**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM10-Q**

 

**(Markone)**

 

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

 

**For the quarterly period ended March31, 2003**

 

**OR**

 

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

 

**Commission File Number:  0-31151**

 

 

**RADVIEWSOFTWARE LTD.**

(Exact name ofregistrant as specified in its charter)

 

| **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 ofprincipal executive offices)

 

##### **Telephone Number (781) 238-1111**

(Registrant’stelephone 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) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports) Yes   ý   No o,and (2) has been subject to such filing requirements for the past 90 days:  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 April 30, 2003, there were 16,471,177 shares ofthe Registrant’s Ordinary Shares outstanding, excluding 134,000 Ordinary Sharesheld by the registrant as treasury shares that are “dormant” shares forpurposes of Israeli law.

 

 

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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 March 31, 2003 and December 31, 2002                    |
|     |                                                                                                 |
|     | Condensed  Consolidated Statements of Operations for the three months ended March 31,  2003 and 2002 |
|     |                                                                                                 |
|     | Condensed  Consolidated Statements of Cash Flows for the three months ended March 31,  2003 and 2002 |
|     |                                                                                                 |
|     | Notes  to Condensed Consolidated Financial Statements                                                |
|     |                                                                                                 |
| Item 2.  | Management’s  Discussion and Analysis of Financial Condition and Results of Operations          |
|     |                                                                                                 |
| Item  3. | Qualitative  and Quantitative Disclosures About Market Risk                                          |
|     |                                                                                                 |
| Item 4.  | Controls and Procedures                                                                              |
|     |                                                                                                 |
|     |                                                                                                 |
|     | **PART II. OTHER INFORMATION**                                                                       |
|     |                                                                                                 |
| Item 2.  | Changes in Securities  and Use of Proceeds                                                           |
|     |                                                                                                 |
| Item 6.  | Exhibits and  Reports on Form 8-K                                                                    |
|     |                                                                                                 |
|     | Signatures                                                                                           |
|     |                                                                                                 |
|     | Certifications                                                                                       |

 

2

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**PARTI - FINANCIAL INFORMATION**

 

**RADVIEW SOFTWARE LTD.AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

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

**(Unaudited)**

 
|                                                                                                                                                                                                                                          |   | **March 31,  2003** |   | **December 31,  2002** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|--------|------------------------|--------|
| **ASSETS**                                                                                                                                                                                                                                    |   |                |   |                   |   |
| Current Assets:                                                                                                                                                                                                                               |   |                |   |                   |   |
| Cash and cash equivalents                                                                                                                                                                                                                     |   | $                   | 6,448  |                   | $      | 7,566 |   |
| Accounts receivable, net of reserves of $86 at March  31, 2003 and  $171 at December 31,  2002                                                                                                                                           |   | 809                 |   | 1,026                  |   |
| Prepaid expenses and other current assets                                                                                                                                                                                                     |   | 395                 |   | 506                    |   |
| Total Current Assets                                                                                                                                                                                                                          |   | 7,652               |   | 9,098                  |   |
|                                                                                                                                                                                                                                          |   |                |   |                   |   |
| Property and Equipment, net                                                                                                                                                                                                                   |   | 652                 |   | 826                    |   |
| Other Assets                                                                                                                                                                                                                                  |   | 670                 |   | 683                    |   |
|                                                                                                                                                                                                                                          |   |                |   |                   |   |
| Total Assets                                                                                                                                                                                                                                  |   | $                   | 8,974  |                   | $      | 10,607 |   |
|                                                                                                                                                                                                                                          |   |                |   |                   |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                                                                                                                |   |                |   |                   |   |
| Current Liabilities:                                                                                                                                                                                                                          |   |                |   |                   |   |
| Accounts payable                                                                                                                                                                                                                              |   | $                   | 361    |                   | $      | 358 |   |
| Accrued expenses                                                                                                                                                                                                                              |   | 1,306               |   | 1,503                  |   |
| Accrued restructuring charge, current portion                                                                                                                                                                                                 |   | 273                 |   | 271                    |   |
| Deferred revenue                                                                                                                                                                                                                              |   | 1,154               |   | 1,051                  |   |
| Total Current Liabilities                                                                                                                                                                                                                     |   | 3,094               |   | 3,183                  |   |
|                                                                                                                                                                                                                                          |   |                |   |                   |   |
| Long-term Liabilities:                                                                                                                                                                                                                        |   |                |   |                   |   |
| Accrued restructuring charge, less current portion                                                                                                                                                                                            |   | 269                 |   | 341                    |   |
| Accrued severance                                                                                                                                                                                                                             |   | 729                 |   | 772                    |   |
| Total Long-Term Liabilities                                                                                                                                                                                                                   |   | 998                 |   | 1,113                  |   |
|                                                                                                                                                                                                                                          |   |                |   |                   |   |
| Total Liabilities                                                                                                                                                                                                                             |   | 4,092               |   | 4,296                  |   |
|                                                                                                                                                                                                                                          |   |                |   |                   |   |
| Shareholders’ Equity:                                                                                                                                                                                                                    |   |                |   |                   |   |
| Ordinary shares, NIS 0.01 par value –   Authorized – 40,000,000 shares;  Issued – 16,605,177 shares at March 31, 2003 and December 31, 2002  Outstanding –16,471,177 shares at March 31, 2003 and  December 31, 2002 |   | 42                  |   | 42                     |   |
| Treasury shares, at cost – 134,000 shares                                                                                                                                                                                                |   | (100                | )      | (100                   | )      |
| Additional paid-in capital                                                                                                                                                                                                                    |   | 54,863              |   | 54,888                 |   |
| Deferred compensation                                                                                                                                                                                                                         |   | (399                | )      | (536                   | )      |
| Accumulated deficit                                                                                                                                                                                                                           |   | (49,524             | )      | (47,983                | )      |
| Total Shareholders’ Equity                                                                                                                                                                                                               |   | 4,882               |   | 6,311                  |   |
|                                                                                                                                                                                                                                          |   |                |   |                   |   |
| Total Liabilities and Shareholders’ Equity                                                                                                                                                                                               |   | $                   | 8,974  |                   | $      | 10,607 |   |

