Research and development expenses consist primarily of salaries, employee–related benefit costs and consulting fees incurred in association with the development of our products. Costs incurred for the research and development of new software products are expensed as incurred until such time that technological feasibility, in the form of a working model, is established at which time such costs are capitalized and recorded at the lower of unamortized cost or net realizable value. The costs incurred subsequent to the establishment of a working model but prior to general release of the product have not been significant. To date, we have not capitalized any costs related to the development of software for external use.
Sales and marketing expenses consist primarily of salaries, employee–related benefit costs, commissions and other incentive compensation, travel and entertainment and marketing program-related expenditures such as collateral materials, trade shows, public relations, advertising and creative services.
General and administrative expenses consist primarily of salaries, employee–related benefit costs and professional service fees.
We are attempting to reduce expenses in an effort to return to profitability during a period when revenues have been less than originally expected. Therefore, operating costs may decline in the near future but there can be no assurance that such decline will be enough to return us to profitability. Should revenues increase significantly, we would expect our expenses to increase commensurate with increases in revenues once we have reached an appropriate level of spending as a percentage of total revenues.
Amortization of goodwill and other intangibles.As described in Note 6 in the Notes to the Condensed Consolidated Financial Statements above, we acquired Interleaf in the quarter ended June 30, 2000. We have accounted for the acquisition as a purchase business combination. As a result of this transaction, we had recorded goodwill and other intangible assets on the balance sheet of $794.7 million. Amortization of goodwill and other intangibles assets related to the Interleaf acquisition was $66.2 million and $132.5 million for the quarter ended and the six months ended June 30, 2001, respectively. As also reported in Note 6, we acquired Keyeon on June 29, 2001. We have accounted for this acquisition as a purchase business combination. As a result of this transaction, we had recorded goodwill and other intangible assets on the balance sheet of $2.0 million. There has been no amortization of the goodwill and other intangible assets associated with the Keyeon transaction because the transaction was completed at the end of the second quarter.
Restructuring. During the second quarter of 2001, we approved a restructuring plan to, among other things, reduce our workforce and consolidate facilities. These restructuring and asset impairment charges were taken to align our cost structure with changing market conditions and to create a more efficient organization. We recorded a pre-tax charge of $123.5 million which included $26.6 million for asset write-downs related to the impairment of certain long-lived assets that were either abandoned during the quarter, or for which the resulting estimated future reduced cash flows were insufficient to cover the carrying amounts.
In connection with the restructuring plan, we expect to save approximately $40.0 million in salary expense over the next twelve months. We expect facility related cash outlays associated with the restructuring charge to be approximately $35.5 million over the next twelve months. Additionally, we expect sublease income associated with these facilities of approximately $3.7 million over the next twelve months. Please see Note 7 of Notes to Condensed Consolidated Financial Statements for additional information.
Other (Expense) Income, net Other (expense) income, net consists of interest income, interest expense and other non-operating expenses. Other (expense) income, net decreased to ($876,000) for the three months ended June 30, 2001 as compared to $3.9 million during the three months ended June 30, 2000. Other (expense) income, net decreased to ($379,000) for the six months ended June 30, 2001 as compared to $11.2 million for the six months ended June 30, 2000. Interest income decreased approximately $900,000 to $3.0 million for the quarter ended June 30, 2001 as compared to $3.9 million for the quarter ended June 30, 2000 and interest income decreased $1.3 million to $6.6 million for the six months ended June 30, 2001 as compared to $7.9 million for the six months ended June 30, 2000 as a result of a decrease in overall cash and investments. Losses on asset disposals increased approximately $1.4 million and $1.5 million for the three and six months ended June 30, 2001, respectively, as compared to the same periods in 2000. This increase is primarily related to a loss of approximately $1.3 million on the sale of various computers and related equipment and furniture of E-Publishing Corporation, formerly our wholly owned subsidiary. Gains on sales of investments increased $963,000 for the quarter ended June 30, 2001 as compared to the quarter ended June 30, 2000. Gains on sales of investments decreased approximately $1.9 million during the six months ended June 30, 2001 as compared to the six months ended June 30, 2000. We also experienced an increase in equity in net losses from an unconsolidated subsidiary of $1.3 million for the quarter ended June 30, 2001 and $2.4 million for the six months ended June 30, 2001 and an increase in realized losses on cost-method investments of $1.9 million for the quarter ended June 30, 2001 and $3.1 million for the six months ended June 30, 2001. Foreign currency exchange losses decreased approximately $526,000 during the three months ended June 30, 2001. Foreign currency exchange losses increased approximately $552,000 during the six months ended June 30, 2001 as compared to the six months ended June 30, 2000. Other expense increased by approximately $805,000 and $814,000 for the three and six months ended June 30, 2001, respectively, as a result of various other items.
