** **

**UNITEDSTATES****SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM10-Q**

** **

**(Mark one)**

 

**ý**** Quarterly report pursuant to Section 13 or 15(d) of the SecuritiesExchange Act of 1934**

 

**For the quarterly period ended September 30,2004**

 

**OR**

 

**o**** Transition report pursuant to Section 13 or 15(d) of the SecuritiesExchange Act of 1934**

 

**Commission File Number:  0-31151**

 

 

**RADVIEW SOFTWARE LTD.**

(Exact name of registrant as specified in itscharter)

 
| **Israel**                                                                          | ** ** | **Not applicable**                    |
|-------------------------------------------------------------------------------------|------------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization)                     |       | (I.R.S. Employer  Identification No.) |
|                                                                                |       |                                  |
| **7 New England Executive Park  Burlington, MA 01803**                              |
| (Address of principal executive offices)                                            |
|                                                                                |       |                                  |
| **Telephone Number (781) 238-1111**                                                 |
| (Registrant’s telephone number, including  area code)                          |
|                                                                                |       |                                  |
| **None**                                                                            |
| (Former name, former address and former  fiscal year, if changed since last report) |

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports)  Yes   ý   No   o,and (2) has been subject to such filing requirements for the past 90days:  Yes   ý   No   o.

 

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 126-2of the Exchange Act):  Yes   o   No   ý.

 

As of October 31, 2004, there were 20,525,682 shares of the Registrant’sOrdinary Shares outstanding, excluding 134,000 Ordinary Shares held by theregistrant as treasury shares that are “dormant” shares for purposes of Israelilaw.

 

 

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**RADVIEW SOFTWARE LTD. AND SUBSIDIARIES**

Form 10-Q INDEX

** **

** **
|    | **PART I. FINANCIAL INFORMATION**                                                                                |   |
|---------|------------------------------------------------------------------------------------------------------------------|--------|
|    |                                                                                                             |   |
| Item 1. | Condensed Consolidated Financial  Statements:                                                                    |   |
|    |                                                                                                             |   |
|    | Condensed Consolidated Balance Sheets as of  September 30, 2004 and December 31, 2003                            |   |
|    |                                                                                                             |   |
|    | Condensed Consolidated Statements of  Operations for the three and nine months ended September 30, 2004 and 2003 |   |
|    |                                                                                                             |   |
|    | Condensed Consolidated Statements of Cash  Flows for the nine months ended September 30, 2004 and 2003           |   |
|    |                                                                                                             |   |
|    | Notes to Condensed Consolidated Financial  Statements                                                            |   |
|    |                                                                                                             |   |
| Item 2. | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                      |   |
|    |                                                                                                             |   |
| Item 3. | Qualitative and Quantitative Disclosures  About Market Risk                                                      |   |
|    |                                                                                                             |   |
| Item 4. | Controls and Procedures                                                                                          |   |
|    |                                                                                                             |   |
|    | **PART II. OTHER INFORMATION**                                                                                   |   |
|    | ** **                                                                                                       |   |
| Item 1. | Legal Proceedings                                                                                                |   |
|    |                                                                                                             |   |
| Item 2. | Unregistered Sales of Equity Securities and  Use of Proceeds                                                     |   |
|    |                                                                                                             |   |
| Item 4. | Submission of Matters to a vote of Security  Holders                                                             |   |
|    |                                                                                                             |   |
| Item 6. | Exhibits                                                                                                         |   |
|    |                                                                                                             |   |
|    | Signatures                                                                                                       |   |
|    |                                                                                                             |   |
|    | Certifications                                                                                                   |   |

 

2

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**PART I - FINANCIAL INFORMATION**

 

**RADVIEW SOFTWARE LTD.AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SH****EETS**

**(In thousands, except share data)**

**(Unaudited)**

 
| ** **                                                                                                                                                                                                                                                                                    | ** ** | **September 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| **ASSETS**                                                                                                                                                                                                                                                                                    |       |                    |       |                   |       |
| Current Assets:                                                                                                                                                                                                                                                                               |       |                    |       |                   |       |
| Cash and cash equivalents                                                                                                                                                                                                                                                                     |       | $                       | 3,131      |                   | $          | 3,075 |   |
| Accounts receivable, net of  reserves of $96 at September 30, 2004 and $72 at December 31, 2003                                                                                                                                                                                               |       | 510                     |       | 678                    |       |
| Prepaid expenses and other  current assets                                                                                                                                                                                                                                                    |       | 313                     |       | 426                    |       |
| Total Current Assets                                                                                                                                                                                                                                                                          |       | 3,954                   |       | 4,179                  |       |
|                                                                                                                                                                                                                                                                                          |       |                    |       |                   |       |
| Property and Equipment, net                                                                                                                                                                                                                                                                   |       | 188                     |       | 333                    |       |
| Other Assets                                                                                                                                                                                                                                                                                  |       | 577                     |       | 643                    |       |
|                                                                                                                                                                                                                                                                                          |       |                    |       |                   |       |
| Total Assets                                                                                                                                                                                                                                                                                  |       | $                       | 4,719      |                   | $          | 5,155 |   |
|                                                                                                                                                                                                                                                                                          |       |                    |       |                   |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                                                                                                                                                                |       |                    |       |                   |       |
| Current Liabilities:                                                                                                                                                                                                                                                                          |       |                    |       |                   |       |
| Accounts payable                                                                                                                                                                                                                                                                              |       | $                       | 339        |                   | $          | 367 |   |
| Accrued expenses                                                                                                                                                                                                                                                                              |       | 938                     |       | 989                    |       |
| Accrued restructuring charge,  current portion                                                                                                                                                                                                                                                |       | 44                      |       | 225                    |       |
| Deferred revenue                                                                                                                                                                                                                                                                              |       | 1,952                   |       | 1,064                  |       |
| Total Current Liabilities                                                                                                                                                                                                                                                                     |       | 3,273                   |       | 2,645                  |       |
|                                                                                                                                                                                                                                                                                          |       |                    |       |                   |       |
| Long-term Liabilities:                                                                                                                                                                                                                                                                        |       |                    |       |                   |       |
| Accrued restructuring charge,  less current portion                                                                                                                                                                                                                                           |       | —                  |       | 95                     |       |
| Accrued severance                                                                                                                                                                                                                                                                             |       | 664                     |       | 619                    |       |
| Total Long-Term Liabilities                                                                                                                                                                                                                                                                   |       | 664                     |       | 714                    |       |
|                                                                                                                                                                                                                                                                                          |       |                    |       |                   |       |
| Total Liabilities                                                                                                                                                                                                                                                                             |       | 3,937                   |       | 3,359                  |       |
|                                                                                                                                                                                                                                                                                          |       |                    |       |                   |       |
| Shareholders’ Equity:                                                                                                                                                                                                                                                                    |       |                    |       |                   |       |
| Ordinary shares, NIS 0.01 par  value –  Authorized – 40,000,000 shares;  Issued – 20,659,682 shares at September 30, 2004 and 17,194,545 shares at  December 31, 2003;  Outstanding – 20,525,682 shares at September 30, 2004 and 17,060,545 shares  at December 31, 2003 |       | 51                      |       | 43                     |       |
| Treasury shares, at cost –  134,000 shares                                                                                                                                                                                                                                               |       | (100                    | )          | (100                   | )          |
| Additional paid-in capital                                                                                                                                                                                                                                                                    |       | 56,813                  |       | 55,010                 |       |
| Deferred compensation                                                                                                                                                                                                                                                                         |       | —                  |       | (89                    | )          |
| Accumulated deficit                                                                                                                                                                                                                                                                           |       | (55,982                 | )          | (53,068                | )          |
| Total Shareholders’ Equity                                                                                                                                                                                                                                                               |       | 782                     |       | 1,796                  |       |
|                                                                                                                                                                                                                                                                                          |       |                    |       |                   |       |
| Total Liabilities and  Shareholders’ Equity                                                                                                                                                                                                                                              |       | $                       | 4,719      |                   | $          | 5,155 |   |

 

The accompanying notes are anintegral part of these condensed consolidated financial statements.