 

The accompanying notes are an integral part of these condensedconsolidated financial statements.

 

3

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**RADVIEW SOFTWARE LTD. ANDSUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

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

**(Unaudited)**

 
|                                                                                                     |   | **Three Months Ended  March 31,** |   |
|----------------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                                                     |   | **2003**                          |   | **2002** |   |
| Revenues:                                                                                                |   |                              |   |   |   |
| Software licenses                                                                                        |   | $                                 | 667    |   | $ | 978 |   |
| Service                                                                                                  |   | 553                               |   | 596 |   |
| Total  Revenues                                                                                          |   | 1,220                             |   | 1,574 |   |
|                                                                                                     |   |                              |   |   |   |
| Cost  of Revenues:                                                                                       |   |                              |   |   |   |
| Software  licenses                                                                                       |   | 20                                |   | 13 |   |
| Service                                                                                                  |   | 119                               |   | 160 |   |
| Total  Cost of Revenues                                                                                  |   | 139                               |   | 173 |   |
|                                                                                                     |   |                              |   |   |   |
| Gross  Profit                                                                                            |   | 1,081                             |   | 1,401 |   |
|                                                                                                     |   |                              |   |   |   |
| Operating  Expenses:                                                                                     |   |                              |   |   |   |
| Sales  and marketing                                                                                     |   | 1,230                             |   | 1,438 |   |
| Research  and development                                                                                |   | 850                               |   | 864 |   |
| General  and administrative                                                                              |   | 437                               |   | 620 |   |
| Stock-based  compensation(1)                                                                             |   | 111                               |   | 150 |   |
| Nonrecurring  expenses (Note 4)                                                                          |   | —                            |   | 334 |   |
| Total  Operating Expenses                                                                                |   | 2,628                             |   | 3,406 |   |
|                                                                                                     |   |                              |   |   |   |
| Operating loss                                                                                           |   | (1,547                            | )      | (2,005 | ) |
|                                                                                                     |   |                              |   |   |   |
| Interest income, net                                                                                     |   | 14                                |   | 35 |   |
| Other  income (expense), net                                                                             |   | (8                                | )      | 25 |   |
|                                                                                                     |   |                              |   |   |   |
| Net  loss                                                                                                |   | $                                 | (1,541 | ) | $ | (1,945 | ) |
|                                                                                                     |   |                              |   |   |   |
| Net loss per share:                                                                                      |   |                              |   |   |   |
| Net loss per share – Basic and diluted                                                              |   | $                                 | (0.09  | ) | $ | (0.12 | ) |
|                                                                                                     |   |                              |   |   |   |
| Weighted  average shares outstanding – Basic and diluted                                            |   | 16,471                            |   | 16,433 |   |
|                                                                                                     |   |                              |   |   |   |
|                                                                                                          |   |
| (1)  The following  summarizes the departmental allocation of the stock-based compensation  charge: |   |                              |   |   |   |
| Sales  and marketing                                                                                     |   | $                                 | 39     |   | $ | 44 |   |
| Research  and development                                                                                |   | 44                                |   | 61 |   |
| General  and administrative                                                                              |   | 28                                |   | 45 |   |
| Total  stock-based compensation                                                                          |   | $                                 | 111    |   | $ | 150 |   |

 

The accompanyingnotes are an integral part of these condensed consolidated financialstatements.

 

4

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**RADVIEWSOFTWARE LTD. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(In thousands)**

