**UNITED STATES****SECURITIES AND EXCHANGECOMMISSION**

**Washington, DC  20549**

 

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**FORM 10-Q**

 

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| **(Mark One)**                          |
|-----------------------------------------|
|                                    |   |   |
| **ý**                              |   | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                    |   |   |
| **For the Quarter ended June 30, 2003** |
|                                    |   |   |
| **OR**                                  |
|                                    |   |   |
| **o**                                   |   | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                    |
| **0-28252  (Commission File Number)**   |

 

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**BROADVISION,INC.**

(Exact name of registrant as specified in itscharter)

 
| **Delaware**                                                    |   | **94-3184303**                           |
|-----------------------------------------------------------------|--------|------------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  Identification Number) |
|                                                            |   |                                     |
| **585 Broadway,  Redwood City, California**                     |   | **94063**                                |
| (Address of principal executive offices)                        |   | (Zip code)                               |
|                                                            |   |                                     |
| **(650) 542-5100**                                              |
| (Registrant’s telephone number, including area code)       |

 

Indicate bycheck mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15 (d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes   ýNo   o

 

Indicate bycheck mark whether the registrant is an accelerated filer (as defined in Rule12b-2 of the Exchange Act). Yes  o No  ý

 

As of  August 8, 2003, there were 32,889,507 sharesof the Registrant’s Common Stock issued and outstanding.

 

 

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**BROADVISION,INC. AND SUBSIDIARIESFORM 10-QQuarter Ended June 30, 2003**

 

**TABLE OF CONTENTS**

** **
| **PART I.**    | **FINANCIAL INFORMATION**                                                                                                                      |
|----------------|------------------------------------------------------------------------------------------------------------------------------------------------|
| Item 1.        | Financial Statements                                                                                                                           |
|           | Condensed  Consolidated Balance Sheets—June 30, 2003   and December 31, 2002                                                    |
|           | Condensed Consolidated Statements of Operations and  Comprehensive  Income (Loss)—Three and  six months ended June 30, 2003 and 2002 |
|           | Condensed Consolidated Statements of Cash Flows—Six months ended  June 30, 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.        | Quantitative and Qualitative Disclosures  about Market Risk                                                                                    |
| Item 4.        | Controls and Procedures                                                                                                                        |
|           |                                                                                                                                           |
| **PART II.**   | **OTHER INFORMATION**                                                                                                                          |
| Item 1.        | Legal Proceedings                                                                                                                              |
| Item 2.        | Changes in Securities and Use of Proceeds                                                                                                      |
| Item 3.        | Defaults upon Senior Securities                                                                                                                |
| Item 4.        | Submission of Matters to a Vote of Security  Holders                                                                                           |
| Item 5.        | Other Information                                                                                                                              |
| Item 6.        | Exhibits and Reports on Form 8-K                                                                                                               |
|           |                                                                                                                                           |
| **SIGNATURES** |

 

2

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**PARTI.  FINANCIAL INFORMATION**

**Item1.****           Financial Statements**

 

**BROADVISION, INC. ANDSUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEE**TS**(In thousands, except per share data)**

 
|                                                                                                                                                                                      |   | **June 30,  2003** |    | **December 31,  2002** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|---------|-----------------------------|--------|
|                                                                                                                                                                                      |   | **(unaudited)**    |    |                        |   |
| **ASSETS**                                                                                                                                                                                |   |               |    |                        |   |
|                                                                                                                                                                                      |   |               |    |                        |   |
| Cash and cash equivalents                                                                                                                                                                 |   | $                  | 90,772  |                        | $      | 77,386 |   |
| Short-term investments                                                                                                                                                                    |   | 4,756              |    | 24,484                      |   |
| Accounts receivable, less allowance for  doubtful accounts and reserves of   $3,934 as of June 30, 2003 and $5,502 as of December 31, 2002                                           |   | 14,391             |    | 22,917                      |   |
| Prepaids and other                                                                                                                                                                        |   | 5,419              |    | 9,181                       |   |
|                                                                                                                                                                                      |   |               |    |                        |   |
| Total current assets                                                                                                                                                                      |   | 115,338            |    | 133,968                     |   |
|                                                                                                                                                                                      |   |               |    |                        |   |
| Property and equipment, net                                                                                                                                                               |   | 19,671             |    | 26,600                      |   |
| Long-term investments                                                                                                                                                                     |   | —             |    | 587                         |   |
| Restricted cash                                                                                                                                                                           |   | 16,761             |    | 16,704                      |   |
| Equity investments                                                                                                                                                                        |   | 1,922              |    | 2,083                       |   |
| Goodwill and other intangibles, net                                                                                                                                                       |   | 56,434             |    | 57,320                      |   |
| Other assets                                                                                                                                                                              |   | 2,570              |    | 2,874                       |   |
|                                                                                                                                                                                      |   |               |    |                        |   |
| Total assets                                                                                                                                                                              |   | $                  | 212,696 |                        | $      | 240,136 |   |
|                                                                                                                                                                                      |   |               |    |                        |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                             |   |               |    |                        |   |
|                                                                                                                                                                                      |   |               |    |                        |   |
| Bank borrowings and current portion of  long-term debt                                                                                                                                    |   | $                  | 27,968  |                        | $      | 25,977 |   |
| Accounts payable                                                                                                                                                                          |   | 9,224              |    | 8,105                       |   |
| Accrued expenses                                                                                                                                                                          |   | 37,731             |    | 55,787                      |   |
| Unearned revenue                                                                                                                                                                          |   | 9,318              |    | 14,158                      |   |
| Deferred maintenance                                                                                                                                                                      |   | 18,513             |    | 24,325                      |   |
|                                                                                                                                                                                      |   |               |    |                        |   |
| Total current liabilities                                                                                                                                                                 |   | 102,754            |    | 128,352                     |   |
|                                                                                                                                                                                      |   |               |    |                        |   |
| Long-term debt, net of current portion                                                                                                                                                    |   | 1,457              |    | 1,945                       |   |
| Other noncurrent liabilities                                                                                                                                                              |   | 72,704             |    | 68,206                      |   |
|                                                                                                                                                                                      |   |               |    |                        |   |
| Total liabilities                                                                                                                                                                         |   | 176,915            |    | 198,503                     |   |
|                                                                                                                                                                                      |   |               |    |                        |   |
| Commitments and Contingencies (Note 4)                                                                                                                                                    |   |               |    |                        |   |
|                                                                                                                                                                                      |   |               |    |                        |   |
| Stockholders’ equity:                                                                                                                                                                |   |               |    |                        |   |
| Convertible preferred stock, $0.0001 par  value; 10,000 shares authorized; none issued and outstanding                                                                                    |   | —             |    | —                      |   |
| Common stock, $0.0001 par value; 2,000,000  shares authorized; 32,846 shares issued and outstanding as of June 30, 2003  and 32,440 shares issued and outstanding as of December 31, 2002 |   | 3                  |    | 3                           |   |
| Additional paid-in capital                                                                                                                                                                |   | 1,211,240          |    | 1,210,797                   |   |
| Accumulated other comprehensive loss, net  of tax                                                                                                                                         |   | —             |    | 37                          |   |
| Accumulated deficit                                                                                                                                                                       |   | (1,175,462         | )       | (1,169,204                  | )      |
| Total stockholders’ equity                                                                                                                                                           |   | 35,781             |    | 41,633                      |   |
|                                                                                                                                                                                      |   |               |    |                        |   |
| Total liabilities and stockholders’ equity                                                                                                                                           |   | $                  | 212,696 |                        | $      | 240,136 |   |

 

*See Accompanying Notes to CondensedConsolidated Financial Statements*

 