 

3

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**RADVIEW SOFTWARE LTD. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERA****TIONS**

**(In thousands, except per share data)**

**(Unaudited)**

 
| ** **                                                                                        | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                        | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues:                                                                                         |       |                                  |       |                                 |       |   |   |   |   |
| Software licenses                                                                                 |       | $                                     | 703        |                                 | $          | 585 |   | $ | 1,673 |   | $ | 1,874 |   |
| Services                                                                                          |       | 583                                   |       | 567                                  |       | 1,661 |   | 1,709 |   |
| Total Revenues                                                                                    |       | 1,286                                 |       | 1,152                                |       | 3,334 |   | 3,583 |   |
|                                                                                              |       |                                  |       |                                 |       |   |   |   |   |
| Cost of Revenues:                                                                                 |       |                                  |       |                                 |       |   |   |   |   |
| Software licenses                                                                                 |       | 15                                    |       | 63                                   |       | 64 |   | 98 |   |
| Services                                                                                          |       | 84                                    |       | 93                                   |       | 241 |   | 323 |   |
| Total Cost of Revenues                                                                            |       | 99                                    |       | 156                                  |       | 305 |   | 421 |   |
|                                                                                              |       |                                  |       |                                 |       |   |   |   |   |
| Gross Profit                                                                                      |       | 1,187                                 |       | 996                                  |       | 3,029 |   | 3,162 |   |
|                                                                                              |       |                                  |       |                                 |       |   |   |   |   |
| Operating Expenses:                                                                               |       |                                  |       |                                 |       |   |   |   |   |
| Sales and marketing                                                                               |       | 899                                   |       | 940                                  |       | 2,601 |   | 3,210 |   |
| Research and development                                                                          |       | 617                                   |       | 627                                  |       | 1,885 |   | 2,127 |   |
| General and administrative                                                                        |       | 442                                   |       | 414                                  |       | 1,361 |   | 1,257 |   |
| Stock-based compensation (1)                                                                      |       | —                                |       | 83                                   |       | 84 |   | 297 |   |
| Restructuring charges (Note 4)                                                                    |       | —                                |       | —                               |       | — |   | 245 |   |
| Total Operating Expenses                                                                          |       | 1,958                                 |       | 2,064                                |       | 5,931 |   | 7,136 |   |
|                                                                                              |       |                                  |       |                                 |       |   |   |   |   |
| Operating loss                                                                                    |       | (771                                  | )          | (1,068                               | )          | (2,902 | ) | (3,974 | ) |
|                                                                                              |       |                                  |       |                                 |       |   |   |   |   |
| Interest income, net                                                                              |       | 6                                     |       | 5                                    |       | 12 |   | 29 |   |
| Other income (expense), net                                                                       |       | (3                                    | )          | 1                                    |       | (24 | ) | (53 | ) |
|                                                                                              |       |                                  |       |                                 |       |   |   |   |   |
| Net loss                                                                                          |       | $                                     | (768       | )                                    | $          | (1,062 | ) | $ | (2,914 | ) | $ | (3,998 | ) |
|                                                                                              |       |                                  |       |                                 |       |   |   |   |   |
| Basic and diluted net loss per share                                                              |       | $                                     | (0.04      | )                                    | $          | (0.06 | ) | $ | (0.15 | ) | $ | (0.24 | ) |
|                                                                                              |       |                                  |       |                                 |       |   |   |   |   |
| Weighted average number of shares used in  computing basic and diluted net loss per share         |       | 20,511                                |       | 16,517                               |       | 19,591 |   | 16,489 |   |
|                                                                                              |       |                                  |       |                                 |       |   |   |   |   |
| (1) The following summarizes the  departmental allocation of the stock-based compensation charge: |       |                                  |       |                                 |       |   |   |   |   |
| Sales and marketing                                                                               |       | $                                     | —     |                                 | $          | 28 |   | $ | 44 |   | $ | 95 |   |
| Research and development                                                                          |       | —                                |       | 35                                   |       | 37 |   | 115 |   |
| General and administrative                                                                        |       | —                                |       | 20                                   |       | 3 |   | 87 |   |
| Total stock-based compensation                                                                    |       | $                                     | —     |                                 | $          | 83 |   | $ | 84 |   | $ | 297 |   |

 

The accompanying notes are an integral partof these condensed consolidated financial statements.

 

4

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**RADVIEW SOFTWARE LTD. ANDSUBSIDIARIES**

**CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(In thousands)**

**(Unaudited)**

** **
| ** **                                                                        | ** ** | **Nine Months Ended****September 30,** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                        | ** ** | **2004**                               | ** ** | **2003** | ** ** |
| Cash Flows from Operating  Activities:                                            |       |                                   |       |   |   |
| Net loss                                                                          |       | $                                      | (2,914     | ) | $ | (3,998 | ) |
| Adjustments to reconcile net  loss to net cash used in operating activities— |       |                                   |       |   |   |
| Depreciation                                                                      |       | 183                                    |       | 485 |   |
| Amortization of deferred  compensation                                            |       | 84                                     |       | 297 |   |
| Accrued severance pay                                                             |       | 45                                     |       | (184 | ) |
| Changes in operating assets and  liabilities—                                |       |                                   |       |   |   |
| Accounts receivable, net                                                          |       | 168                                    |       | 400 |   |
| Prepaid expenses and other  current assets                                        |       | 113                                    |       | 209 |   |
| Accounts payable                                                                  |       | (28                                    | )          | 97 |   |
| Accrued expenses                                                                  |       | (51                                    | )          | (616 | ) |
| Accrued restructuring charge                                                      |       | (276                                   | )          | (171 | ) |
| Deferred revenue                                                                  |       | 888                                    |       | 61 |   |
| Net cash used in operating  activities                                            |       | (1,788                                 | )          | (3,420 | ) |
|                                                                              |       |                                   |       |   |   |
| Cash Flows from Investing  Activities:                                            |       |                                   |       |   |   |
| Purchases of property and  equipment                                              |       | (38                                    | )          | (92 | ) |
| Decrease in other assets                                                          |       | 66                                     |       | 46 |   |
| Net cash provided by (used in)  investing activities                              |       | 28                                     |       | (46 | ) |
|                                                                              |       |                                   |       |   |   |
| Cash Flows from Financing  Activities:                                            |       |                                   |       |   |   |
| Proceeds from private placement  of ordinary shares, net                          |       | 1,784                                  |       | — |   |
| Proceeds from exercise of stock  options                                          |       | 32                                     |       | 44 |   |
| Net cash provided by financing  activities                                        |       | 1,816                                  |       | 44 |   |
|                                                                              |       |                                   |       |   |   |
| Increase (decrease) in cash and  cash equivalents                                 |       | 56                                     |       | (3,422 | ) |
|                                                                              |       |                                   |       |   |   |
| Cash and cash equivalents,  beginning of period                                   |       | 3,075                                  |       | 7,566 |   |
| Cash and cash equivalents, end  of period                                         |       | $                                      | 3,131      |   | $ | 4,144 |   |
|                                                                              |       |                                   |       |   |   |
| Cash paid during period for  interest                                             |       | $                                      | 5          |   | $ | 12 |   |

 

The accompanying notes are an integral partof these condensed consolidated financial statements.

 

5

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** **

**RADVIEW SOFTWARE LTD. AND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(Unaudited)**

**1.  Operations**

 

RadView Software Ltd.(the “Company”) is an Israeli corporation. The Company develops, markets and supports software that enablesorganizations to verify the scalability, efficiency and reliability of webapplications, and facilitates their rapid development.

 

The Company has a history of incurring net losses and had anaccumulated deficit of approximately $56.0 million at September 30, 2004.  The Company has funded these lossesprincipally from proceeds from equity financing, including the privateplacement of its ordinary shares completed in March 2004 (see Note 4).