**(Unaudited)**

** **
|                                                                              |   | **Three Months Ended  March 31,** |   |
|-----------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                              |   | **2003**                          |   | **2002** |   |
| Cash Flows from Operating Activities:                                             |   |                              |   |   |   |
| Net loss                                                                          |   | $                                 | (1,541 | ) | $ | (1,945 | ) |
| Adjustments to reconcile net loss to net cash used in  operating activities— |   |                              |   |   |   |
| Depreciation                                                                      |   | 189                               |   | 238 |   |
| Property and equipment impairment write-off (Note 4)                              |   | —                            |   | 16 |   |
| Amortization of deferred compensation                                             |   | 111                               |   | 150 |   |
| Accrued severance pay                                                             |   | (43                               | )      | (43 | ) |
| Changes in operating assets and liabilities—                                 |   |                              |   |   |   |
| Accounts receivable                                                               |   | 217                               |   | 273 |   |
| Prepaid expenses and other current assets                                         |   | 111                               |   | 93 |   |
| Accounts payable                                                                  |   | 3                                 |   | 83 |   |
| Accrued expenses                                                                  |   | (197                              | )      | (309 | ) |
| Accrued restructuring charge                                                      |   | (70                               | )      | 93 |   |
| Deferred revenue                                                                  |   | 103                               |   | (257 | ) |
| Net cash used in operating activities                                             |   | (1,117                            | )      | (1,608 | ) |
|                                                                              |   |                              |   |   |   |
| Cash Flows from Investing Activities:                                             |   |                              |   |   |   |
| Purchases of property and equipment                                               |   | (15                               | )      | (45 | ) |
| Decrease in other assets                                                          |   | 13                                |   | 28 |   |
| Net cash used in investing activities                                             |   | (2                                | )      | (17 | ) |
|                                                                              |   |                              |   |   |   |
| Cash Flows from Financing Activities:                                             |   |                              |   |   |   |
| Proceeds from employee share purchase plan                                        |   | 1                                 |   | — |   |
| Net cash provided by financing activities                                         |   | 1                                 |   | — |   |
|                                                                              |   |                              |   |   |   |
| Decrease in cash and cash equivalents                                             |   | (1,118                            | )      | (1,625 | ) |
|                                                                              |   |                              |   |   |   |
| Cash and cash equivalents, beginning of period                                    |   | 7,566                             |   | 13,182 |   |
| Cash and cash equivalents, end of period                                          |   | $                                 | 6,448  |   | $ | 11,557 |   |
|                                                                              |   |                              |   |   |   |
| Cash paid during period for interest                                              |   | $                                 | 4      |   | $ | 9 |   |

 

The accompanyingnotes are an integral part of these condensed consolidated financialstatements.

 

5

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**RADVIEW SOFTWARE LTD. AND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**(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 historyof incurring net losses and had an accumulated deficit of approximately $49.5million at March 31, 2003.  TheCompany has funded these losses principally from proceeds from equityfinancing.  During the last two years,the Company restructured its business to significantly reduce total operatingexpenses through reductions in workforce and the termination of certainleases.  On April 30, 2003, theCompany further restructured its operations by reducing its workforce,resulting in an approximately 28% reduction of quarterly operatingexpenses.  As a result of therestructuring, the Company expects to record a restructuring charge of approximately$250,000 in the second quarter of 2003 relating substantially to severancepayments.  Management believes thatexisting cash and cash equivalents will be adequate to fund operations throughMarch 31, 2004.

 

**2. ****Significant Accounting 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.

 

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 andlosses from the above-mentioned translation (which were immaterial for allperiods presented) are reflected in the statements of operations.  The representative rate of exchange was U.S.$1.00 to 4.687 New Israeli Shekel (“NIS”) at March 31, 2003, U.S. $1.00 to NIS4.737 at December 31, 2002, and U.S. $1.00 to NIS 4.668 at March 31, 2002.

 

6

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*(c)  Interim Financial Statements*

* *

The accompanying condensed consolidated balancesheet as of March 31, 2003, the condensed consolidated statements of operationsand the condensed consolidated statements of cash flows for the three monthsended March 31, 2003 and 2002, are unaudited but, in the opinion of management,include all adjustments necessary for a fair presentation of results for theseinterim periods.  Certain informationand footnote 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 months ended March 31, 2003 are not necessarilyindicative of the results to be expected for the entire fiscal year.  These financial statements should be read inconjunction with the annual consolidated financial statements for 2002 andrelated notes included in the Company’s Form 10-K filed with the SEC on March26, 2003.

 

*(d)*       Research and Development Cost

 

The Company has evaluatedthe establishment of technological feasibility of its products in accordancewith SFAS No. 86, *Accounting for the Costsof Computer Software to Be Sold, Leased or Otherwise Marketed*.  The Company sells products in a market thatis subject to rapid technological change, new product development and changingcustomer needs.  Accordingly, theCompany has concluded that technological feasibility is not established untilthe development stage of the product is nearly complete.  The Company defines technologicalfeasibility as the completion of a working model.  The time period during which costs could be capitalized from thepoint of reaching technological feasibility until the time of general productrelease is very short.  Consequently,the amounts that could be capitalized are not material to the Company’sfinancial position or results of operations. Therefore, the Company has charged all such costs to research anddevelopment expense in the period incurred.

 

*(e)  Revenue Recognition*

* *

The Company recognizesrevenue in accordance with Statement of Position (“SOP”) 97-2, *Software Revenue Recognition,* and SOP98-9, *Modificationof SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions*.  ****SOP 98-9********requires the use of the residual methodfor recognition of revenues when vendor-specific objective evidence exists forundelivered elements but does not exist for delivered elements of a softwarearrangement. If fair value for a delivered element does not exist but the fairvalue does exist for all undelivered elements, the Company defers the fairvalue of the undelivered elements and recognizes the remaining value for thedelivered elements.