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**BROADVISION, INC. ANDSUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSAND COMPREHENSIVE LOSS(In thousands, except per share amounts; unaudited)**

 
|                                                                                                                                                         |   | **Three Months Ended  June 30,** |   | **Six Months Ended  June 30,** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
|                                                                                                                                                         |   | **2003**                         |   | **2002**                       |   | **2003** |   | **2002** |   |
|                                                                                                                                                         |   |                             |   |                           |   |   |   |   |   |
| **Revenues:**                                                                                                                                                |   |                             |   |                           |   |   |   |   |   |
| Software licenses                                                                                                                                            |   | $                                | 6,824  |                           | $      | 10,309 |   | $ | 14,799 |   | $ | 18,488 |   |
| Services                                                                                                                                                     |   | 14,981                           |   | 19,110                         |   | 31,461 |   | 41,386 |   |
| Total revenues                                                                                                                                               |   | 21,805                           |   | 29,419                         |   | 46,260 |   | 59,874 |   |
|                                                                                                                                                         |   |                             |   |                           |   |   |   |   |   |
| **Cost of  revenues:**                                                                                                                                       |   |                             |   |                           |   |   |   |   |   |
| Cost of software licenses                                                                                                                                    |   | 495                              |   | 903                            |   | 883 |   | 2,003 |   |
| Cost of services                                                                                                                                             |   | 7,177                            |   | 10,422                         |   | 13,735 |   | 22,756 |   |
| Total cost of revenues                                                                                                                                       |   | 7,672                            |   | 11,325                         |   | 14,618 |   | 24,759 |   |
|                                                                                                                                                         |   |                             |   |                           |   |   |   |   |   |
| Gross profit                                                                                                                                                 |   | 14,133                           |   | 18,094                         |   | 31,642 |   | 35,115 |   |
|                                                                                                                                                         |   |                             |   |                           |   |   |   |   |   |
| **Operating  expenses:**                                                                                                                                     |   |                             |   |                           |   |   |   |   |   |
| Research and development                                                                                                                                     |   | 6,063                            |   | 13,006                         |   | 12,214 |   | 26,981 |   |
| Sales and marketing                                                                                                                                          |   | 6,043                            |   | 15,803                         |   | 12,875 |   | 31,981 |   |
| General and administrative                                                                                                                                   |   | 2,413                            |   | 5,009                          |   | 4,701 |   | 11,202 |   |
| Goodwill and intangible  amortization                                                                                                                        |   | —                           |   | 887                            |   | 887 |   | 1,774 |   |
| Restructuring charge                                                                                                                                         |   | 7,817                            |   | 34,565                         |   | 8,852 |   | 39,945 |   |
| Impairment of assets                                                                                                                                         |   | —                           |   | —                         |   | — |   | 2,276 |   |
| Total operating expenses                                                                                                                                     |   | 22,336                           |   | 69,270                         |   | 39,529 |   | 114,159 |   |
|                                                                                                                                                         |   |                             |   |                           |   |   |   |   |   |
| Operating loss                                                                                                                                               |   | (8,203                           | )      | (51,176                        | )      | (7,887 | ) | (79,044 | ) |
|                                                                                                                                                         |   |                             |   |                           |   |   |   |   |   |
| Interest income, net                                                                                                                                         |   | 177                              |   | 1,250                          |   | 592 |   | 1,250 |   |
| Other income (expense),  net                                                                                                                                 |   | 545                              |   | 140                            |   | 1,206 |   | (7,937 | ) |
|                                                                                                                                                         |   |                             |   |                           |   |   |   |   |   |
| Loss before provision for  income taxes                                                                                                                      |   | (7,481                           | )      | (49,786                        | )      | (6,089 | ) | (85,731 | ) |
|                                                                                                                                                         |   |                             |   |                           |   |   |   |   |   |
| Provision for income taxes                                                                                                                                   |   | (114                             | )      | (6,904                         | )      | (169 | ) | (7,081 | ) |
|                                                                                                                                                         |   |                             |   |                           |   |   |   |   |   |
| Net loss                                                                                                                                                     |   | $                                | (7,595 | )                              | $      | (56,690 | ) | $ | (6,258 | ) | $ | (92,812 | ) |
|                                                                                                                                                         |   |                             |   |                           |   |   |   |   |   |
| Basic and diluted loss per  share                                                                                                                            |   | $                                | (0.23  | )                              | $      | (1.77 | ) | $ | (0.19 | ) | $ | (2.91 | ) |
|                                                                                                                                                         |   |                             |   |                           |   |   |   |   |   |
| **Shares  used in computing:**                                                                                                                               |   |                             |   |                           |   |   |   |   |   |
| Basic and diluted shares                                                                                                                                     |   | 32,751                           |   | 32,037                         |   | 32,599 |   | 31,857 |   |
|                                                                                                                                                         |   |                             |   |                           |   |   |   |   |   |
| **Comprehensive  loss:**                                                                                                                                     |   |                             |   |                           |   |   |   |   |   |
| Net loss                                                                                                                                                     |   | $                                | (7,595 | )                              | $      | (56,690 | ) | $ | (6,258 | ) | $ | (92,812 | ) |
| Other comprehensive gain  (loss), net of tax: Unrealized investment gains (losses) less  reclassification adjustment for gains (losses) included in net loss |   | (4                               | )      | (453                           | )      | (37 | ) | 3,940 |   |
| Total comprehensive loss                                                                                                                                     |   | $                                | (7,599 | )                              | $      | (57,143 | ) | $ | (6,295 | ) | $ | (88,872 | ) |

 

*See Accompanying Notes to CondensedConsolidated Financial Statements*

 

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**BROADVISION,INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands; unaudited)**

 
|                                                                          |   | **Six Months  Ended June 30,** |   |
|-------------------------------------------------------------------------------|--------|--------------------------------|--------|
|                                                                          |   | **2003**                       |   | **2002** |   |
| **Cash flows from operating activities:**                                     |   |                           |   |   |   |
| Net loss                                                                      |   | $                              | (6,258 | ) | $ | (92,812 | ) |
| Adjustments to reconcile net loss to net  cash used for operating activities: |   |                           |   |   |   |
| Depreciation and amortization                                                 |   | 6,897                          |   | 10,467 |   |
| Provision (credit) for doubtful accounts  and reserves                        |   | (43                            | )      | 38 |   |
| Amortization of prepaid royalties                                             |   | 726                            |   | 1,849 |   |
| Realized loss on cost method long-term  investments                           |   | 74                             |   | 9,825 |   |
| Amortization of goodwill and other  intangibles                               |   | 887                            |   | 1,774 |   |
| Stock-based compensation charge                                               |   | 49                             |   | 770 |   |
| Restructuring charge, non-cash                                                |   | —                         |   | 18,243 |   |
| Loss on sale of assets                                                        |   | —                         |   | 344 |   |
| Impairment of assets                                                          |   | —                         |   | 2,276 |   |
| Provision for deferred tax asset valuation                                    |   | —                         |   | 6,279 |   |
| Changes in operating assets and  liabilities:                                 |   |                           |   |   |   |
| Accounts receivable                                                           |   | 8,569                          |   | 19,326 |   |
| Prepaids and other                                                            |   | 3,373                          |   | 1,910 |   |
| Accounts payable and accrued expenses                                         |   | (12,564                        | )      | (47,351 | ) |
| Unearned revenue and deferred maintenance                                     |   | (10,652                        | )      | (9,200 | ) |
| Other noncurrent assets                                                       |   | 328                            |   | (387 | ) |
| Net cash used for operating activities                                        |   | (8,614                         | )      | (76,649 | ) |
|                                                                          |   |                           |   |   |   |
| **Cash flows from investing activities:**                                     |   |                           |   |   |   |
| Purchase of property and equipment                                            |   | (127                           | )      | (1,053 | ) |
| Transfer from (to) restricted cash                                            |   | (57                            | )      | 2,575 |   |
| Proceeds from sale of assets                                                  |   | 186                            |   | 247 |   |
| Purchase of long-term investments                                             |   | (2,729                         | )      | (2,349 | ) |
| Sales/maturity of long-term investments                                       |   | 3,403                          |   | 21,186 |   |
| Purchase of short-term investments                                            |   | (2,917                         | )      | (23,453 | ) |
| Sales/maturity of short-term investments                                      |   | 22,586                         |   | 50,255 |   |
| Net cash provided by investing activities                                     |   | 20,345                         |   | 47,408 |   |
|                                                                          |   |                           |   |   |   |
| **Cash flows from financing activities:**                                     |   |                           |   |   |   |
| Proceeds from issuance of common stock, net                                   |   | 394                            |   | 2,795 |   |
| Proceeds from borrowings, net                                                 |   | 1,991                          |   | 25,000 |   |
| Repayments of borrowings                                                      |   | (730                           | )      | (490 | ) |
| Net cash provided by financing activities                                     |   | 1,655                          |   | 27,305 |   |
|                                                                          |   |                           |   |   |   |
| Net increase (decrease) in cash and cash  equivalents                         |   | 13,386                         |   | (1,936 | ) |
| Cash and cash equivalents at beginning of  period                             |   | 77,386                         |   | 75,758 |   |
| Cash and cash equivalents at end of period                                    |   | $                              | 90,772 |   | $ | 73,822 |   |
|                                                                          |   |                           |   |   |   |
| **Supplemental disclosures of cash flow information:**                        |   |                           |   |   |   |
| Cash paid for interest                                                        |   | $                              | 78     |   | $ | 125 |   |
| Cash paid for income taxes                                                    |   | $                              | 829    |   | $ | 803 |   |