 

In July 2004, the Company received $1,000,000in cash from a technology license transaction with a distribution partner (seeNote 6).  Managementbelieves that existing cash and cash equivalents will be adequate to fundoperations at least through September 30, 2005.

 

On September 20, 2004, the Company’s shares were delisted from theNasdaq SmallCap Market.  The delistingfollowed a Nasdaq Staff Determination letter initially received on August 2,2004 indicating that the Company failed to comply with the shareholders’equity, market capitalization and net income requirements for continued listingset forth in Marketplace Rule 4320(e)(B), and that the Company’s securitieswere therefore subject to delisting from the Nasdaq SmallCap Market.   The Company's shares are now traded on theOver-the-Counter Bulletin Board (the “OTCBB”) under the same trading symbol of“RDVW”.

 

**2.  SignificantAccounting Policies**

 

The Company’s condensed consolidated financialstatements are prepared in accordance with accounting principles generallyaccepted in the United States for interim financial information.  The significant policies followed in thepreparation of the condensed consolidated financial statements, applied on aconsistent basis, are as follows.

 

**(a)**          Use of Estimates

** **

The preparation of thefinancial statements in conformity with accounting principles generallyaccepted in the United States requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities as of the date of the financialstatements and the reported amounts of revenues and expenses during thereporting periods.  Actual results coulddiffer from these estimates.

 

**(b) Financial Statements in U.S. Dollars**

 

The consolidated financial statements of theCompany have been prepared in U.S. dollars because the currency of the primaryeconomic environment in which the operations of the Company are conducted isthe U.S. dollar. Substantially all of the Company’s sales are in U.S. dollars.Most purchases of materials, components and most marketing and management costsare denominated in U.S. dollars. Therefore, the functional currency of theCompany is the U.S. dollar.

 

6

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Transactions and balances denominated in U.S.dollars are presented at their original amounts. Transactions and balances inother currencies are translated into U.S. dollars in accordance with theprinciples set forth in the Financial Accounting Standards Board of the UnitedStates (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 52, *Foreign Currency Translation*. Accordingly,items have been translated as follows:

 

•                  Monetary Items — At the exchange ratein effect on the balance sheet date.

•                  Nonmonetary Items — At historicalexchange rates.

•                  Revenue and Expense Items — At theexchange rates in effect as of the date of recognition of those items(excluding depreciation and other items deriving from nonmonetary items).

 

All exchange gains and losses from the above-mentioned translation(which were immaterial for all periods presented) are reflected in thestatements of operations.  Therepresentative rate of exchange was U.S. $1.00 to 4.482 New Israeli Shekel (“NIS”)at September 30, 2004, U.S. $1.00 to NIS 4.379 at December 31, 2003, and U.S.$1.00 to NIS 4.441 at September 30, 2003.

 

***(c)  Interim FinancialStatements***

* *

The accompanying condensed consolidated balancesheet as of September 30, 2004, the condensed consolidated statements ofoperations for the three and nine months ended September 30, 2004 and 2003, andthe condensed consolidated statements of cash flows for the nine months ended September30, 2004 and 2003, are unaudited but, in the opinion of management, include alladjustments necessary for a fair presentation of results for these interimperiods.  Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with accounting principles generally accepted in the United States havebeen omitted, although the Company believes that the disclosures included areadequate to make the information presented not misleading. The results ofoperations for the three and nine months ended September 30, 2004 are notnecessarily indicative of the results to be expected for the entire fiscalyear.  These financial statements shouldbe read in conjunction with the annual consolidated financial statements for2003 and related notes included in the Company’s Form 10-K filed with the SECon March 29, 2004.

 

**(d)**          Research and DevelopmentCost

** **

The Company has evaluated the establishment of technologicalfeasibility of its products in accordance with SFAS No. 86, *Accounting for the Costs of Computer Software to BeSold, Leased or Otherwise Marketed*. The Company sells products in a market that is subject to rapid technologicalchange, new product development and changing customer needs.  Accordingly, the Company has concluded thattechnological feasibility is not established until the development stage of theproduct is nearly complete.  The Companydefines technological feasibility as the completion of a working model.  The time period during which costs could becapitalized from the point of reaching technological feasibility until the timeof general product release is very short. Consequently, the amounts that could be capitalized are not material tothe Company’s financial position or results of operations.  Therefore, the Company has charged all suchcosts to research and development expense in the period incurred.

 

***(e)  RevenueRecognition***

* *

The Company generates revenues mainly from licensing the rights to useits software products.  The Company alsogenerates revenues from support and maintenance services and, to a lesserextent, training and consulting services. The Company sells its productsprimarily through its direct sales force and, to a lesser extent, throughresellers and distributors considered as end-users.

 

The Company recognizes revenue in accordance with Statement of Position(“SOP”) 97-2, *Software Revenue Recognition,*and SOP 98-9, *Modification of SOP 97-2, Software Revenue Recognition, WithRespect to Certain Transactions*. ****Under SOP 97-2, r****evenuesfrom software product licenses are recognized upon delivery of the softwareprovided there is persuasive evidence of an agreement, the fee is fixed or determinableand collection of the related receivable is probable and no further obligationsexist.  Revenues under multiple-elementarrangements, which may include software licenses, support and maintenance, andtraining and consulting services, are allocated to each element based on theirrespective fair values, based on vendor-specific objective evidence.  This objective evidence represents the priceof products and services when sold separately. Revenue is recognized for software licenses sold to resellers ordistributors at the time of shipment, provided that all revenue recognitioncriteria set forth in SOP 97-2 are fulfilled.

 

****SOP 98-9********requires the use of the residual methodfor recognition of revenues when vendor-specific objective evidence exists for undeliveredelements but does not exist for delivered elements of a software arrangementwhen all other revenue recognition criteria set forth in SOP 97-2 are met. Iffair value for a delivered element does not

 

7

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exist but the fair value doesexist for all undelivered elements, the Company defers the fair value of theundelivered elements and recognizes the remaining value for the deliveredelements.

 

Revenues from support and maintenance agreements are recognized ratablyover the term of the maintenance period, which is typically one year. Revenuesfrom training arrangements are recognized as the services are performed.

 

The Company generallydoes not grant a right of return to its customers.  When a right of return exists, revenue isdeferred until the right of return expires, at which time revenue is recognizedprovided that all other revenue recognition criteria are met.

 

Amounts collected or billed prior to satisfying the above revenuerecognition criteria are reflected as deferred revenue.  Deferred revenue primarily representsdeferred maintenance revenue, and to a lesser extent, deferred software licenserevenues.

 

**(f)**            Employee Stock Options

** **

At September 30, 2004, the Company has three stock option plans.  The Company has elected to follow AccountingPrinciples Board (“APB”) Opinion No. 25, *Accountingfor Stock Options Issued to Employees,* and FASB Interpretation (“FIN”)No. 44, *Accounting for Certain TransactionsInvolving Stock Compensation,* in accounting for its employee stockoption plans.  Under APB No. 25, when theexercise price of an employee stock option is equivalent to or above the marketprice of the underlying stock on the date of grant, no compensation expense isrecognized.  The Company adopted thedisclosure provisions of SFAS No. 148, *Accountingfor Stock-Based Compensation - Transition and Disclosure*, whichamended certain provisions of SFAS No. 123, *Accountingfor Stock-Based Compensation*, to provide alternative methods oftransition for an entity that voluntarily changes to the fair value basedmethod of accounting for stock-based employee compensation, effective as of thebeginning of the fiscal year.  TheCompany continues to apply the provisions of APB No. 25 in accounting forstock-based compensation.

 

Pro forma information regarding the Company’s net lossand net loss per share is required by SFAS No. 123 and has been determined asif the Company had accounted for its employee stock options under the fairvalue method prescribed by SFAS No. 123.  