 

Revenues from softwareproduct licenses are recognized upon delivery of the software provided there ispersuasive evidence of an agreement, the fee is fixed or determinable andcollection of the related receivable is probable. Revenues undermultiple-element arrangements, which may include software, software maintenanceand training, are allocated to each element based on their respective fairvalues, based on vendor-specific objective evidence. This objective evidencerepresents the price of products and services when sold separately. Revenue isrecognized for software licenses sold to resellers or distributors at the timeof shipment, provided that all revenue recognition criteria set forth in SOP97-2 are fulfilled.

 

Revenues from softwaremaintenance agreements are recognized ratably over the term of the maintenanceperiod, which is typically one year. Revenues from training arrangements arerecognized as the services are performed.

 

The Company generallydoes not grant a right of return to its customers.  When a right of return exists, revenue is deferred until theright of return expires, at which time revenue is recognized provided that allother revenue recognition criteria are met.

 

Amounts collected orbilled prior to satisfying the above revenue recognition criteria are reflectedas deferred revenue.  Deferred revenueprimarily represents deferred maintenance revenue.

 

7

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*(f)*           Employee Stock Options

 

At March 31, 2003, the Company has three stock optionplans.  The Company accounts for thoseplans under the recognition and measurement principles of Accounting PrinciplesBoard Opinion No. 25 *Accounting for StockIssued to Employees* and related interpretations (collectively “APBNo. 25”).  Stock-based compensationincluded in the reported net loss relates to stock options issued to employeesat an exercise price below the market price on the date of grant.  The following table illustrates the effecton net loss and earnings per share if the Company had applied the fair valuerecognition provisions of SFAS No. 123, *Accountingfor Stock-Based Compensation*, to stock-based employee compensation.

 
|                                                                                 |   | **Three Months Ended  March 31,** |   |
|--------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                                 |   | **2003**                          |   | **2002** |   |
|                                                                                 |   | **(In thousands)**                |   |
|                                                                                 |   |                              |   |   |   |
| Net loss attributable to ordinary  shareholders, as reported                         |   | $                                 | (1,541 | ) | $ | (1,945 | ) |
| Add:   Stock-based compensation included in reported net loss                   |   | 111                               |   | 150 |   |
| Deduct:   Total stock-based compensation expense under fair value based methods |   | (238                              | )      | (294 | ) |
| Pro forma net loss attributable to ordinary  shareholders                            |   | $                                 | (1,668 | ) | $ | (2,089 | ) |
|                                                                                 |   |                              |   |   |   |
| Net loss per share attributable to ordinary  shareholders:                           |   |                              |   |   |   |
| As reported                                                                          |   | $                                 | (0.09  | ) | $ | (0.12 | ) |
| Pro forma                                                                            |   | $                                 | (0.10  | ) | $ | (0.13 | ) |

 

**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 share was determined bydividing net loss attributable to ordinary shareholders by the weighted averageordinary shares outstanding during the period.  Diluted net loss per ordinary share is the same as basic net lossper ordinary share for all periods presented, as the effects of the Company’spotential additional ordinary shares were antidilutive.

 

The calculation of diluted net loss per shareexcludes outstanding stock options because their inclusion would beantidilutive.  There were approximately5,110,000 stock options outstanding at March 31, 2003 and approximately2,809,000 stock options outstanding at March 31, 2002.

 

8

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**4. ****Nonrecurring Expenses**

 

The following is areconciliation of the accrued restructuring charges for the three-month periodsended March 31, 2002 and 2003.

 
| **Description**                   |   | **Balance,  Beginning  of Period** |   | **Provision** |   | **Payments  and  Write-offs** |   | **Balance,  End of Period** |   |
|-----------------------------------|--------|------------------------------------|--------|---------------|--------|-------------------------------|--------|-----------------------------|--------|
|                              |   | **(In thousands)**                 |   |
| **Three Months Ended-**           |   |                               |   |          |   |                          |   |                        |   |
| **March 31, 2002:**               |   |                               |   |          |   |                          |   |                        |   |
| Employee severance costs          |   | $                                  | — |          | $      | 218                           |   | $                           | (177   | ) | $ | 41 |   |
| Idle-lease costs                  |   | 231                                |   | 46            |   | (42                           | )      | 235                         |   |
| Property and equipment impairment |   | —                             |   | 47            |   | (17                           | )      | 30                          |   |
| Vendor contract termination fees  |   | —                             |   | 23            |   | (5                            | )      | 18                          |   |
|                              |   | $                                  | 231    |          | $      | 334                           |   | $                           | (241   | ) | $ | 324 |   |
| **March 31, 2003:**               |   |                               |   |          |   |                          |   |                        |   |
| Employee severance costs          |   | $                                  | — |          | $      | —                        |   | $                           | — |   | $ | — |   |
| Idle-lease costs                  |   | 612                                |   | —        |   | (70                           | )      | 542                         |   |
| Property and equipment impairment |   | —                             |   | —        |   | —                        |   | —                      |   |
| Vendor contract termination fees  |   | —                             |   | —        |   | —                        |   | —                      |   |
|                              |   | $                                  | 612    |          | $      | —                        |   | $                           | (70    | ) | $ | 542 |   |

 

Amountspayable within one year have been classified as a current liability in theaccompanying condensed consolidated balance sheets.

 

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

 

To date, the Company hasviewed its operations and has managed its business as principally one operatingsegment.