 

*See AccompanyingNotes to Condensed Consolidated Financial Statements*

 

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**BROADVISION, INC. ANDSUBSIDIARIESNOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

 

**Note 1.****          Organizationand Summary of Significant Accounting Policies**

 

***Natureof Business***

 

BroadVision develops,markets and supports enterprise portal applications that enable companies tounify their e-business infrastructure and conduct both interactions andtransactions with employees, partners, and customers through a personalizedself-service model that increases revenues, reduces costs, and improvesproductivity. As of June 30 2003, BroadVision had approximately 1,000 customersand government entities around the globe using the Company’s applications tofacilitate their portal-based commerce and information access initiatives.

 

BroadVision was founded in1993 and has been a publicly traded corporation since 1996. BroadVisionpioneered web-based e-commerce and was among the first to offer pre-integrated,packaged applications to power enterprise business portals.

 

BroadVision’s enterpriseportal applications allow organizations to unify and extend their key businessapplications, information, and business processes by taking advantage of thepower of the web and new wireless and mobile devices to allow customers,partners, and employees to do business on their own terms, in a personalizedand collaborative way.  BroadVisionsolutions allow multiple constituents to serve themselves from anywhere, atanytime, through any web device. BroadVision enterprise portal applications enable organizations to createbusiness value by transforming the way they do business; moving businessinteractions and transactions from a manual, human-assisted paradigm to anautomated, personalized self-service model that enhances growth, reduces costsand improves productivity.

 

The Company believes itsproducts improve its customers’ revenue opportunities by enabling them toestablish more effective and efficient one-to-one relationships with theircustomers and business partners. Web and wireless users are engaged by highlypersonalized real-time interactions, able to transact business securely andencouraged to remain online and make return visits.  The Company’s applications also improve the cost-effectiveness ofone-to-one relationship management by enabling non-technical managers to modifybusiness rules and content in real-time and by helping to reduce the cost ofcustomer acquisition and retention, business development, technical support andemployee workplace initiatives. Because the Company provides pre-integrated, packagedsolutions, time to deployment is shorter and customers are able to manage andmaintain their web and wireless applications in a cost-effective manner.Because of the Company’s commitment to open standards and open architecture,BroadVision applications integrate with its customers’ existing systems andexpand as its customers’ needs and businesses grow.

 

Supportingthis application infrastructure, as of June 30, 2003, are more than 100 partnerfirms around the world who are working to ensure the Company’s joint customers’success through complementary technology, applications, tools and servicesofferings that extend and enhance BroadVision customers’ implementations.

 

BroadVision markets itsproducts and services worldwide through a direct sales force and independentdistributors, value-added resellers (“VARs”) and application service providers(“ASPs”). In addition, its sales are promoted through independent professionalconsulting organizations, known as systems integrators. The Company has operationsin North America, Europe, and Asia/Pacific.

 

BroadVision Global Services(“BVGS”) organization provides a full spectrum of global services to helpensure success for businesses, including strategic services, implementationservices, migration services and ongoing training and maintenance.

 

***Basisof Presentation and Use of Estimates***

 

The accompanyingconsolidated financial statements include the accounts of the Company and itswholly-owned subsidiaries. All significant intercompany transactions have been eliminatedin consolidation.  In the Company’s opinion, the consolidated financialstatements presented herein include all necessary adjustments, consisting ofnormal recurring adjustments, to fairly state the Company’s financial position,results of operations and cash flows for the periods indicated. The preparation of consolidated financial statements in conformity withgenerally accepted accounting principles in the United States of Americarequires management to make certain assumptions and estimates that affectreported amounts of assets and liabilities as of the date of the financialstatements and the reported amounts

 

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of revenues and expenses duringthe reporting period.  Actual results could differ from estimates. The financial results and related information as of June 30, 2003 and for thethree and six months ended June 30, 2003 and 2002 are unaudited. Theconsolidated balance sheet at December 31, 2002 has been derived from theaudited consolidated financial statements as of that date but does notnecessarily reflect all of the informational disclosures previously reported inaccordance with generally accepted accounting principles in the United Statesof America.

 

The accompanying condensedconsolidated financial statements should be read in conjunction with theconsolidated financial statements and notes thereto included with the Company’sForm 10-K and other documents that have been filed with the Securities andExchange Commission (“SEC”). The results of the Company’s operations for theinterim periods presented are not necessarily indicative of operating resultsfor the full fiscal year or any future periods.

 

***Revenue Recognition***

 

*Overview*

 

The Company’s revenueconsists of fees for licenses of the Company’s software products, maintenance,consulting services and customer training. The Company generally charges feesfor licenses of its software products either based on the number of personsregistered to use the product or based on the number of Central ProcessingUnits (“CPUs”) on which the product is installed. The Company’s revenuerecognition policies comply with the provisions of Statement of Position(“SOP”) No. 97-2, *Software RevenueRecognition*, as amended; SOP No. 98-9, *Software Revenue Recognition, With Respect to Certain Transactions*andthe SEC’s Staff Accounting Bulletin No. 101, *RevenueRecognition in Financial Statements*.

 

*SoftwareLicense Revenue*

 

The Company licenses itsproducts through its direct sales force and indirectly through resellers. Ingeneral, software license revenues are recognized when a non-cancelable licenseagreement has been signed under which the customer acknowledges anunconditional obligation to pay, the software product has been delivered, thereare no uncertainties surrounding product acceptance, the fees are fixed anddeterminable and collection is considered probable. Delivery is considered tohave occurred when title and risk of loss have been transferred to thecustomer, which generally occurs when media containing the licensed programs isprovided to a common carrier. In the case of electronic delivery, deliveryoccurs when the customer is given access to the licensed programs. Ifcollectibility is not considered probable, revenue is recognized when the feeis collected.  Subscription-basedlicense revenues are recognized ratably over the subscription period. TheCompany enters into reseller arrangements that typically provide for sublicensefees payable to the Company based upon a percentage of list price. The Companydoes not grant its resellers the right of return.