 

 

8

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The following table illustrates the effect on net lossand net loss per share if the Company had applied the fair value recognitionprovisions of SFAS No. 123 to stock-based employee compensation.

 
| ** **                                                                                | ** ** | **Three Months Ended  September 30,**     | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                | ** ** | **2004**                                  | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                                      |       | **(In thousands, except per share data)** |       |
|                                                                                      |       |                                      |       |                                 |       |   |   |   |   |
| Net loss, as reported                                                                     |       | $                                         | (768       | )                                    | $          | (1,062 | ) | $ | (2,914 | ) | $ | (3,998 | ) |
| Add: Stock-based compensation included in  reported net loss                              |       | —                                    |       | 83                                   |       | 84 |   | 297 |   |
| Deduct: Total stock-based compensation  expense determined under fair value based methods |       | (64                                       | )          | (192                                 | )          | (312 | ) | (644 | ) |
| Pro forma net loss                                                                        |       | $                                         | (832       | )                                    | $          | (1,171 | ) | $ | (3,142 | ) | $ | (4,345 | ) |
|                                                                                      |       |                                      |       |                                 |       |   |   |   |   |
| Basic and diluted net loss per share                                                      |       |                                      |       |                                 |       |   |   |   |   |
| As reported                                                                               |       | $                                         | (0.04      | )                                    | $          | (0.06 | ) | $ | (0.15 | ) | $ | (0.24 | ) |
| Pro forma                                                                                 |       | $                                         | (0.04      | )                                    | $          | (0.07 | ) | $ | (0.16 | ) | $ | (0.26 | ) |

 

**(g)           Recently Issued AccountingPronouncements**

 

In March 2004,the Emerging Issues Task Force (“EITF”) reached consensus on Issue No. 03-1, *The Meaning of Other-Than-Temporary Impairment andIts Application to Certain Investments*, regarding disclosures about

 

unrealizedlosses on available-for-sale debt and equity securities accounted for underSFAS No. 115, *Accounting for CertainInvestments in Debt and Equity Securities*, and SFAS No. 124, *Accounting for Certain Investments Held byNot-For-Profit Organizations*. EITF 03-1 was to be effective for all other-than-temporary impairmentevaluations made in reporting periods beginning after June 15, 2004.  However, the guidance contained in paragraphs10-20 of EITF 03-1 has been delayed by EITF Issue 03-1-1, *Effective Date of Paragraphs 10-20 of EITF Issue No.03-1, `The Meaning of Other-Than-Temporary Impairment and Its Application toCertain Investments,’* posted in September 2004. The delay of theeffective date for paragraphs 10-20 will be superseded concurrent with thefinal issuance of proposed FASB EITF Issue 03-1-a, *Implication Guidance for the Application of Paragraph 16 of EITF IssueNo. 03-1, `The Meaning of Other-Than-Temporary Impairment and Its Applicationto Certain Investments’*. Under EITF 03-1, the disclosures continueto be effective in annual financial statements for fiscal years ending afterDecember 15, 2003, for investments accounted for under SFAS No. 115 and124.  For all other investments withinthe scope of EITF 03-1, the disclosures continue to be effective in annualfinancial statements for fiscal years ending after June 15, 2004. The additionaldisclosures for cost method investments continue to be effective for fiscalyears ending after June 15, 2004.  We donot expect the implementations of these pronouncements will have a materialeffect on our consolidated financial statements.

 

**3.  Earnings Per Share**

 

Basic and diluted net loss per share ispresented in conformity with SFAS No. 128, *EarningsPer Share*, for all periods presented.  Basic and diluted net loss per ordinary sharewas determined by dividing net loss attributable to ordinary shareholders bythe weighted average ordinary shares outstanding during the period.  Diluted net loss per ordinary share is thesame as basic net loss per ordinary share for all periods presented, as theeffects of the Company’s potential additional ordinary shares wereantidilutive.

 

9

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The calculation of diluted net loss per shareexcludes outstanding stock options, warrants and additional investment rightsheld by certain investors because their inclusion would be antidilutive, as setforth in the following table.

 

| ** **                                                              | ** ** | **September 30,**  | ** ** |
|-------------------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                              | ** ** | **2004**           | ** ** | **2003** | ** ** |
| ** **                                                              | ** ** | **(In thousands)** | ** ** |
|                                                                    |       |               |       |   |   |
| Stock options                                                           |       | 3,400              |       | 4,187 |   |
| Warrants (See Note 4(b))                                                |       | 3,000              |       | — |   |
| Additional investment rights held by  certain investors (See Note 4(b)) |       | 3,333              |       | — |   |

 

**4.  Shareholders’Equity**

 

**(a)**          Private Placement

** **

On March 17, 2004, the Company completed a private placement (the “PrivatePlacement”) of its ordinary shares, additional investment rights to purchaseordinary shares (“Additional Investment Rights”) and four series of warrants topurchase ordinary shares (“Warrants”) pursuant to a securities purchaseagreement (the “Purchase Agreement”) between the Company and certain purchasersnamed therein (the “Purchasers”), in reliance on an exemption under Section4(2) of the Securities Act of 1933, as amended, and Regulation D promulgatedthereunder.

 

The Company issued 3,333,331 ordinary shares to the Purchasers for apurchase price per share of $0.60, or aggregate gross proceeds of $2.0million.  The Company received net proceeds of $1.8 million from thePrivate Placement.

 

In accordance with the Purchase Agreement, the Company was required toregister for resale on Form S-3 (the “Registration Statement”) the ordinaryshares issued in the Private Placement and the ordinary shares issuable uponexercise of the Additional Investment Rights and Warrants.

 

The Registration Statement was declared effective on June 17,2004.   The Company must maintain theeffectiveness of the Registration Statement for a period of up to two yearsfrom the effective date of the Registration Statement.

 

**(b)  Warrants and Additional Investment Rights**

 

In connection with the Private Placement, the Company issued to thePurchasers Additional Investment Rights to purchase 3,333,331 ordinary sharesat an exercise price of $0.810 per share, exercisable from March 11, 2004 untilone year after the effective date of the Registration Statement.

 

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The Company alsoissued to the Purchasers four series of Warrants as follows:

 
| **Series**        | *** *** | **Term**              | *** *** | **Exercise  Price** | *** *** | **Number of  Shares** | ** **   |
|-------------------|--------------|-----------------------|--------------|---------------------|--------------|-----------------------|--------------|
|              | *** *** |                  | *** *** |                | *** *** |                  |         |
| Series A warrants | *** *** | Four and a half years | *** *** | $                   | 0.992        | *** ***          | 1,000,000    |   |
| Series B warrants | *** *** | Two years             | *** *** | $                   | 0.873        | *** ***          | 666,668      |   |
| Series C warrants | *** *** | Four and a half years | *** *** | $                   | 0.992        | *** ***          | 666,664      |   |
| Series D warrants | *** *** | Two years             | *** *** | $                   | 0.873        | *** ***          | 666,664      |   |
|              | *** *** |                  | *** *** |                | *** *** | 2,999,996             | *** *** |

 

The Warrants wereinitially exercisable for the number of shares indicated above subject tocustomary anti-dilution adjustments and, with respect to the Series C and Dwarrants, subject to the conditions indicated below.  The Series A and Series B warrants becameexercisable beginning September 11, 2004 for a term as noted in the tableabove.  One-half of the Series C andSeries D warrants became exercisable on September 20, 2004, the date the Company’sordinary shares were delisted from the Nasdaq SmallCap Market. Because theAdditional Investment Rights were not exercised before the delisting event, theother one-half of the Series C and D warrants will not become exercisable.

 

The Company may require the Purchasers to exercise their right topurchase ordinary shares pursuant to the Additional Investment Rights orWarrants if the closing price of the ordinary shares on an eligible marketexceeds the respective exercise prices of the Additional Investment Rights orany series of the Warrants by at least 100% for twenty consecutive trading dayson which the average daily trading volume of the ordinary shares is at least250,000 Ordinary Shares, excluding blocks of 25,000 or more ordinary shares.