 

The Company’s revenues bythe geographic location of the customer are as follows:

 
|           |   | **Three months ended  March 31,** |   |
|----------------|--------|-----------------------------------|--------|
|           |   | **2003**                          |   | **2002** |   |
|           |   | **(in thousands)**                |   |
|           |   |                              |   |   |   |
| United States  |   | $                                 | 778    |   | $ | 884 |   |
| Europe         |   | 174                               |   | 205 |   |
| Israel         |   | 162                               |   | 190 |   |
| Other          |   | 106                               |   | 295 |   |
| Total revenues |   | $                                 | 1,220  |   | $ | 1,574 |   |

 

9

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**MANAGEMENT’S DISCUSSION AND ANALYSIS****OF**

**FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

 

*Statements in this Quarterly Reporton Form 10-Q concerning RadView’s business outlook or future performance;anticipated revenues, expenses or other financial items; product introductionsand plans and objectives related thereto; and statements concerning assumptionsmade or expectations as to any future events, conditions, performance or othermatters, are “forward-looking statements” as that term is defined under U. S.federal securities laws. Forward-looking statements are subject to variousrisks, uncertainties and other factors that could cause actual results todiffer materially from those stated in such statements. These risks,uncertainties and factors include, but are not limited to: our history oflosses; market acceptance of our products; our ability to develop new productsand enhance existing products; impact of significant competition; and otherfactors detailed in RadView’s filings with the Securities and ExchangeCommission, including this Quarterly Report on Form 10-Q.*

 

# **Overview**

 

RadView develops, marketsand supports software that enables companies to assure the scalability,efficiency and reliability of web applications.  In 1997, we introduced our first web-testing product, WebLOAD,which was initially focused on assessing the scalability of webapplications.  Since then, we haveenhanced the functionality of WebLOAD to provide an integrated solution toassess the performance and accelerate the deployment of web applications.  In February 2000, we introduced WebRM, whichis designed to facilitate the systematic verification of web applicationquality throughout the application development lifecycle and to accelerate thedeployment of high performance web applications.  In August 2001, we introduced WebFT, a testing tool forverification of the functionality of web applications.

 

On April 30, 2003, theCompany restructured its operations by reducing its workforce, resulting in anapproximately 28% reduction of quarterly operating expenses.  The Company expects to record arestructuring charge of approximately $250,000 in the second quarter of 2003relating substantially to severance payments. As a result of the restructuring, the Company has appointed Mr. ChristopherDineen as the Chief Financial Officer effective on June 1, 2003.  Mr. Dineen was previously the Company’s VicePresident of Finance.

 

# **Significant Accounting Policies**

 

***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 our policies for revenue recognition andsoftware development costs.

 

***Revenue Recognition***

 

We recognize softwarelicense revenues upon delivery of our software to customers, providedpersuasive evidence of an agreement exists, the fee is fixed or determinableand collection of the related receivable is probable.  We allocate our software license revenues under arrangementswhere we sell software and services together under one contract to each elementbased on our relative fair values, with these fair values being determinedusing the price charged when that element is sold separately.  If fair value for a delivered element doesnot exist but the fair value does exist for all undelivered elements, we deferthe fair value of the undelivered elements and recognize the remaining valuefor the delivered elements.

 

We generally recognizesoftware license revenues from resellers or distributors at the time ofshipment, provided that all other revenue recognition criteria set forth ingoverning statements of position on software revenue recognition have been met.  We recognize services revenues from softwaremaintenance agreements ratably over the

 

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term of the maintenance period, typically one year.  We recognize services revenues from trainingas the services are performed. Amounts collected or billed prior to satisfyingthe above revenue recognition criteria are reflected as deferred revenue.

 

***Software Development Costs***

 

We account for softwaredevelopment costs in accordance with SFAS No. 86, *Accounting for the Costs of Computer Software to Be Sold, Leased orOtherwise Marketed*.  Softwaredevelopment costs incurred from the point of reaching technological feasibilityuntil the time of general product release should be capitalized.  We define technological feasibility as thecompletion of a working model.  Becausewe sell our products in a market that is subject to rapid technological change,new product development 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 financialstatements.  Therefore, we have chargedall such costs to research and development expense in the period incurred.

 

***Stock Options***

 

We account for stockoptions issued to employees under the intrinsic method in accordance withAccounting Principles Board, or APB, Opinion No. 25, *Accounting for Stock Issued to Employees*.  Under this approach we do not record anyexpense unless the exercise price is greater than the fair market price of ourordinary shares on the date of grant.  We have provided disclosures of impact to our reported net loss andearnings per share if we had applied the fair value provisions of SFAS No. 123,*Accounting for Stock-Based Compensation*,to stock-based employee compensation.