 

The Company recognizesrevenue using the residual method pursuant to the requirements of SOP No. 97-2,as amended by SOP No. 98-9. Revenues recognized from multiple-element softwarearrangements are allocated to each element of the arrangement based on the fairvalues of the elements, such as licenses for software products, maintenance,consulting services or customer training. The determination of fair value isbased on objective evidence, which is specific to the Company. The Companylimits its assessment of objective evidence for each element to either theprice charged when the same element is sold separately or the price establishedby management having the relevant authority to do so, for an element not yetsold separately. If evidence of fair value of all undelivered elements existsbut evidence does not exist for one or more delivered elements, then revenue isrecognized using the residual method. Under the residual method, the fair valueof the undelivered elements is deferred and the remaining portion of thearrangement fee is recognized as revenue.

 

The Company records deferredrevenue for software license agreements when cash has been received from thecustomer and the agreement does not qualify for revenue recognition underthe Company’s revenuerecognition policy. The Company records accounts receivable for softwarelicense agreements when the agreement qualifies for revenue recognition butcash or other consideration has not been received from the customer.

 

*ServicesRevenue*

 

Consulting services revenuesand customer training revenues are recognized as such services are performed.Maintenance revenues, which include revenues bundled with software licenseagreements that entitle the customers to technical support and futureunspecified enhancements to the Company’s products, are deferred and recognizedratably over the related agreement period, generally twelve months.  The Company’s consulting services, whichconsist of consulting, maintenance and training, are delivered through BVGS. Thisgroup provides consulting services, manages

 

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projects and clientrelationships, manages the needs of our partner community, provides training-relatedservices to employees, customers and partners, and also provides softwaremaintenance services, including technical support, to our customers andpartners. We record reimbursement by our customers for out-of-pocket expensesas a component of services revenue.  Servicesthat the Company provides are not essential to the functionality of thesoftware.

 

***Stock Split***

 

On July 24, 2002, theCompany announced that its Board of Directors had approved a one-for-ninereverse split of the Company’s common stock. The reverse split was effectiveJuly 29, 2002. Each nine shares of outstanding common stock of the Companyautomatically converted into one share of common stock. The accompanyingconsolidated financial statements and related financial information containedherein have been retroactively restated to give effect for this stock split.

 

***Employee Stock Option and Purchase Plans***

 

The Companyaccounts for employee stock-based awards in accordance with the provisions ofAccounting Principles Board (“APB”) Opinion No. 25, *Accounting for Stock Issued to Employees*,Financial Accounting Standards Board Interpretation No. 44 (“FIN 44”), *Accounting for Certain Transactions Involving StockCompensation—an Interpretation of APB No. 25, and related interpretations*.As such, compensation expense is recorded on the date of grant only if thecurrent market price of the underlying stock exceeded the exercise price onsuch date. Pursuant to Statement of Financial Accounting Standards (“SFAS”)No. 123, *Accounting for Stock-BasedCompensation*, the Company discloses the pro forma effects of usingthe fair value method of accounting for stock-based compensation arrangements.The Company accounts for equity instruments issued to non-employees inaccordance with the provisions of SFAS No. 123 and Emerging Issues TaskForce (“EITF”) 96-18, *Accounting for EquityInstruments That Are Issued to Other Than Employees For Acquiring or inConjunction with Selling Goods or Services*.

 

The Companyapplies APB Opinion Number 25, *Accountingfor Stock Issued to Employees*, and related interpretations whenaccounting for its stock option and stock purchase plans. In accordance withAPB No. 25, the Company applies the intrinsic value method in accountingfor employee stock options. Accordingly, the Company generally recognizes nocompensation expense with respect to stock-based awards to employees.

 

Duringthe six months ended June 30, 2003, the Company recorded compensation expenseof $49,000. This charge was recorded as a result of granting a third-partyconsultant common stock in the Company. The charge was calculated based upon the market value of the underlyingstock.  During the six months ended June30, 2002, the Company recorded compensation expense of $770,000. This chargewas recorded as a result of granting terminated employees continued vesting oftheir stock options for a period beyond their actual termination date. Thecompensation charge was calculated using the Black-Scholes model.

 

TheCompany has determined pro forma information regarding net income and earningsper share as if it had accounted for employee stock options under the fairvalue method as required by SFAS Number 123, Accounting for Stock Compensation.The fair value of these stock-based awards to employees was estimated using theBlack-Scholes option pricing model. Had compensation cost for the Company’sstock option plan and employee stock purchase plan been determined consistentwith SFAS No. 123, the Company’s reported net loss and net loss per sharewould have been changed to the amounts indicated below (in thousands except pershare data, unaudited):

 
|                                                                                                                                          |   | **Three Months Ended****June 30,** |    | **Six Months Ended  June 30,** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------|---------|--------------------------------|--------|
|                                                                                                                                          |   | **2003**                           |    | **2002**                       |   | **2003** |   | **2002** |   |
| Net loss as reported                                                                                                                          |   | $                                  | (7,595  | )                              | $      | (56,690 | ) | $ | (6,258 | ) | $ | (92,812 | ) |
| Add: Stock-based employee compensation  expense included in reported net loss, net of related tax effects                                     |   | —                             |    | 162                            |   | 49 |   | 770 |   |
| Deduct: Total stock-based employee  compensation expense determined under fair value based method for all awards,  net of related tax effects |   | (3,055                             | )       | (11,245                        | )      | (3,432 | ) | (34,993 | ) |
| Pro forma net loss                                                                                                                            |   | $                                  | (10,650 | )                              | $      | (67,773 | ) | $ | (9,641 | ) | $ | (127,035 | ) |
|                                                                                                                                          |   |                               |    |                           |   |   |   |   |   |
| Loss per share:                                                                                                                               |   |                               |    |                           |   |   |   |   |   |
| Basic—as reported                                                                                                                        |   | $                                  | (0.23   | )                              | $      | (1.77 | ) | $ | (0.19 | ) | $ | (2.91 | ) |
| Basic—pro forma                                                                                                                          |   | $                                  | (0.33   | )                              | $      | (2.12 | ) | $ | (0.30 | ) | $ | (3.99 | ) |
|                                                                                                                                          |   |                               |    |                           |   |   |   |   |   |
| Diluted—as reported                                                                                                                      |   | $                                  | (0.23   | )                              | $      | (1.77 | ) | $ | (0.19 | ) | $ | (2.91 | ) |
| Diluted—pro forma                                                                                                                        |   | $                                  | (0.33   | )                              | $      | (2.12 | ) | $ | (0.30 | ) | $ | (3.99 | ) |

 

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***Net Loss Per Share***

 

SFAS No. 128, *Earnings PerShare*, requires the presentation of basic and diluted earnings pershare. Earnings per share are calculated by dividing net income available tocommon stockholders by a weighted average number of shares outstanding for theperiod. Basic earnings per share are determined solely on common shares whereasdiluted earnings per share include common equivalent shares, as determinedunder the treasury stock method.