 

**5.   AccruedRestructuring Charges**

 

The following is a reconciliation of the activity in the accruedrestructuring charge for each of the nine-month periods ended September 30,2003 and 2004:

 
| **Description**                           | ** ** | **Balance,  Beginning of  Period** | ** ** | **Provision** | ** ** | **Payments  and  Write-offs** | ** ** | **Balance,  End of Period** | ** ** |
|-------------------------------------------|------------|------------------------------------|------------|---------------|------------|-------------------------------|------------|-----------------------------|------------|
| ** **                                | ** ** | **(In thousands)**                 | ** ** |
| **Nine Months Ended-September 30, 2003:** | ** ** | ** **                         | ** ** | ** **    | ** ** | ** **                    | ** ** | ** **                  | ** ** |
| Employee severance costs                  |       | $                                  | —     |          | $          | 207                           |       | $                           | (175       | ) | $ | 32 |   |
| Idle-lease costs                          |       | 612                                |       | 26            |       | (229                          | )          | 409                         |       |
| Vendor contract termination fees          |       | —                             |       | 12            |       | (12                           | )          | —                      |       |
|                                      |       | $                                  | 612        |          | $          | 245                           |       | $                           | (416       | ) | $ | 441 |   |
| **September 30, 2004:**                   |       |                               |       |          |       |                          |       |                        |       |
| Idle-lease costs                          |       | $                                  | 320        |          | $          | —                        |       | $                           | (276       | ) | $ | 44 |   |

 

Amounts payable within one year have beenclassified as a current liability in the accompanying condensed consolidatedbalance sheets.

 

11

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**6.  Technology LicenseTransaction**

 

On July 7, 2004, theCompany received $1,000,000 in cash from a technology license transaction forits WebLOAD product with Ixia, an original equipment manufacturer pursuant tothe exercise of an option by Ixia under the terms of a development, publishingand distribution agreement.   Thetechnology license provides Ixia with expanded rights including the right toaccess and use source code for the WebLOAD product and the right to createderivative products.  Ixia is required tocontinue to pay to the Company royalties on its sale of WebLOAD at a reducedrate through July 7, 2005, after which Ixia would have no further paymentobligations to the Company.  Ixia has theright to make a payment of $250,000 to the Company within five days after thereceipt of source code materials in lieu of its obligations to pay the reducedroyalty.  As of September 30, 2004,delivery of the source code materials had not been completed.

 

The Company is obligated to provide product updates and technical andengineering support to Ixia until July 2005. The Company will recognize the $1,000,000 technology license fee asrevenue over the 12-month period that commenced on July 7, 2004.  If Ixia elects to make the $250,000 paymentin lieu of its reduced royalty obligation, then this amount would also berecognized as revenue over the same 12-month period.  In connection with this technology licensetransaction, a total of $250,000 of revenue has been recognized for the threeand nine months ended September 30, 2004, and has been classified as softwarelicenses revenues in the accompanying condensed, consolidated financialstatements.

 

**7.  Lease Commitments**

 

On July 20, 2004, theCompany amended the lease on its office space in Burlington,Massachusetts.  Under the amendment, theCompany substituted its original space for a smaller office at a lower baserent.  The new space is for 4,929 squarefeet and expires in July 2009.  Theoriginal lease was for 11,228 square feet and would have expired in March 2005.

 

**8. Disclosures About Segments of an Enterprise**

 

The Company has adopted SFAS No. 131, *DisclosuresAbout Segments of an Enterprise and Related Information*. The Companyoperates in one reportable segment (see Note 1 for a brief description of theCompany’s business). The total revenues are attributed to geographic areasbased on the location of the end-user customer as follows:

 
| ** **     | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **     | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **     | ** ** | **(In thousands)**                    | ** ** |
| ** **     | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| United States  |       | $                                     | 1,016      |                                 | $          | 793 |   | $ | 2,434 |   | $ | 2,375 |   |
| Europe         |       | 224                                   |       | 151                                  |       | 538 |   | 406 |   |
| Israel         |       | 39                                    |       | 164                                  |       | 174 |   | 492 |   |
| Other          |       | 7                                     |       | 44                                   |       | 188 |   | 310 |   |
| Total revenues |       | $                                     | 1,286      |                                 | $          | 1,152 |   | $ | 3,334 |   | $ | 3,583 |   |

 

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**MANAGEMENT’S DISCUSSION AND ANALYSI****S OF**

**FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

*Statements in this Quarterly Report on Form10-Q concerning RadView’s business outlook or future performance; anticipatedrevenues, expenses or other financial items; product introductions and plansand objectives related thereto; and statements concerning assumptions made orexpectations as to any future events, conditions, performance or other matters,are “forward-looking statements” as that term is defined under U. S. federalsecurities laws. Forward-looking statements are subject to various risks,uncertainties and other factors that could cause actual results to differmaterially from those stated in such statements. These risks, uncertainties andfactors include, but are not limited to: our history of losses; marketacceptance of our products; our ability to develop new products and enhanceexisting products; impact of significant competition; and other factorsdetailed in RadView’s filings with the Securities and Exchange Commission,including this Quarterly Report on Form 10-Q.*

 

# **Overview**

# ** **

We develop, market and support software that enables companies toassure the scalability, efficiency and reliability of Web applications.   In 1997, we introduced WebLOAD, asingle-user load testing solution designed to assess the performance andaccelerate the deployment of web applications. In February 2000, we introduced WebRM, a multiple-user load testingsolution, which extends the functionality of WebLOAD to facilitate thecollaborative testing efforts of both small and large testing teams to verifyweb application quality throughout the application development lifecycle.  In August 2001, we introduced WebFT, atesting tool for verification of the functionality of web applications.  In July 2003, we introduced WebLOAD Analyzer,a solution for identifying the root-cause of performance problems within webapplications.  In May 2004, we introducedTestView, a comprehensive web application testing solution that integratesWebFT for functional testing, WebLOAD for load and scalability testing andTestView Manager for test management through a central console.

 

On July 7, 2004, we received $1,000,000 incash from a technology license transaction for our WebLOAD product with Ixia,an original equipment manufacturer partner pursuant to the exercise of anoption by Ixia under the terms of a development, publishing and distribution agreement.   The technology license provides Ixia withexpanded rights including the right to access and use source code for theWebLOAD product and the right to create derivative products.  Ixia is required to continue to pay to usroyalties on its sale of WebLOAD at a reduced rate through July 7, 2005, afterwhich they would have no further payment obligations to us.  Ixia has the right to make a single paymentof $250,000 to us within five days of the receipt of source code materials inlieu of its obligations to pay the reduced royalty.  As of September 30, 2004, delivery of thesource code materials had not been completed. We are obligated to provideproduct updates and technical and engineering support to Ixia until July2005.  We will recognize the $1,000,000technology license fee as software license revenue over the 12 month periodthat commenced July 7, 2004.  If Ixiaelects to make the $250,000 payment in lieu of its reduced royalty obligation,then this amount would also be recognized as revenue.

 

# **Application of CriticalAccounting Policies and Estimates**

# ** **

## ***General***

## *** ***

We prepare ourconsolidated financial statements in conformity with accounting principlesgenerally accepted in the U.S.  As such,we are required to make certain estimates, judgments and assumptions that webelieve are reasonable based upon the information available. These estimatesand assumptions affect the reported amounts of assets and liabilities at thedate of the financial statements and the reported amounts of revenues andexpenses during the periods presented. To fully understand and evaluate our reported financial results, webelieve it is important to understand the significant estimates and judgmentsapplied as they relate to our policies for revenue recognition, softwaredevelopment costs, restructuring costs and accounting for stock options.  More detailed descriptions of these policiesare provided in Note 2 to the consolidated financial statements.