 

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**Results of Operations**

 

The following table setsforth, as a percentage of total revenues, consolidated statement of operationsdata for the periods indicated:

 
|                         |   | **Three Months Ended****March 31,** |   |
|------------------------------|--------|-------------------------------------|--------|
|                         |   | **2003**                            |   | **2002** |   |
| Revenues:                    |   |                                |   |   |   |
| Software licenses            |   | 54.7                                | %      | 62.1 | % |
| Services                     |   | 45.3                                | %      | 37.9 | % |
| Total  revenues              |   | 100.0                               | %      | 100.0 | % |
|                         |   |                                |   |   |   |
| Cost  of revenues:           |   |                                |   |   |   |
| Software  licenses           |   | 1.6                                 | %      | 0.8 | % |
| Services                     |   | 9.8                                 | %      | 10.2 | % |
| Total  cost of revenues      |   | 11.4                                | %      | 11.0 | % |
|                         |   |                                |   |   |   |
| Gross  profit                |   | 88.6                                | %      | 89.0 | % |
|                         |   |                                |   |   |   |
| Operating  expenses:         |   |                                |   |   |   |
| Sales  and marketing         |   | 100.8                               | %      | 91.4 | % |
| Research  and development    |   | 69.7                                | %      | 54.9 | % |
| General  and administrative  |   | 35.8                                | %      | 39.4 | % |
| Stock-based  compensation    |   | 9.1                                 | %      | 9.5 | % |
| Nonrecurring  charges        |   | 0.0                                 | %      | 21.2 | % |
| Total  operating expenses    |   | 215.4                               | %      | 216.4 | % |
|                         |   |                                |   |   |   |
| Loss  from operations        |   | (126.8                              | )%     | (127.4 | )% |
|                         |   |                                |   |   |   |
| Other  income:               |   |                                |   |   |   |
| Interest  income, net        |   | 1.1                                 | %      | 2.2 | % |
| Other  income (expense), net |   | (0.6                                | )%     | 1.6 | % |
|                         |   |                                |   |   |   |
| Net  loss                    |   | (126.3                              | )%     | (123.6 | )% |

 

**Three Months Ended March 31, 2003 and 2002**

 

***Revenues***

 

*Total Revenues*. Total revenues were $1.2 million for the three months ended March 31,2003 and $1.6 million for the same period in 2002, which represents a decreaseof $354,000, or 22.5%.  Total revenuesdecreased due to declines in both software licenses revenues and servicerevenues.

 

*Software Licenses*. Software license revenues for the three months ended March 31, 2003decreased $311,000, or 31.8%, as compared to the same period in 2002.  This decrease consisted of a decline insoftware license revenues of $73,000 from U.S. customers and $238,000 frominternational customers, both declines resulting from lower unit volume salesattributable to weakness in the global economy and slower technology spending.

 

*Services*.  Service revenues for the threemonths ended March 31, 2003 decreased $43,000, or 7.2%, as compared to the sameperiod in 2002.  This decrease consistedof a decline in services revenues of $49,000 from U.S. customers, offset by a$6,000 increase of services revenues from international customers.  The decrease in U.S. service revenuesresulted from the decline in maintenance services and training services thattypically accompany

 

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software license orders.  Theincrease in international service revenues resulted from providing support andmaintenance services to a larger installed customer base internationally.

 

***Cost of Revenues***

 

*Cost of Software Licenses*. Cost of software licenses consistsprincipally of direct product costs, such as product media and packaging, aswell as royalties due to third parties. Cost of software licenses increased from $13,000, or 1.3% of softwarelicense revenue, for the three months ended March 31, 2002 to $20,000, or 3.0%of software license revenue, for the same period in 2003.  The increase was due to increased royaltiesdue to third party software vendors.

 

*Cost of Services*. Cost of services consists principally ofpersonnel-related costs associated with customer support and training.  Cost of services decreased from $160,000, or26.8% of service revenue, for the three months ended March 31, 2002 to$119,000, or 21.5% of service revenue, for the same period in 2003.  The decrease was due to reduced personnelcosts to provide support and maintenance services resulting from the headcountreductions taken in the first quarter of 2002.

 

***Operating Expenses***

 

*Sales and Marketing*. Sales and marketing expenses consist principally of salaries andcommissions earned by sales personnel, travel and marketing program costs suchas trade shows, advertising and product promotion.  Sales and marketing expenses decreased from $1.4 million, or91.4% of total revenues, for the three months ended March 31, 2002 to $1.2million, or 100.8% of total revenues, for the same period in 2003.  The decrease in absolute dollars was dueprimarily to headcount reductions of sales and marketing personnel during thefirst quarter of 2002.

 

*Research and Development*. Research and development expenses consist principally of salaries andrelated expenses required to develop and enhance the Company’s products.  Research and development expenses decreasedfrom $864,000 or 54.9% of total revenues, for the three months ended March 31,2002, to $850,000, or 69.7% of total revenues, for the same period in 2002.  The decrease in absolute dollars was dueprimarily to headcount reductions of research and development personnel duringthe first quarter of 2002.

 

*General and Administrative*. General and administrative expenses consist principally of finance,executive and administrative salaries and related expenses, professional feesand other costs associated with being a public company.  General and administrative expensesdecreased from $620,000, or 39.4% of total revenues, for the three months endedMarch 31, 2002 to $437,000, or 35.8% of total revenues, for the same period in2003.  The decrease in absolute dollarswas due to lower professional fees incurred in 2003 as compared to 2002.