Income Taxes
During the quarter ended June 30, 2001, we recognized tax expense of $331,000. We recognized income tax expense of $1.2 million during the six months ended June 30, 2001. The tax expense during both periods mainly relates to foreign withholding taxes and state income taxes.
Litigation Settlement
On February 22, 2000, we reached a settlement agreement and entered into a license agreement with Art Technology Group, or ATG, in connection with the lawsuit filed by us on December 11, 1998 against ATG alleging infringement of our U.S. Patent No. 5,710,887. In accordance with the terms of the agreement, we granted ATG a nonexclusive, nontransferable, worldwide, perpetual license and we were paid $8.0 million by ATG at the effective date of the settlement and began to receive quarterly installment payments commencing on February 24, 2000 (four consecutive quarterly payments of $750,000 during 2000 and eight consecutive quarterly payments of $500,000 during 2001 and 2002) which will total $7.0 million.
LIQUIDITY AND CAPITAL RESOURCES
| | June 30,
2001 | | December 31,
2000 | |
| |
| |
| |
| | (in thousands) | |
| Cash, cash equivalents and liquid short–term investments | $ | 186,106 | | $ | 222,534 | |
| |
| |
| |
| Long-term liquid investments | $ | 53,138 | | $ | 78,769 | |
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| Working capital | $ | 104,830 | | $ | 215,831 | |
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| Working capital ratio | 1.7:1 | | 2.7:1 | |
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At June 30, 2001, we had $239.2 million of cash, cash equivalents and liquid short–term and long-term investments, which represents a decrease of $62.1 million as compared to December 31, 2000. We currently have $4.4 million of outstanding term debt under our existing credit facility with a commercial bank.
Cash used for operating activities was $33.0 million for the six months ended June 30, 2001 and cash provided by operating activities was $34.6 million for the six months ended June 30, 2000. Net cash used for operating activities for the six months ended June 30, 2001 was primarily attributed to a decrease in accounts payable and accrued liabilities and increase in other noncurrent assets, the net loss for the period less non-cash charges and, all partially offset by a decrease in accounts receivable and prepaid expenses along with an increase in unearned revenue and deferred maintenance. Cash provided by investing activities was $5.3 million for the six months ended June 30, 2001 and cash used for investing activities was $180.3 million for the six months ended June 30, 2000. Cash provided by investing activities for the six months ended June 30, 2001 was primarily due to cash acquired in a purchase transaction of approximately $7.2 million, net sales/maturities of investments of approximately $45.6 million, partially offset by approximately $47.5 million in purchases of property and equipment. Cash provided by financing activities was $12.2 million and $14.7 million for the six months ended June 30, 2001 and 2000, respectively, and consists primarily of proceeds from the issuance of common stock.
Capital expenditures were $47.5 million and $17.2 million for the six months ended June 30, 2001 and 2000, respectively. Our capital expenditures consisted of purchases of operating resources to manage our operations and consisted of computer hardware and software, office furniture and fixtures and leasehold improvements. In February and April 2000, we entered into new facility lease agreements for approximately 519,000 square feet currently under construction. Lease payments will be made on an escalating basis with the total future minimum lease payments amounting to $316.4 million. As of June 30, 2001, we have paid approximately $49 million for improvements to the facility. The total estimated cost of improvements is approximately $52 million , but is subject to change.
In connection with the restructuring plan described in Note 7 of the accompanying Notes to Condensed Consolidated Financial Statements, we expect to pay out approximately $786,000 of severance related costs and approximately $32,000 of other restructuring costs throughout the remainder of 2001. We expect facility related cash outlays associated with the restructuring charge to be approximately $35.5 million over the next twelve months and an additional $150.6 million from July 1, 2002 through December 31, 2008. Additionally, we expect sublease income associated with these facilities of approximately $3.7 million over the next twelve months, and $102.3 million from July 1, 2002 through December 31, 2008. The total cash outlay is expected to be funded from existing cash balances and internally generated cash flows from operations.
We believe that our available cash and short–term investment resources, cash generated from operations and amounts available under our commercial credit facilities will be sufficient to meet our expected working capital and capital expenditure requirements for at least the next 12 months. This estimate is a forward–looking statement that involves risks and uncertainties, and actual results may vary as a result of a number of factors, including those discussed under “Factors Affecting Quarterly Operating Results” below and elsewhere herein. We may need to raise additional funds in order to support more rapid expansion, develop new or enhanced services, respond to competitive pressures, acquire complementary businesses or technologies or respond to unanticipated requirements. We may seek to raise additional funds through private or public sales of securities, strategic relationships, bank debt, financing under leasing arrangements or otherwise. If additional funds are raised through the issuance of equity securities, the percentage ownership of our stockholders will be reduced, stockholders may experience additional dilution or such equity securities may have rights, preferences or privileges senior to those of the holders of our common stock. There can be no assurance that additional financing will be available on acceptable terms, if at all. If adequate funds are not available or are not available on acceptable terms, we may be unable to develop our products, take advantage of future opportunities or respond to competitive pressures or unanticipated requirements, which could have a material adverse effect on our business, financial condition and operating results.