 

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## ***RevenueRecognition***

 

Our revenue recognitionapproach requires that four basic criteria must be met before revenue can berecognized: (1) persuasive evidence of an arrangement exists; (2) delivery hasoccurred or services rendered; (3) the fee is fixed and determinable; and (4)collectibility is reasonably assured. Determination of criteria (3) and (4) is based on management’s judgmentsregarding the fixed nature of the fee charged for services rendered andproducts delivered, and the collectibility of those fees.  Should changes in conditions cause managementto determine these criteria are not met for certain future transactions,revenue recognized for any reporting period could be adversely affected.

 

## ***SoftwareDevelopment Costs***

## *** ***

Software developmentcosts incurred from the point of reaching technological feasibility until thetime of general product release should be capitalized.  We define technological feasibility as thecompletion of a working model.  Thedetermination of technological feasibility requires the exercise of judgment byour management.  Because we sell ourproducts in a market that is subject to rapid technological change, new productdevelopment and changing customer needs, we have concluded that technologicalfeasibility is not established until the development stage of the product isnearly complete.  For us, the period inwhich we can capitalize software development costs is very short, so theamounts that could be capitalized are not material to our financial statements.  Therefore, we have charged all such costs toresearch and development expense in the period incurred

 

## ***RestructuringCharges***

## *** ***

In prior years, werecorded significant restructuring charges. These restructuring chargesincluded estimates pertaining to employee separation costs and the settlementsof contractual obligations resulting from our actions.  In addition, we have estimated the costs forcertain under-utilized facilities and have made assumptions regarding apotential sub-lessee’s future rental rate, as well as the amount of timerequired to identify a sub-lessee.  Todate, our actual restructuring costs have approximated the estimated costsrecorded; however, actual future costs of amounts not yet paid may differ fromthese estimates.

 

## ***Accountingfor Stock Options***

## *** ***

We account for stock options issued to employees under the intrinsicmethod in accordance with Accounting Principles Board, or APB, Opinion No. 25, *Accounting for Stock Issued to Employees*.  Under this approach we do not record anyexpense at the time the options are granted unless the exercise price of agranted option is below the fair market price of our ordinary shares on thedate of grant.   We have provideddisclosures of impact to our reported net loss and net loss per share if we hadapplied the fair value method.  The pro formafair value disclosures requires the application of estimates, such as estimatedexpected life of the options and estimated market volatility for our ordinaryshares.  These estimates are based onmanagement’s review of historical option lives and computations of marketvolatility for our ordinary shares.

 

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**Results of Operations**

 

The following table sets forth, as a percentage of total revenues,consolidated statement of operations data for the periods indicated:

 
| ** **                  | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                  | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues:                   |       |                                  |       |                                 |       |   |   |   |   |
| Software licenses           |       | 54.7                                  | %          | 50.8                                 | %          | 50.2 | % | 52.3 | % |
| Services                    |       | 45.3                                  |       | 49.2                                 |       | 49.8 |   | 47.7 |   |
| Total revenues              |       | 100.0                                 |       | 100.0                                |       | 100.0 |   | 100.0 |   |
|                        |       |                                  |       |                                 |       |   |   |   |   |
| Cost of Sales:              |       |                                  |       |                                 |       |   |   |   |   |
| Software licenses           |       | 1.2                                   |       | 5.5                                  |       | 1.9 |   | 2.7 |   |
| Services                    |       | 6.5                                   |       | 8.0                                  |       | 7.2 |   | 9.0 |   |
| Total cost of sales         |       | 7.7                                   |       | 13.5                                 |       | 9.1 |   | 11.7 |   |
|                        |       |                                  |       |                                 |       |   |   |   |   |
| Gross Profit                |       | 92.3                                  |       | 86.5                                 |       | 90.9 |   | 88.3 |   |
|                        |       |                                  |       |                                 |       |   |   |   |   |
| Operating Expenses:         |       |                                  |       |                                 |       |   |   |   |   |
| Sales and marketing         |       | 69.9                                  |       | 81.6                                 |       | 78.1 |   | 89.6 |   |
| Research and development    |       | 48.0                                  |       | 54.4                                 |       | 56.5 |   | 59.4 |   |
| General and administrative  |       | 34.4                                  |       | 35.9                                 |       | 40.8 |   | 35.1 |   |
| Stock-based compensation    |       | 0.0                                   |       | 7.2                                  |       | 2.5 |   | 8.3 |   |
| Restructuring charges       |       | 0.0                                   |       | 0.0                                  |       | 0.0 |   | 6.8 |   |
| Total operating expenses    |       | 152.3                                 |       | 179.2                                |       | 177.9 |   | 199.2 |   |
|                        |       |                                  |       |                                 |       |   |   |   |   |
| Operating loss              |       | (60.0                                 | )          | (92.7                                | )          | (87.0 | ) | (110.9 | ) |
|                        |       |                                  |       |                                 |       |   |   |   |   |
| Interest income, net        |       | 0.4                                   |       | 0.4                                  |       | 0.4 |   | 0.8 |   |
| Other income (expense), net |       | (0.2                                  | )          | 0.1                                  |       | (0.8 | ) | (1.5 | ) |
|                        |       |                                  |       |                                 |       |   |   |   |   |
| Net loss                    |       | (59.8                                 | )%         | (92.2                                | )%         | (87.4 | )% | (111.6 | )% |

 

**Three and Nine Months Ended September 30, 2004 and 2003**

 

***Revenues***

 

*Total Revenues*. Total revenues increased by $134,000 or11.6% to $1.3 million for the three months ended September 30, 2004 from $1.2million for the same period in 2003. This increase resulted primarily from an increase in software licensesrevenues primarily due to the software revenue recognized as a result of thetransaction with Ixia.  Total revenues decreasedby $249,000, or 6.9%, to $3.3 million for the nine months ended September 30,2004 from $3.6 million for the same period in 2003.  The decrease for the nine-month periodresulted from lower software license revenue in the first six months of 2004,partially offset by an increase in software license revenues in the last threemonths.

 

*SoftwareLicenses*.  Software license revenues were $703,000 forthe three months ended September 30, 2004 and $585,000 for the same period in2003, which represents an increase of $118,000, or 20.2%.  Software license revenues increased as aresult of $250,000 of revenues recognized in the quarter from the technologylicense transaction with Ixia partially offset with a decline in softwarelicense revenues from international customers.   Software license revenues were $1.7 millionfor the nine months ended September 30, 2004 which reflects a decrease of$201,000, or 10.7%, compared to software license revenues of $1.9 million forthe same period in 2003.  This decreaseconsisted of a decrease of $211,000 in software license revenues frominternational customers partially offset by an increase of $10,000 in softwarelicense revenues from U.S. customers.

 

*Services*. Services revenues consist primarily of revenue from annual support andmaintenance contracts and, to a lesser extent, training and consultingservices.  Services revenues were $583,000for the three months ended

 

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September 30, 2004 and $567,000 for the sameperiod in 2003.  Service revenues were$1.7 million for both nine months ended September 30, 2004 and 2003.

 

***Cost of Revenues***

 

*Cost ofSoftware Licenses*. Cost of software licenses consists principally of direct product costs,such as product media and packaging, as well as royalties due to thirdparties.  Cost of software licensesdecreased to $15,000, or 2.1% of software license revenues, for the threemonths ended September 30, 2004 from $63,000, or 10.8% of software licenserevenues, for the same period in 2003. Cost of software licenses decreased from $98,000, or 5.2% of softwarelicense revenues, for the nine months ended September 30, 2003 to $64,000, or3.8% of software license revenues, for the same period in 2004.  These decreases were due to lower royaltycosts as a result of a decline in orders for certain of our products thatresult in third-party royalties.