 

*Stock-based Compensation*. Stock-based compensation expense reflectsthe accounting charge relating to the issuance of equity instruments toemployees at an exercise price below fair market value and to all equityinstruments issued to nonemployees.  Forstock options granted to employees, the difference between the exercise priceand the estimated fair value of the ordinary shares on the date options aregranted is charged to operations as stock-based compensation expense over thevesting period of the underlying options. For stock options granted to nonemployees, the value of a particulargrant as determined by the Black-Scholes valuation model is charged tooperations as stock-based compensation expense over the service period orvesting period of the underlying option. Stock-based compensation expense was $111,000 for the three months endedMarch 31, 2003 compared to $150,000 for the same period in 2002.  These decreases resulted from the forfeitureof employee stock options for terminated employees for whom stock-basedcompensation was originally recorded.

 

Deferredcompensation on the unvested options is included as a component ofshareholders’ equity and amortized to stock-based compensation expense over thevesting period of the underlying options. Deferred stock-based compensation totaled $399,000 at March 31, 2003,and will result in additional charges to operations through May 2004.

 

*Nonrecurring Expenses*. Nonrecurring expenses totaled $334,000 for the three months ended March31, 2002 and consisted of restructuring charges.  The restructuring charge was incurred in January 2002, when we

 

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implemented additional restructuring plans in an effort to loweroperating costs.  The restructuringplans and related charges recorded in the first quarter of 2002 consisted ofseverance costs for terminated employees of $218,000, lease termination costsof $46,000, fixed asset impairment and other costs of $70,000.  A total of 26 employees were terminated, orapproximately 27% of the then current workforce, of whom 13 employees were fromsales and marketing, 11 employees were from research and development, and twoemployees were from general and administrative.

 

*Interest Income, Net*. Interest income, net consists principallyof interest earned on cash investments. Interest income, net was $14,000 for the three months ended March 31,2003 compared to $35,000 for the same period in 2002.  The decreases in interest income resulted from lower investedcash balances and lower interest rates in 2003 as compared to 2002.

 

*Other Income (Expense), Net*. Other income (expense), net consistsprincipally of currency translation gains and losses.  There was other expense of $8,000 for the three months endedMarch 31, 2003 compared to other income of $25,000 for the same period in 2002.  The change was due to exchange ratefluctuations.

 

*Income Taxes.*  The Company has estimated net operating losscarryforwards for Israeli tax purposes totaling approximately $15.0 millionthrough March 31, 2003 that would reduce future Israeli income taxes, if any.These net operating losses may be carried forward indefinitely and offsetagainst future taxable income.  Therewill be no tax benefit available from these losses and no deferred income taxeshave been included in the Company’s financial statements.

 

The Company’s U.S. subsidiary has net operating losscarryforwards for U.S. Federal and state tax purposes totaling approximately$26.5 million through March 31, 2003. These losses are available to offset any future U.S. taxable income ofthe U.S. subsidiary and will expire between 2012 and 2023.  The Company has recorded a full valuationallowance against its deferred tax asset due to the uncertainty surrounding theability and the timing of the realization of these tax benefits.

 

**Liquidity and Capital Resources**

 

Cashand cash equivalents totaled $6.4 million as of March 31, 2003 compared to $7.6million as of December 31, 2002.

 

Cashused in operating activities was $1.1 million for the three months ended March31, 2003 and $1.6 million for the same period in 2002.  Cash used in operating activities forthe three months ended March 31, 2003 was due to a net loss of $1.5 million, adecrease of $43,000 in accrued severance pay, a decrease of $197,000 in accruedexpenses, and a decrease of $70,000 in accrued restructuring charge, offset, inpart, by depreciation of $189,000, amortization of deferred compensation of$111,000, a decrease of $217,000 in accounts receivable, a decrease of $111,000in prepaid expenses, an increase in accounts payable of $3,000, and an increasein deferred revenue of $103,000.  Cash used for the three months ended March31, 2002 was due to the net loss of $1.9 million and a decrease of $43,000 inaccrued severance pay, a decrease of $309,000 in accrued expenses, and adecrease of $257,000 in deferred revenue, offset, in part, by depreciation of$238,000, property and equipment impairment write-offs of $16,000, amortizationof deferred compensation of $150,000, a decrease of $273 in accountsreceivable, a decrease of $93,000 in prepaid expenses, an increase of $83,000in accounts payable, and an increase of $93,000 in accrued restructuringcharge.

 

Cashused in investing activities was $2,000 for the three months ended March 31,2003 and $17,000 for the same period in 2002. Cash used in investing activities for the three months ended March 31,2003 was primarily for purchases of $15,000 in property and equipment, offset,in part, by a decrease of $13,000 in other assets.  Cash used in investing activities for the three months endedMarch 31, 2002 was primarily for purchases of $45,000 in property andequipment, offset, in part, by a decrease of $28,000 in other assets.

 

Cashprovided by financing activities was $1,000 for the three months ended March31, 2003.  There was no cash used infinancing activities for the three months ended March 31, 2002.

 

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We lease all of ouroffice facilities under noncancellable operating leases that expire overvarying terms through 2005.  As of March31, 2003, the future total lease payments under these leases were as follows:$440,000 in 2003, $517,000 in 2004, and $166,000 in 2005.

 

Weexpect that operating expenses, as well as planned capital expenditures, willconstitute a material use of our cash resources.  We believe that our existing cash and cash equivalents will besufficient to meet our anticipated needs for working capital and capitalexpenditures for at least the next 12 months. We may find it necessary 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.