 

The followingtable sets forth basic and diluted earnings per share computational data forthe periods presented (in thousands, except per share amounts, unaudited):

** **
|                                                                                |   | **Three Months Ended****June 30,** |   | **Six Months Ended  June 30,** |   |
|-------------------------------------------------------------------------------------|--------|------------------------------------|--------|--------------------------------|--------|
|                                                                                |   | **2003**                           |   | **2002**                       |   | **2003** |   | **2002** |   |
| Net loss                                                                            |   | $                                  | (7,595 | )                              | $      | (56,690 | ) | $ | (6,258 | ) | $ | (92,812 | ) |
|                                                                                |   |                               |   |                           |   |   |   |   |   |
| Weighted average common shares outstanding  utilized for basic net loss per share   |   | 32,751                             |   | 32,037                         |   | 32,599 |   | 31,857 |   |
| Potential common shares                                                             |   | —                             |   | —                         |   | — |   | — |   |
| Weighted average common shares outstanding  utilized for diluted net loss per share |   | 32,751                             |   | 32,037                         |   | 32,599 |   | 31,857 |   |
| Basic net loss per share                                                            |   | $                                  | (0.23  | )                              | $      | (1.77 | ) | $ | (0.19 | ) | $ | (2.91 | ) |
| Diluted net loss per share                                                          |   | $                                  | (0.23  | )                              | $      | (1.77 | ) | $ | (0.19 | ) | $ | (2.91 | ) |

 

There were148,030 and 139,988 potential common shares excluded from the determination ofdiluted net loss per share for the three and six months ended June 30, 2003,respectively, as the effect of such shares is anti-dilutive. There were 97,277and 337,551 potential common shares excluded from the determination of dilutednet loss per share for the three and six months ended June 30, 2002,respectively, as the effect of such shares is anti-dilutive.

 

***Allowances and Reserves***

 

Occasionally,the Company’s customers experience financial difficulty after the Companyrecords the revenue but before payment has been received. The Company maintainsallowances for doubtful accounts for estimated losses resulting from theinability of its customers to make required payments. The Company’s normalpayment terms are 30 to 90 days from invoice date. If the financialcondition of the Company’s customers was to deteriorate, resulting in animpairment of their ability to make payments, additional allowances may berequired. The Company records reductions to revenue for estimated returns ofproducts by our customers and related allowances. If market conditions were todecline, we may experience larger volumes of returns resulting in anincremental reduction of revenue at the time the return occurs.

 

***Restructuring***

 

The Companyhas approved certain restructuring plans to, among other things, reduce itsworkforce and consolidate facilities. These restructuring charges were taken toalign the Company’s cost structure with changing market conditions and tocreate a more efficient organization. The Company’s restructuring charges arecomprised primarily of: (i) severance and benefits termination costsrelated to the reduction of the Company’s workforce; (ii) leasetermination costs and/or costs associated with permanently vacating itsfacilities; (iii) other incremental costs incurred as a direct result of the restructuringplan; and (iv) impairment costs related to certain long-lived assetsabandoned. The Company accounts for each of these costs in accordance with SECStaff Accounting Bulletin No. 100, *Restructuringand Impairment Charges.*

 

The Companyaccounts for severance and benefits termination costs in accordance with EITFIssue No. 94-3, *Liability Recognitionfor Certain Employee Termination Benefits and Other Costs to Exit an Activity(Including Certain Costs Incurred in a Restructuring)* for exit ordisposal activities initiated prior to December 31, 2002. Accordingly, the

 

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Company records the liabilityrelated to these termination costs when the following conditions have been met:(i) management with the appropriate level of authority approves atermination plan that commits the Company to such plan and establishes thebenefits the employees will receive upon termination; (ii) the benefitarrangement is communicated to the employees in sufficient detail to enable theemployees to determine the termination benefits; (iii) the planspecifically identifies the number of employees to be terminated, theirlocations and their job classifications; and (iv) the period of time toimplement the plan does not indicate changes to the plan are likely. Thetermination costs recorded by the Company are not associated with nor do theybenefit continuing activities.  TheCompany accounts for severance and benefits termination costs for exit ordisposal activities initiated after December 31, 2002 in accordance with SFASNo. 146, *Accounting for Costs Associatedwith Exit Activities*.  SFASNo. 146 requires that a liability for a cost associated with an exit ordisposal activity be recognized and measured initially at fair value only whenthe liability is incurred.  This differsfrom EITF 94-3, which required that a liability for an exit cost be recognizedat the date of an entity’s commitment to an exit plan.

 

Prior to theadoption on January 1, 2003 of SFAS No. 146, the Company accounted for thecosts associated with lease termination and/or abandonment in accordance withEITF 88-10, *Costs Associated with LeaseModification or Termination*. Accordingly, the Company recorded thecosts associated with lease termination and/or abandonment when the leasedproperty has no substantive future use or benefit to the Company.

 

Inherent inthe estimation of the costs related to the Company’s restructuring efforts areassessments related to the most likely expected outcome of the significantactions to accomplish the restructuring. In determining the charge related tothe restructuring, the majority of estimates made by management related tocharges for excess facilities. In determining the charges for excessfacilities, the Company was required to estimate future sublease income, futurenet operating expenses of the facilities, and brokerage commissions, amongother expenses. The most significant of these estimates related to the timingand extent of future sublease income in which to reduce the Company’s leaseobligations. Specifically, in determining the restructuring obligations relatedto facilities as of June 30, 2003, the Company reduced its lease obligations byestimated sublease income of $46.8 million. The Company based itsestimates of sublease income, in part, on the opinions of independent realestate experts, current market conditions and rental rates, an assessment ofthe time period over which reasonable estimates could be made, the status ofnegotiations with potential subtenants, and the location of the respectivefacility, among other factors.

 

Theseestimates, along with other estimates made by management in connection with therestructuring, may vary significantly depending, in part, on factors that maybe beyond the Company’s control. Specifically, these estimates will depend onthe Company’s success in negotiating with lessors, the time periods required tolocate and contract suitable subleases and the market rates at the time of suchsubleases. Adjustments to the facilities reserve will be required if actuallease exit costs or sublease income differ from amounts currently expected. TheCompany will review the status of restructuring activities on a quarterly basisand, if appropriate, record changes to its restructuring obligations in currentoperations based on management’s most current estimates.

 

***Legal Matters***

 

The Company’scurrent estimated range of liability related to pending litigation is based onclaims for which it is probable that a liability has been incurred and the Companycan estimate the amount and range of loss. The Company has recorded the minimumestimated liability related to those claims, where there is a range of loss.Because of the uncertainties related to both the determination of theprobability of an unfavorable outcome and the amount and range of loss in theevent of an unfavorable outcome, the Company is unable to make a reasonableestimate of the liability that could result from the remaining pendinglitigation. As additional information becomes available, the Company willassess the potential liability related to its pending litigation and revise itsestimates, if necessary. Such revisions in the Company’s estimates of thepotential liability could materially impact the Company’s results of operationsand financial position.

 

***Foreign Currency Transactions***

 

The functionalcurrency of the Company’s foreign subsidiaries is the U.S. dollar. Foreignexchange gains and losses resulting from the remeasurement of foreign currencyassets and liabilities are included in other income (expense), net in theCondensed Consolidated Statements of Operations.

 

***Valuation of Long-Lived Assets***

 

The Companyperiodically assesses the impairment of long-lived assets in accordance withthe provisions of SFAS No. 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets*. The Companyassesses the impairment

 

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of goodwill and identifiableintangible assets in accordance with SFAS No. 141, Business Combinationsand SFAS No. 142, Goodwill and Other Intangible Assets.

 

***Fair Value of Financial Instruments***

 

The Company’s financialinstruments consist of cash and cash equivalents, short-term investments,restricted cash, long-term investments, equity investments, accounts receivable,accounts payable and debt. The Company does not have any derivative financialinstruments. The Company believes the reported carrying amounts of itsfinancial instruments approximates fair value, based upon the maturities andnature of its cash equivalents, short-term investments, long-term investments,accounts receivable and payable, and based on the current rates available to iton similar debt issues. Additionally, the Company periodically evaluates thecarrying value of all of its investments for other-than-temporary impairmentwhen events and circumstances indicate that the book value of an asset may notbe recoverable. If such assets are considered to be impaired, the impairment tobe recognized is measured by the amounts by which the carrying amount exceedsits fair market value. The Company’s equity investments are comprised ofinvestments in public and non-public technology-related companies. The Companymay record future impairment charges due to continued economic decline and thepotential resulting negative impact on these companies.