 

*Cost of Services*. Cost of servicesconsists principally of personnel-related costs associated with customersupport and training.  Cost of servicesdecreased to $84,000, or 14.4% of services revenues, for the three months endedSeptember 30, 2004 from $93,000, or 16.4% of services revenues, for the sameperiod in 2003.  Cost of servicesdecreased to $241,000, or 14.5% of services revenues, for the nine months endedSeptember 30, 2004, from $323,000, or 18.9% of services revenues, for the sameperiod in 2003.  These decreases were dueto reduced personnel costs for support and maintenance services resulting fromthe headcount reductions taken in the first half of 2003.

 

***Operating Expenses***

 

*Sales andMarketing*.  Sales and marketing expenses consistprincipally of salaries and commissions earned by sales personnel, travel andmarketing program costs such as trade shows, advertising and product promotion.  Sales and marketing expenses were $899,000,or 69.9% of total revenues, for the three months ended September 30, 2004 comparedto $940,000, or 81.6% of total revenues, for the same period in 2003.  Sales and marketing expenses were $2.6million, or 78.0% of total revenues, for the nine months ended September 30,2004 compared to $3.2 million, or 89.6% of total revenues, for the same periodin 2003.  These decreases were dueprimarily to headcount reductions of sales and marketing personnel during thefirst half of 2003 along with reduced spending for marketing programs.

 

*Research andDevelopment*.  Research and development expenses consistprincipally of salaries and related expenses required to develop and enhancethe Company’s products.  Research anddevelopment expenses were $617,000, or 48.0% of total revenues, for the threemonths ended September 30, 2004, compared to $627,000, or 54.4% of totalrevenues, for the same period in 2003. Research and development expenses were $1.9 million, or 56.5% of totalrevenues for the nine months ended September 30, 2004 compared to $2.1 million,or 59.4% of total revenues, for the same period in 2003.  These decreases were due primarily toheadcount reductions of research and development personnel during the firsthalf of 2003.

 

*General andAdministrative*.  General and administrative expenses consistprincipally of finance, executive and administrative salaries and relatedexpenses, professional fees and other costs associated with being a publiccompany.  General and administrativeexpenses were $442,000, or 34.4% of total revenues, for the three months endedSeptember 30, 2004 compared to $414,000, or 35.9% of total revenues, for thesame period in 2003.  General andadministrative expenses were $1.4 million, or 40.8% of total revenues, comparedto $1.3 million, or 35.1% of total revenues, for the same period in 2003.  These increases were due primarily toadditional professional fees incurred during the first and third quarters of2004.

 

*Stock-basedCompensation*.Stock-based compensation expense reflects the accounting charge relating to theissuance of equity instruments to employees at an exercise price below fairmarket value at date of grant and to all equity instruments issued tononemployees.  For stock options grantedto employees, the difference between the exercise price and the fair value ofthe ordinary shares on the date options are granted is charged to operations asstock-based compensation expense over the vesting period of the underlying options.  For stock options granted to nonemployees,the value of a particular grant as determined by the Black-Scholes valuationmodel is charged to

 

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operations as stock-based compensationexpense over the service period or vesting period of the underlyingoption.  There was no stock-basedcompensation expense for the three months ended September 30, 2004 compared to$83,000 for the same period in 2003. Stock-based compensation expense was $84,000 for the nine months endedSeptember 30, 2004 compared to $297,000 for the same period in 2003.  This decrease resulted from the completion ofall amortization of deferred compensation.

 

*InterestIncome, Net*.Interest income, net consists principally of interest earned on cashinvestments.  Interest income, net was$6,000 for the three months ended September30, 2004 compared to $5,000 for the same period in 2003. Interest income, netwas $12,000 for the nine months ended September30, 2004 compared to $29,000 for the same period in 2003. The decreases ininterest income resulted from lower invested cash balances in 2004 as comparedto 2003.

 

*Other Income(Expense), Net*.  Other income (expense), net consistsprincipally of currency translation gains and losses.  There was other expense, net of $3,000 forthe three months ended September 30, 2004 compared to other income, netof $1,000 for the same period in 2003.  Other expense, net was $24,000 for the ninemonths ended September 30, 2003 compared to $53,000 for the same period in2003.  The changes in other income (expense),net were due to exchange rate fluctuations.

 

*Income Taxes.*  We have estimated net operating losscarryforwards for Israeli tax purposes totaling approximately $22.0 millionthrough September 30, 2004 that would reduce future Israeli income taxes, ifany. These net operating losses may be carried forward indefinitely and offsetagainst future taxable business income. We expect that during the period these losses are utilized, our incomewould be substantially tax exempt. Accordingly, there will be no tax benefit available from these lossesand no deferred income taxes have been included in our consolidated financialstatements.

 

Our U.S. subsidiary has estimated net operatingloss carryforwards for U.S. Federal and state tax purposes totalingapproximately $28.5 million through September 30, 2004.  These losses are available to offset anyfuture U.S. taxable income of the U.S. subsidiary and will expire between 2012and 2024.  The Company has recorded afull valuation allowance against its deferred tax asset due to the uncertaintysurrounding the ability and the timing of the realization of these taxbenefits.

 

**Liquidity and Capital Resources**

 

Cashand cash equivalents totaled $3.1 million as of September 30, 2004 and December31, 2003.

 

Cash used in operating activities has resulted substantially from ourreported net losses partially reduced by noncash items such as depreciation andstock-based compensation.

 

Cash used in operatingactivities was $1.8 million for the nine months ended September 30, 2004 and $3.4 million for the same period in2003.  Cash used in operating activitiesfor the nine months ended September30, 2004 was due primarily to a net loss of $2.9 million and a decrease of$355,000 in accounts payable, accrued expenses and accrued restructuring,partially offset by noncash items, a decrease of $168,000 in accountsreceivable and an increase of $888,000 in deferred revenues.  Accrued expenses, accounts payable andaccrued restructuring decreased as a result of the payment of accruedpayroll-related costs, professional fees and idle leases.  Deferred revenues increased primarily as aresult of $750,000 of net deferred revenue resulting from the $1 million cashpayment from the technology license transaction with Ixia.

 

Cash provided by investing activities was$28,000 for the nine months ended September 30, 2004 and cash used in investingactivities was $46,000 for the nine months ended September 30, 2003.  The cash provided by investing activities in2004 resulted from a decrease of $66,000 in other assets partially offset bythe purchase of $38,000 in property and equipment.

 

Cash provided byfinancing activities was $1.8 million for the nine months ended September 30,2004 and $44,000 in the same period of 2003. Cash provided by financing activities in 2004 consisted primarily of$1.8 million of net proceeds from a private placement of 3,333,331 of ourordinary shares in March 2004 for an aggregate

 

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purchase price of$2.0 million.  In connection with theprivate placement, the investors were granted the right to purchase within oneyear an additional 3,333,331 ordinary shares at a purchase price of $0.81 pershare.  In addition, the investors alsoreceived four series of warrants to purchase an aggregate of up to 2,999,996ordinary shares at exercise prices ranging from $0.87 to $0.99 per share. Warrantsto purchase an aggregate of 666,664 shares are no longer exercisable.

 

We expect that operating expenses and, to alesser extent, our planned capital expenditures, will constitute a material useof our cash resources.  We believe thatour existing cash and cash equivalents will be sufficient to meet ouranticipated needs for working capital and capital expenditures at least throughSeptember 30, 2005.   We may find itnecessary to obtain additional equity or debt financing.  In the event additional financing is required,we may not be able to complete financing on acceptable terms or at all.

 

On September 20, 2004, our ordinary shares were delisted from theNasdaq SmallCap Market, following the receipt of a Nasdaq Staff Determinationletter dated September 8, 2004 indicating that we failed to comply with theshareholders’ equity, market capitalization and net income requirements forcontinued listing set forth in Marketplace Rule 4320(e)(B),and that our securities were, therefore, subject to delisting from the NasdaqSmallCap Market.  The Nasdaq made itsdetermination to delist based on its review of our earlier response because theplan we presented did not definitively satisfy the Nasdaq’s timeframe forcompliance in the near term.