Factors That May Affect Future Operating Results
We may experience significant fluctuations in quarterly operating results that may be caused by many factors including, but not limited to, those discussed below and herein, as set out in Items 7 and 7A in our annual report on Form 10–K for the year ended December 31, 2000 and elsewhere therein and as disclosed in other documents filed with the Securities and Exchange Commission.
Significant fluctuations in future quarterly operating results may be caused by many factors including, among others, the timing of introductions or enhancements of products and services by us or our competitors, market acceptance of new products, the mix of our products sold, changes in pricing policies by us or our competitors, our ability to retain customers, changes in our sales incentive plans, budgeting cycles of our customers, customer order deferrals in anticipation of new products or enhancements by us or our competitors, nonrenewal of service agreements (which generally automatically renew for one year terms unless earlier terminated by either party upon 90–days notice), product life cycles, changes in strategy, seasonal trends, the mix of distribution channels through which our products are sold, the mix of international and domestic sales, the rate at which new sales people become productive, changes in the level of operating expenses to support projected growth and general economic conditions. We anticipate that a significant portion of our revenues will be derived from a limited number of orders, and the timing of receipt and fulfillment of any such orders is expected to cause material fluctuations in our operating results, particularly on a quarterly basis. Due to the foregoing factors, quarterly revenues and operating results are difficult to forecast, and we believe that period–to–period comparisons of our operating results will not necessarily be meaningful and should not be relied upon as any indication of future performance. It is likely that our future quarterly operating results from time to time will not meet the expectations of market analysts or investors, which may have an adverse effect on the price of our common stock.
Our success depends largely on the skills, experience and performance of key personnel. If we lose one or more key personnel, our business could be harmed. Our future success depends on our ability to continue attracting and retaining highly skilled personnel. We may not be successful in attracting, assimilating and retaining qualified personnel in the future.
Some of these risks and uncertainties relate to the new and rapidly evolving nature of the markets in which we operate. These related market risks include, among other things, the early stage of the developing online commerce market, the dependence of online commerce on the development of the Internet and its related infrastructure, the uncertainty pertaining to widespread adoption of online commerce and the risk of government regulation of the Internet. Other risks and uncertainties relate to our ability to, among other things, successfully implement our marketing strategies, respond to competitive developments, continue to develop and upgrade our products and technologies more rapidly than our competitors, and commercialize our products and services by incorporating these enhanced technologies. There can be no assurance that we will succeed in addressing any or all of these risks.
There has been a general downturn in the economy. We had revised our projected estimate of revenue range for fiscal 2001. If the economic environment continues to decline, our future results may be significantly impacted. We believe that the current economic decline has increased the average length of our sales cycle and our operating results could suffer and our stock price could decline if we do not achieve the level of revenues we expect.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We develop products in the United States and market our products throughout the world. As a result, our financial results could be affected by factors such as changes in currency exchange rates or weak economic conditions in foreign markets. The majority of our sales are made in United States dollars. Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. We had no derivative financial instruments as of June 30, 2001 or December 31, 2000. We invest in instruments that meet high credit quality standards and the amount of credit exposure to any one issue, issuer and type of instrument is limited. We do not expect any material loss with respect to the investment portfolio. Investments are carried at market value. The following represents our investment portfolio as of June 30, 2001 by maturity:
| (in thousands) | Year Ended December 31, 2001 | | Year Ended December 31, 2002 | | Year Ended December 31, 2003 | | Year Ended December 31, 2004 | | Year Ended December 31, 2005 | | Thereafter | | Total |
| | | | | | | | | | | | | | |
| Cash equivalents | $ | 52,302 | | $ | - | | $ | - | | $ | - | | $ | - | | $ | - | | $ | 52,302 |
| Short-term investments | $ | 18,276 | | $ | 28,822 | | $ | - | | $ | - | | $ | - | | $ | - | | $ | 47,098 |
| Long-term investments | $ | - | | $ | 24,216 | | $ | 17,994 | | $ | 10,928 | | $ | - | | $ | - | | $ | 53,138 |
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| Total investment Securities | $ | 70,578 | | $ | 53,038 | | $ | 17,994 | | $ | 10,928 | | $ | - | | $ | - | | $ | 152,538 |
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Not included in the above are checking and money market accounts of $85.3 million of cash and cash equivalents, $1.4 million of short term marketable securities in common stock and $11.2 million in equity investments.