 

***New Accounting Pronouncements***

 

InApril 2002, the FASB issued Statement of Financial Accounting StandardsNo. 145 (“SFAS 145”), “Rescission of FASB Statements No. 4, 44and 64, Amendment of FASB Statement No. 13 and Technical Corrections.”Among other provisions, SFAS 145 rescinds SFAS 4, “Reporting Gains andLosses from Extinguishment of Debt.” Accordingly, gains or losses fromextinguishment of debt shall not be reported as extraordinary items unless theextinguishment qualifies as an extraordinary item under the criteria of APBNo. 30. Gains or losses from extinguishment of debt that do not meet thecriteria of APB 30 should be reclassified to income from continuing operationsin all prior periods presented. SFAS 145 is effective for fiscal yearsbeginning after May 15, 2002. The adoption of SFAS 145, at thebeginning of our fiscal year 2003, did not have a material impact on ourconsolidated financial position, results of operations or cash flows.

 

InJuly 2002, the FASB issued Statement of Financial Accounting StandardsNo. 146 (“SFAS 146”), “Accounting for Costs Associated with Exit orDisposal Activities.” SFAS 146 addresses financial accounting andreporting for costs associated with exit or disposal activities. This statementrequires that a liability for a cost associated with an exit or disposalactivity be recognized when the liability is incurred. Previous guidance,provided under EITF No. 94-3, “Liability Recognition for Certain EmployeeTermination Benefits and Other Costs to Exit an Activity (including certaincosts incurred in a restructuring),” required that an exit cost liability berecognized at the date of an entity’s commitment to an exit plan. The adoptionof SFAS 146, at the beginning of our fiscal year 2003, did not have amaterial impact on our consolidated financial position, results of operationsor cash flows.

 

InDecember 2002, the FASB issued SFAS 148, which provides alternativemethods of transition for a voluntary change to the fair value based method ofaccounting for stock-based employee compensation. In addition, SFASNo. 148 amends the disclosure requirements of Statement 123 to requiremore prominent and more frequent disclosures in financial statements about theeffects of stock-based compensation. The transition guidance and annualdisclosure provisions of SFAS 148 are effective for fiscal years endingafter December 15, 2002. The interim disclosure provisions are effectivefor financial reports containing financial statements for interim periodsbeginning after December 15, 2002. The adoption of SFAS 148 did nothave a material impact on our consolidated financial position, results ofoperations or cash flows. See “Stock-Based Incentive Compensation” for theimpact to our required pro forma disclosures.

 

InNovember 2002, the FASB issued FIN 45, which expands on the accountingguidance of Statements of Financial Accounting Standards No. 5, 57 and 107and incorporates without change the provisions of FASB InterpretationNo. 34, which has been superseded. FIN 45 affects, among other things,leasing transactions involving residual guarantees, vendor and manufacturerguarantees and tax and environmental indemnities. All such guarantees arerequired to be disclosed in the notes to the financial statements starting withthe period ending after December 15, 2002. For guarantees issued afterDecember 31, 2002, the fair value of the obligation must be reported onthe balance sheet. Existing guarantees are permitted to be grandfathered andare not recognized on the balance sheet. The adoption of FIN 45, at thebeginning of our fiscal year 2003, did not have a material impact on ourconsolidated financial position, results of operations or cash flows. Pleasesee Guarantees and Product Warranties for additional disclosures.

 

InJanuary 2003, the FASB issued Interpretation No. 46 (“FIN 46”),“Consolidation of Variable Interest Entities.” FIN 46 expands upon andstrengthens existing accounting guidance that addresses when a company shouldinclude in its financial statements the assets, liabilities and activities ofanother entity. A variable interest entity is a

 

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corporation, partnership,trust, or any other legal structure used for business purposes that either(i) does not have equity investors with voting rights or (ii) hasequity investors that do not provide sufficient financial resources for theentity to support its activities. FIN 46 requires a variable interest entity tobe consolidated by a company if that company is subject to a majority of therisk of loss from the variable interest entity’s activities or is entitled toreceive a majority of the entity’s residual returns or both. The consolidationrequirements of FIN 46 apply immediately to variable interest entities createdafter January 31, 2003. The consolidation requirements apply to olderentities in the first fiscal year or interim period beginning afterJune 15, 2003. Disclosure requirements apply to any financial statementsissued after January 31, 2003. We do not expect the adoption ofSFAS 146 to have a material impact on our consolidated financial position,results of operations or cash flows.

 

InApril 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133on Derivative Instruments and Hedging Activities.” SFAS 149 amends andclarifies the accounting for derivative instruments, including certainderivative instruments embedded in other contracts, and for hedging activitiesunder SFAS 133, “Accounting for Derivative Instruments and HedgingActivities.” SFAS 149 is generally effective for contracts entered into ormodified after June 30, 2003 and for hedging relationships designatedafter June 30, 2003. We are currently evaluating the impact ofSFAS 149 on our consolidated financial position and results of operations.We do not expect the adoption of SFAS 149 to have a material impact on ourconsolidated financial position, results of operations or cash flows.

 

InMay 2003, the FASB issued SFAS 150, “Accounting for Certain FinancialInstruments with Characteristics of both Liabilities and Equity.” SFAS 150requires that certain financial instruments, which under previous guidance wereaccounted for as equity, must now be accounted for as liabilities. Thefinancial instruments affected include mandatorily redeemable stock, certainfinancial instruments that require or may require the issuer to buy back someof its shares in exchange for cash or other assets and certain obligations thatcan be settled with shares of stock. SFAS 150 is effective for allfinancial instruments entered into or modified after May 31, 2003, andotherwise is effective at the beginning of the first interim period beginningafter June 15, 2003. We do not expect the adoption of SFAS 150 tohave a material impact on our consolidated financial position, results ofoperations or cash flows.

 

**Note2.****          SelectiveBalance Sheet Detail**

 

Property andequipment consisted of the following (in thousands):

 
|                                            |   | **June 30,  2003** |   | **December 31,  2002** |   |
|-------------------------------------------------|--------|--------------------|--------|-----------------------------|--------|
|                                            |   | **(unaudited)**    |   |                        |   |
| Furniture and fixtures                          |   | $                  | 9,149  |                        | $      | 9,138 |   |
| Computers and software                          |   | 49,520             |   | 49,579                      |   |
| Leasehold improvements                          |   | 21,445             |   | 21,456                      |   |
|                                            |   | 80,114             |   | 80,173                      |   |
| Less accumulated depreciation and  amortization |   | (60,443            | )      | (53,573                     | )      |
|                                            |   | $                  | 19,671 |                        | $      | 26,600 |   |

 

Accruedexpenses consisted of the following (in thousands):

 
|                       |   | **June 30,  2003** |   | **December  31,  2002** |   |
|----------------------------|--------|--------------------|--------|-------------------------|--------|
|                       |   | **(unaudited)**    |   |                    |   |
| Employee benefits          |   | $                  | 2,094  |                    | $      | 2,081 |   |
| Commissions and bonuses    |   | 1,135              |   | 2,027                   |   |
| Sales and other taxes      |   | 7,518              |   | 11,956                  |   |
| Restructuring (See Note 6) |   | 18,461             |   | 29,056                  |   |
| Other                      |   | 8,523              |   | 10,667                  |   |
|                       |   | $                  | 37,731 |                    | $      | 55,787 |   |

 