 

**ITEM 3.  QUALITATIVE AND QUANTITATIVE DISCLOSURES 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 conductsbusiness in various foreign currencies, primarily in Europe and the MiddleEast.  As a result, the Company isexposed to the effect of foreign currency exchange rate fluctuations on the U.S.dollar value of foreign currency-denominated revenues and expenses.  The Company does not use foreign exchangeforward contracts to hedge its foreign currency denominated receivables.  Looking forward, there can be no assurancethat changes in foreign currency rates, relative to the U.S. dollar, will notmaterially adversely affect the consolidated results of the Company.

 

**ITEM 4.  CONTROLS AND PROCEDURES**

 

**Evaluationof Controls and Procedures**

 

Within 90 days prior tothe filing of this report, under the supervision and with the participation ofthe Company’s management, including the Company’s Chief Executive Officer(“CEO”) and Chief Financial Officer (“CFO”), an evaluation of the effectivenessof the Company’s disclosure controls and procedures was performed. Based onthis evaluation, the CEO and CFO have concluded that the Company’s disclosurecontrols and procedures are effective to ensure that material information isrecorded, processed, summarized and reported by management of the Company on atimely basis in order to comply with the Company’s disclosure obligations underthe Securities Exchange Act of 1934 and the SEC rules thereunder.

 

**Changesin internal controls**

 

There were no significantchanges in the company’s internal controls or in other factors that couldsignificantly affect these controls subsequent to the date of the evaluation.

 

**PARTII - OTHER INFORMATION**

 

**Item2.  Changes in Securities**

 

**(d) Useof Proceeds from Sale of RegisteredSecurities**

 

On August 9, 2000, in connection with our initialpublic offering, the Securities and Exchange Commission declared effective aRegistration Statement on Form F-1 (No. 333-41526) that registered 5,750,000ordinary shares.  The managingunderwriters in the offering were Donaldson Lufkin Jenrette, Wit SoundView,Piper Jaffrey, and DLJdirect.

 

On August 15, 2000, wesold 4,000,000 of such ordinary shares at an initial public offering price of$10.00 per share, generating gross offering proceeds of $40 million.  After deducting $2.8 million in underwritingdiscounts and approximately $1.9 million in other related expenses, the netproceeds to us were approximately $35.3 million.

 

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Through March 31, 2003,we have used $28.8 million of the net proceeds from our initial public offeringas follows:

 

•                  $1.8million for capital expenditures;

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

•                  $3.8million for repayment of principal and accrued interest on long-term debt witha bank;

•                  $100,000for the repurchase of ordinary shares; and

•                  $21.7million for working capital.

 

**Item6.  Exhibits and Reports on Form 8-K**

 

**(a)Exhibit Index**

 

99.1*                                            Certificationpursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002.

 

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*  Filed herewith

 

**(b)Reports on Form 8-K:**

 

No reports on Form 8-Kwere filed in the three-month period ended March 31, 2003.

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities and Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|                     | RADVIEW SOFTWARE LTD.                       |
|--------------------------|---------------------------------------------|
|                     |                                        |
|                     |                                        |
| Date:  May 15, 2003 | /s/ BRIAN E. LECLAIR                        |   |
|                     | Brian E. LeClair                            |
|                     | Vice President and  Chief Financial Officer |

 

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## **CERTIFICATIONS**

 

# **Ilan Kinreich, President and Chief Executive Officer**

 

I, Ilan Kinreich, certifythat:

 

1.             I have reviewed thisquarterly report on Form 10-Q of RadView Software Ltd.;

 

2.             Based on my knowledge,this quarterly report does not contain any untrue statement of a material factor omit to state a material fact necessary to make the statements made, inlight of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.             Based on my knowledge,the financial statements, and other financial information included in thisquarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.             The registrant’s othercertifying officers and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and we have:

 

a)            designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b)           evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)            presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.             The registrant’s othercertifying officers and I have disclosed, based on our most recent evaluation,to the registrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent function):

 

a)            all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)           any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.             The registrant’s othercertifying officers and I have indicated in this quarterly report whether ornot there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 

 
| Date:  May 15, 2003 | /s/ Ilan Kinreich                      |
|--------------------------|----------------------------------------|
|                     | Ilan Kinreich                          |
|                     | President and Chief  Executive Officer |

 

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**Brian E.LeClair, Vice President and Chief Financial Officer**

## ** **

I, Brian E. LeClair,certify that:

 

1.             I have reviewed thisquarterly report on Form 10-Q of RadView Software Ltd.;

 

2.             Based on my knowledge,this quarterly report does not contain any untrue statement of a material factor omit to state a material fact necessary to make the statements made, inlight of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.             Based on my knowledge,the financial statements, and other financial information included in thisquarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.             The registrant’s othercertifying officers and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and we have:

 

a)            designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b)           evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)            presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.             The registrant’s othercertifying officers and I have disclosed, based on our most recent evaluation,to the registrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent function):

 

a)            all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)             any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.             The registrant’s othercertifying officers and I have indicated in this quarterly report whether ornot there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 

 
| Date:  May 15, 2003 | /s/ Brian E. LeClair                        |
|--------------------------|---------------------------------------------|
|                     | Brian E. LeClair                            |
|                     | Vice President and  Chief Financial Officer |

 

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