Equity Investments
Equity investments consist of investments in non-public and publicly traded 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 cost when such market values do not exist. Adjustments to fair value are recorded as a component of other comprehensive (loss) income unless the investments are considered permanently impaired in which case the adjustment is recorded as a component of other income (expense), net in the condensed consolidated statements of operations. During the three and six months ended June 30, 2001, we recorded impairment charges related to cost-method equity investments of $1.9 million and $3.1 million, respectively. There were no such charges during the three and six months ended June 30, 2000.
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 our 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. During the three and six months ended June 30, 2001 we recorded our share of our equity investee’s net loss of $1.3 million and $2.4 million, respectively. There were no such charges during the three and six months ended June 30, 2000.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On April 20, 2001, we filed a Form 8-K with the Securities and Exchange Commission reporting that several purported class action lawsuits had been filed in the United States District Court for the Northern California District of California against us and certain of our officers and directors. In each of the lawsuits, the plaintiffs seek to assert claims on behalf of a class of all persons who purchased our securities between January 26, 2001 and April 2, 2001. The complaints allege that the Company and the individual defendants violated federal securities laws in connection with our reporting of financial results during such period. We expect that all of the lawsuits will eventually be consolidated into a single action, as is customary in such cases. We believe that the lawsuits are without merit and we will defend ourselves vigorously.
On June 7, 2001, Verity, Inc. filed suit in the United States District Court for the Northern California District of California against us alleging copyright infringement, breach of contract, unfair competition and other claims. We have answered the complaint denying all allegations and will defend ourselves vigorously.
Item 2. Changes in Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
| | (a) | The Annual Meeting of Stockholders of the Company was held on May 24, 2001. |
| | (b) | Pehong Chen, David Anderson, Koh Boon Hwee, Todd Garrett, Klaus Luft and Carl Pascarella were elected as Directors. |
| | (c) | The matters voted upon and the voting of stockholders with respect thereto are as follows: |
i. The election of Directors:
| | For | | Withheld |
| |
| |
|
| Pehong Chen | 198,717,316 | | 1,415,218 |
| David Anderson | 198,836,461 | | 1,296,073 |
| Koh Boon Hwee | 198,770,021 | | 1,362,513 |
| Todd Garrett | 198,778,978 | | 1,353,556 |
| Klaus Luft | 198,831,381 | | 1,301,153 |
| Carl Pascarella | 198,826,994 | | 1,305,540 |
ii. To approve the Company’s Equity Incentive Plan, as amended, to increase the number of shares of common stock authorized for issuance thereunder by 12,000,000 shares:
| | For: | 166,332,928 | Against: | 32,877,282 |
| | Abstain: | 922,324 | Not Voted: | |
iii. To approve the Company’s Employee Stock Purchase Plan, as amended, to increase the number of shares of common stock authorized for issuance thereunder by 1,500,000 shares:
| | For: | 196,620,569 | Against: | 2,621,904 |
| | Abstain: | 890,061 | Not Voted: | |
iv. To ratify the appointment of Arthur Andersen LLP to serve as independent auditors of the Company for the fiscal year ending December 31, 2001:
| | For: | 198,717,154 | Against: | 576,057 |
| | Abstain: | 839,321 | Not Voted: | 2 |
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
| (a) | Exhibits |
| | |
| | | Exhibits | Description |
| | |
|
|
| | | 3.1 | Amended and Restated Certificate of Incorporation. (1) |
| | | 3.2 | Certificate of Amendment of Certificate of Incorporation, dated June 28, 2000. (2) |
| | | 3.3 | Amended and restated Bylaws. (1) |
| | | 3.4 | Independent Software Vendor Agreement between IONA Technologies, PLC and the Company, dated June 26, 1998 (as amended). (3) |
| | | 4.1 | References are hereby made to Exhibits 3.1 to 3.2. (1) |
| | | | |
| | (1) | Incorporated by reference to the Company’s Proxy Statement filed on September 13, 1999. |
| | (2) | Incorporated by reference to the Company’s 10-Q for the quarter ended June 30, 2000 filed on August 14, 2000. |
| | (3) | Certain portions have been deleted pursuant to a confidential treatment request. |
| (b) | Reports on Form 8–K |
A current report on Form 8-K was filed with the Securities and Exchange Commission by the Company on April 20, 2001, reporting that several purported class action lawsuits had been filed against the Company and certain of its officers and directors.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | BROADVISION, INC. |
| Date: | August 14, 2001 | By: | /s/ Pehong Chen |
| | | |
|
| | | | Pehong Chen
Chairman of the Board, President and Chief
Executive Officer (Principal Executive Officer) |
| | | | |
| | | | |
| | | | |
| Date: | August 14, 2001 | By: | /s/ Terence A. Davis |
| | | |
|
| | | | Terence A. Davis
Corporate Treasurer,
Interim Chief Financial Officer
(Principal Financial and Accounting Officer) |