Othernoncurrent liabilities consisted of the following (in thousands):

 
|                       |   | **June 30,  2003** |   | **December 31,  2002** |   |
|----------------------------|--------|--------------------|--------|-----------------------------|--------|
|                       |   | **(unaudited)**    |   |                        |   |
| Restructuring (See Note 6) |   | $                  | 71,796 |                        | $      | 67,139 |   |
| Other                      |   | 908                |   | 1,067                       |   |
|                       |   | $                  | 72,704 |                        | $      | 68,206 |   |

 

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**Note3.****          CommercialCredit Facilities**

 

The Companyhas various credit facilities with a commercial lender which include term debtin the form of notes payable and a revolving line of credit. The amountavailable under the revolving line of credit is $27.0 million.Borrowings are collateralized by all of the Company’s assets and bear interestat the bank’s prime rate (floating with a floor of 4.25%). Interest is duemonthly and principal is due at expiration in February 2004. The amended andrestated loan and security agreement requires us to maintain certain levels incash and cash equivalents, short-term investments and long-term investments(excluding equity investments). Additionally, the amended and restated loan andsecurity agreement requires us to maintain certain levels on deposit with ourcommercial lender and certain quarterly operating levels and ratios.  At June 30, 2003 and December 31, 2002,$27.0 million and $25.0 million was outstanding under the line of credit,respectively.

 

As of June 30,2003, the Company was not in compliance with the profitability covenant of thecommercial credit facilities.  TheCompany is negotiating a waiver regarding non-compliance, which it believes itwill obtain in the three-month period ending September 30, 2003.

 

As of June 30,2003 and December 31, 2002, outstanding term debt borrowings were approximately$2.4 million and $2.9 million, respectively. Borrowings bear interest at the bank’s prime rate (4.00% as of June 30,2003 and December 31, 2002) and prime rate plus 1.25%. Principal and interestare due in monthly payments through maturity based on the terms of thefacilities. Principal payments of $977,000 are due annually from 2000 through2004, $611,000 due in 2005, and a final payment of $357,000 due in 2006.

 

Commitmentstotaling $16.8 million and $16.7 million in the form of standby letters ofcredit were issued on the Company’s behalf from financial institutions as ofJune 30, 2003 and December 31, 2002, respectively, in favor of the Company’svarious landlords to secure obligations under the Company’s facility leases.

 

**Note4.****          Commitmentsand Contingencies**

 

In November 2002, the FASBissued FASB Interpretation No. 45 (“FIN 45”), *Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others—an interpretation of FASB Statements No.5, 57 and 107 and rescission of FIN 34*.  FIN 45 requires that disclosures be made by a guarantor in itsinterim and annual financial statements about its obligations under certainguarantees that it has issued and clarifies that a guarantor is required torecognize, at the inception of a guarantee, a liability for the fair value ofthe obligation undertaken in issuing the guarantee.  FIN 45 does not apply to certain guarantee contracts, such asresidual value guarantees provided by lessees in capital leases, guaranteesthat are accounted for as derivatives, guarantees that represent contingentconsideration in a business combination, guarantees issued between eitherparents and their subsidiaries or corporations under common control, a parent’sguarantee of a subsidiary’s debt to a third party, and a subsidiary’s guaranteeof the debt owed to a third party by either its parent or anothersubsidiary  of that parent.  This interpretation is effective on aprospective basis for guarantees issued or modified after December 31, 2002 andfor financial statements of interim or annual periods ending after December 15,2002.  This interpretation did not havea material impact on the Company’s financial position or results of operations.

 

On February 15, 2002,BroadVision and Hewlett-Packard signed an agreement, which terminatedHewlett-Packard’s rights to resell BroadVision software effective February 15,2002. In the event BroadVision becomes insolvent, files a petition for reliefunder the United States Bankruptcy Code, or materially breaches the agreement,Hewlett-Packard will have rights to a limited term license for BroadVision’sbusiness-to-business customer portals software products and a limited uselicense for BroadVision’s One-to-One Enterprise software product.Hewlett-Packard’s license will be limited in term until such time asHewlett-Packard has received monies for sale of the products up to a maximum of$12.0 million. In addition, the Company will pay back to Hewlett-Packard aportion of the unused prepaid royalty payments, received from Hewlett-Packardin prior periods totaling approximately $2.4 million. The amounts payable underthis agreement are due quarterly and are included in Accrued Liabilities in theaccompanying consolidated balance sheets.

 

*Warranties and Indemnification*

 

The Companyprovides a warranty to its customers that its software will performsubstantially in accordance with documentation typically for a period of90 days following receipt of the software. The Company also indemnifiescertain customers from third-party claims of intellectual property infringementrelating to the use of its products.

 

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Historically, costs related tothese guarantees have not been significant and the Company is unable toestimate the maximum potential impact of these guarantees on its future resultsof operations.

 

The Companyhas agreements whereby it indemnifies its officers and directors for certainevents or occurrences while the officer is, or was, serving in such capacity.The term of the indemnification period is for so long as such officer ordirector is subject to an indemnifiable event by reason of the fact that suchperson was serving in such capacity. The maximum potential amount of futurepayments the Company could be required to make under these indemnificationagreements is unlimited; however, the Company has a director and officerinsurance policy that limits its exposure and enables the Company to recover aportion of any future amounts paid. As a result of the Company’s insurancepolicy coverage, the Company believes the estimated fair value of theseindemnification agreements is insignificant. Accordingly, the Company has noliabilities recorded for these agreements as of either June 30, 2003 orDecember 31, 2002. The Company assesses the need for an indemnification reserveon a quarterly basis and there can be no guarantee that an indemnificationreserve will not become necessary in the future.

 

*Leases*

 

The Company leases itsheadquarters facility and its other facilities under non-cancelable operatinglease agreements expiring through the year 2013. Under the terms of theagreements, the Company is required to pay lease costs, property taxes,insurance and normal maintenance costs.

 

A summary of total futureminimum lease payments as of June 30, 2003, under noncancelable operating leaseagreements is as follows (in thousands):

 
| **Years Ending December 31,** |   | **Operating  Leases** |    |
|------------------------------------|--------|-----------------------|---------|
| 2003                               |   | $                     | 11,484  |   |
| 2004                               |   | 23,320                |    |
| 2005                               |   | 23,586                |    |
| 2006                               |   | 21,204                |    |
| 2007                               |   | 18,372                |    |
| 2008 and thereafter                |   | 88,626                |    |
|                               |   |                  |    |
| Total minimum lease payments       |   | $                     | 186,592 |   |

 

As of June 30,2003, the Company has accrued $89.2 million of estimated future facilitiescosts as a restructuring accrual. See Note 6 below.

 

*EquityInvestment*

 

In January 2000, theCompany  had entered into a limitedpartnership agreement with a venture capital firm under which it is obligatedto contribute capital based upon the periodic funding requirements.  The total capital commitment is $2.0million, of which $900,000 has been contributed through June 30, 2003.  The remaining $1.1 million will becontributed in future periods based upon the capital requirements of the fund.

 

*StandbyLetter of Credit Commitments*

 

As of June 30, 2003, theCompany had $16.8 million of outstanding commitments in the form of standbyletters of credit in favor of the Company’s various landlords to secureobligations under the Company’s facility leases.

 

*Legal Proceedings*

 

On June 7,2001, Verity, Inc. filed suit against the Company alleging copyrightinfringement, breach of contract, unfair competition and other claims. TheCompany has answered the complaint denying all allegations and is defendingitself vigorously. The trial date is set for September 2, 2003 in San Jose,California, in the United States District Court, Northern District, San JoseDivision. The Company is unable to estimate the amount or range of anypotential loss from this matter.

 

During thesecond quarter of 2003, the Company settled a dispute with Avalon Partners,Inc., doing business as Cresa Partners (“Cresa”) with respect to brokercommissions related to the Company’s termination and restructuring of

 

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certain facilities leasesassociated with the Company’s restructuring plans taken during the secondquarter of 2002. Under the terms of the settlement, the Company made a one-timepayment of $2.2 million to Cresa in April 2003.