 

Our ordinary shares are now quoted on the Over-the-Counter BulletinBoard, or the OTCBB, effective September 20, 2004, under trading symbol “RDVW”.

 

# **Contractual Obligations**

# ** **

We lease all of ouroffice facilities under noncancellable operating leases that expire overvarying terms through 2009.  On July 20,2004, we amended the lease to our Burlington, Massachusetts headquarters toreduce both our base rent and the square footage of our office.  The amended lease will expire in July2009.  As of September 30, 2004, ourcontractual obligations were as follows:

 
| ** **                  | ** ** | **Payments due by Period** | ** ** |
|-----------------------------|------------|----------------------------|------------|
| **Contractual Obligations** | ** ** | **Total**                  | ** ** | **Less than  1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  5 years** | ** ** |
| ** **                  | ** ** | **(In Thousands)**         | ** ** |
|                        |       |                       |       |   |   |   |   |   |   |   |   |
| Operating leases            |       | $                          | 634        |   | $ | 273 |   | $ | 207 |   | $ | 110 |   | $ | 44 |   |
| Severance pay (1)           |       | 664                        |       | — |   | — |   | — |   | 664 |   |
| Total                       |       | $                          | 1,298      |   | $ | 273 |   | $ | 207 |   | $ | 110 |   | $ | 708 |   |

 

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(1)          Severance pay relates to accrued severanceobligations to our Israeli employees as required under Israeli labor laws.  These obligations are payable only upon thetermination of the respective employee and may be reduced if the employee’stermination is voluntary.

 

**ITEM3.****  QUALITATIVE AND QUANTITATIVEDISCLOSURES ABOUT MARKET RISK**

 

The Company does not usederivative financial instruments in its investing portfolio.  The Company places its investments ininstruments that meet high credit quality standards such as money market funds,government securities, and commercial paper. The Company limits the amount of credit exposure to any one issuer.  The Company does not expect any material losswith respect to its investment portfolio.

 

The Company conducts business in various foreign currencies, primarilyin Europe and Israel.  As a result, theCompany is exposed to the effect of foreign currency exchange rate fluctuationson the U.S. dollar value of foreign currency-denominated revenues andexpenses.  The Company does not useforeign exchange forward contracts to hedge its foreign currency denominatedreceivables.  Looking forward, there canbe no assurance that changes in

 

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foreign currency rates, relative to theU.S. dollar, will not materially adversely affect the consolidated results ofthe Company.

 

**ITEM4.****  CONTROLS AND PROCEDURES**

 

**Evaluation of Controls and Procedures**

 

We carried out an evaluation, under the supervision and with theparticipation of the Company’s management, including the Company’s ChiefExecutive Officer, or CEO, and Chief Financial Officer, or CFO, of theeffectiveness of the design and operation of the Company’s disclosure controlsand procedures as of the end of the period covered by this Quarterly Report onForm 10-Q. Based on this evaluation, the CEO and CFO have concluded that theCompany’s disclosure controls and procedures are effective to ensure thatmaterial information is recorded, processed, summarized and reported by managementof the Company on a timely basis in order to comply with the Company’sdisclosure obligations under the Securities Exchange Act of 1934 and the SECrules thereunder.

 

**Changes in internal controls**

 

There were no significant changes in the Company’s internal controls orin other factors that could significantly affect these controls subsequent tothe date of the evaluation.

 

**PART II - OTHERINFORMATION**

 

**Item 1.****  LegalProceedings**

 

On August 5,2004, we filed suit against Veritas Software Corporation, Veritas Software(Israel) Ltd. and Precise Software Solutions Ltd. (direct or indirectwholly-owned subsidiaries of Veritas Software Corporation), collectively thedefendants.  We asserted claims of tradesecret misappropriation, violation of various intellectual property andstatutory rights and unfair competition. The claims are based on allegationsthat the defendants improperly used our trade secrets received by thedefendants, inter alia, from three of our former employees, who weresubsequently hired by the defendants.  Inaddition to various damages, the suit requested a temporary injunction andpermanent injunction prohibiting defendants from misappropriating ourtechnology.  An initial hearing was heldon August 10, 2004.  On August 12, 2004,we entered into a court-approved settlement with the defendants.  Pursuant to the settlement, the defendantsagreed, inter alia, not to use our trade secrets, to refrain from hiringadditional RadView employees for a specified period and to certain limitationsfor a specified period on our three former employees who are now employed bythe defendants.

 

In addition tothis lawsuit, we may be involved from time to time in litigation arising in thenormal course of our business.  Althoughwe are currently not a party to any such litigation that we believe would havea material adverse effect, individually or in the aggregate, on our business orfinancial condition, it is possible that in the future we could become a partyto such proceedings.

 

**Item 2.****  Unregistered Sales of EquitySecurities and Use of Proceeds**

 

**(b) Use****of Proceeds from Sale of Registered Securities**

 

On August 9, 2000, in connection with ourinitial public offering, the Securities and Exchange Commission declaredeffective a Registration Statement on Form F-1 (No. 333-41526) pursuant towhich we sold 4,000,000 ordinary shares.

 

Through September 30, 2004, we have used $34.0 million of the netproceeds of the $35.3 million from our initial public offering as follows:

•                  $1.9 million forcapital expenditures;

•                  $1.4 million forrepayment of principal and accrued interest on a loan with Rad DataCommunications, Inc., a related party;

•                  $3.8 million forrepayment of principal and accrued interest on long-term debt with a bank;

•                  $100,000 for therepurchase of ordinary shares; and

 

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•                  $26.8million for working capital.

 

**Item 4.****  Submission of Matters to a Vote ofSecurity Holders**

 

(a)   TheCompany held an Annual Meeting of Shareholders, or the Annual Meeting, on September14, 2004.

 

(b)   ShaiBeilis, Ilan Kinreich, Willaim J. Geary, and Kathleen A. Cote were elected asdirectors at the Annual Meeting. The term of Robert Steinkrauss and David Assiaas directors continued after the Annual Meeting.

 

(c)   Thefollowing are the proposals that were considered at the Annual Meeting,together with the results for the respective proposals.

 

Proposal 1 – To elect the following individuals to the Company's Boardof Directors.

 
| **Director Nominee** | ** ** | **Votes In Favor** | ** ** | **Votes Withheld** | ** ** |
|----------------------|------------|--------------------|------------|--------------------|------------|
| Shail Beilis         |       | 15,546,716         |       | 56,377             |       |
| Ilan Kinreich        |       | 15,557,716         |       | 45,377             |       |
| William J. Geary     |       | 15,550,721         |       | 52,372             |       |
| Kathleen A. Cote     |       | 15,561,821         |       | 41,272             |       |

 

Proposal 2 – to ratify and approve the selection of Kost Forer Gabbay& Kasierer, a member of Ernst & Young Global, as the Company'sindependent auditors for the year ending December 31, 2004. The proposal wasapproved with 15,572,921 shares voted in favor, 20,672 shares voted against,and 9,500 abstentions.

 

**Item 6.****  Exhibits**

**Exhibit Index**

 
| 31.1*  | Certification by Chief Executive Officer pursuant to 15 U.S.C.  Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of  2002. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                 |
| 31.2*  | Certification by Chief Financial Officer pursuant to 15 U.S.C.  Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of  2002. |
|   |                                                                                                                                                 |
| 32*    | Certification pursuant to 18 U.S.C Section 1350, as adopted pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002.                              |

 

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*  Filedherewith

 

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** **

**SIGNATURE**S

** **

Pursuant to the requirements of the Securities and Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned thereunto duly authorized.

 
|                         |   | RADVIEW SOFTWARE LTD.                       |
|------------------------------|--------|---------------------------------------------|
|                         |   |                                        |
| Date: November 12, 2004 |   | /s/ CHRISTOPHER DINEEN                      |   |
|                         |   | Christopher Dineen  Chief Financial Officer |

 

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