December 22, 2005. |
| | (16) Incorporated by reference to the Company's Current Report on Form 8-K filed on October 16, 2008. |
| | (17) Incorporated by reference to the Company's Current Report on Form 8-K filed on December 23, 2004. |
| | (18) Incorporated by reference to the Company's Registration Statement on Form S-1 filed on December 17, 2004. |
| | (19) Incorporated by reference to the Company's Current Report on Form 8-K filed on January 10, 2007. |
| | (20) Incorporated by reference to the Company's Form 10-K for the fiscal year ended December 31, 2006 filed on March 27, 2007. |
| | (21) Incorporated by reference to the Company’s Current Report on Form 8-K filed on November 18, 2008. |
| | (22) Incorporated by reference to the Company’s Current Report on Form 8-K filed on November 19, 2004. |
| | (23) Incorporated by reference to the Company’s Form 10-K for the fiscal year ended December 31, 2005 filed on June 9, 2006. |
| | (24) Incorporated by reference to the Company’s Current Report on Form 8-K filed on March 30, 2007. |
| | (25) Incorporated by reference to the Company’s Registration Statement on Form S-8 filed on November 6, 2006. |