 

The Company is also subjectto various other claims and legal actions arising in the ordinary course ofbusiness. In the opinion of management, after consultation with legal counsel,the ultimate disposition of these matters is not expected to have a materialeffect on the Company’s business, financial condition or results of operations.Although management currently believes that the outcome of other outstandinglegal proceedings, claims and litigation involving the Company will not have amaterial adverse effect on its business, results of operations or financialcondition, litigation is inherently uncertain, and there can be no assurancethat existing or future litigation will not have a material adverse effect onthe Company’s business, results of operations or financial condition.

 

**Note5.****          Geographic,Segment and Significant Customer Information**

 

The Companyoperates in one segment, electronic business commerce solutions. The Company’sreportable segment includes the Company’s facilities in North and South America(“Americas”), Europe and Asia Pacific and the Middle East (“Asia/Pacific”). TheCompany’s chief operating decision maker is considered to be the Company’sChief Executive Officer (“CEO”). The CEO reviews financial informationpresented on a consolidated basis accompanied by disaggregated informationabout revenues by geographic region and by product for purposes of makingoperating decisions and assessing financial performance.

 

Thedisaggregated revenue information reviewed by the CEO is as follows (unaudited,in thousands):

 
|                |   | **Three  months ended**June 30, |   | **Six  months ended  June 30,** |   |
|---------------------|--------|---------------------------------|--------|---------------------------------|--------|
|                |   | **2003**                        |   | **2002**                        |   | **2003** |   | **2002** |   |
| Software licenses   |   | $                               | 6,824  |                            | $      | 10,309 |   | $ | 14,799 |   | $ | 18,488 |   |
| Consulting services |   | 5,876                           |   | 9,752                           |   | 12,347 |   | 21,440 |   |
| Maintenance         |   | 9,105                           |   | 9,358                           |   | 19,114 |   | 19,946 |   |
| Total revenues      |   | $                               | 21,805 |                            | $      | 29,419 |   | $ | 46,260 |   | $ | 59,874 |   |

 

The Company sells its products and provides services worldwide througha direct sales force and through a channel of independent distributors, VARsand ASPs. In addition, the licenses of the Company’s products are promotedthrough independent professional consulting organizations known as systemsintegrators. The Company provides services worldwide through its BroadVisionGlobal Services Organization and indirectly through distributors, VARs, ASPs,and systems integrators. The Company currently operates in three primarygeographical territories, Americas, Europe and Asia/Pacific.

 

Disaggregatedfinancial information regarding the Company’s products and services andgeographic revenues is as follows (in thousands):

 
|          |   | **Three months ended********June 30,** |   | **Six months ended********June 30,** |   |
|---------------|--------|----------------------------------------|--------|--------------------------------------|--------|
|          |   | **2003**                               |   | **2002**                             |   | **2003** |   | **2002** |   |
|          |   | **(unaudited)**                        |   | **(unaudited)**                      |   | **(unaudited)** |   | **(unaudited)** |   |
| Revenues:     |   |                                   |   |                                 |   |   |   |   |   |
| Americas      |   | $                                      | 10,370 |                                 | $      | 18,852 |   | $ | 23,678 |   | $ | 37,054 |   |
| Europe        |   | 9,648                                  |   | 8,998                                |   | 17,969 |   | 19,841 |   |
| Asia/Pacific  |   | 1,787                                  |   | 1,569                                |   | 4,613 |   | 2,979 |   |
| Total Company |   | $                                      | 21,805 |                                 | $      | 29,419 |   | $ | 46,260 |   | $ | 59,874 |   |

 
|                |   | **June 30,  2003** |   | **December  31,  2002** |   |
|---------------------|--------|--------------------|--------|-------------------------|--------|
|                |   | **(unaudited)**    |   |                    |   |
| Long-Lived  Assets: |   |               |   |                    |   |
| Americas            |   | $                  | 77,241 |                    | $      | 84,727 |   |
| Europe              |   | 735                |   | 1,175                   |   |
| Asia/Pacific        |   | 699                |   | 892                     |   |
| Total Company       |   | $                  | 78,675 |                    | $      | 86,794 |   |

 

During thethree months and six months ended June 30, 2003 and 2002, no single customeraccounted for more than 10% of the Company’s revenues.

 

15

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**Note6.****          RestructuringCharges**

 

The Companyhas approved restructuring plans to, among other things, reduce its workforceand consolidate facilities in an effort to respond to changing marketconditions and to create a more efficient organization.  As a result, pre-tax restructuring chargesof $7.8 million and $34.6 million were recorded during the three months endedJune 30, 2003 and 2002, respectively, to provide for these actions and otherrelated items. The Company recorded the low-end of a range of assumptionsmodeled for the restructuring charges, in accordance with SFAS No. 5, *Accounting for Contingencies*.  Adjustments to the restructuring accrualswill be made in future periods, if necessary, based upon the then-currentactual events, estimates and circumstances.

 

The followingtable summarizes the restructuring accrual activity recorded during the threemonths ended June 30, 2003 (unaudited, in thousands):

** **
|                             |   | **Severance  and Benefits** |   | **Facilities** |   | **Other** |   | **Total** |   |
|----------------------------------|--------|-----------------------------|--------|----------------|--------|-----------|--------|-----------|--------|
| Accrual balances, March 31, 2003 |   | $                           | 1,113  |           | $      | 88,905    |   | $         | 32     |   | $ | 90,050 |   |
| Restructuring charges            |   | 398                         |   | 7,445          |   | (26       | )      | 7,817     |   |
| Cash payments                    |   | (511                        | )      | (7,134         | )      | 34        |   | (7,610    | )      |
| Accrual balances, June 30, 2003  |   | $                           | 1,000  |           | $      | 89,216    |   | $         | 40     |   | $ | 90,257 |   |

 

Included in the cash payments for the quarterwas a brokerage commission of $2.2 million paid to settle a prior dispute.  The nature of the charges summarized aboveis as follows:

 

Severance and benefits – As of June 30, 2003,the Company has accrued $1.0 million of estimated severance and benefits costsas a restructuring accrual.  These costsrepresent severance, payroll taxes and COBRA benefits related to restructuringplans implemented prior to June 30, 2003. The Company recorded a related charge of $398,000 during the threemonths ended June 30, 2003.  This charge related to workforce reductionsas a component of the Company’s restructuring plans executed during thequarter.  The Company estimates that the $1.0 million accrual will be paidin full by June, 2004.

 

Facilities – As of June 30, 2003, the Companyhas accrued $89.2 million of estimated future facilities costs as arestructuring accrual.  Of this accrual,$70.4 million relates to future minimum lease payments, net of estimatedsublease income and planned company occupancy, and the remaining $18.8 millionrelates to estimated allowances, fees and expenses.  The estimated sublease income netted against the restructuring accrualconsists of the following (unaudited, in millions):

 
| Sublease income to be received under  non-cancelable sublease agreements signed prior to June 30, 2003 |   | $    | 16.8   |   |
|--------------------------------------------------------------------------------------------------------|--------|------|--------|--------|
| Estimated sublease income for sublease  agreements yet to be negotiated                                |   | 30.0 |   |
| Total estimated sublease income                                                                        |   | $    | 46.8   |   |

 

We expect topay the following future minimum lease payment amounts related to restructuredor abandoned leased space and the related allowances, fees and expenses throughOctober 2013 (in millions):

 
| **Years Ending December 31,** |   |   |   |
|-------------------------------|--------|--------|--------|
| 2003                          |   | $      | 9.1    |   |
| 2004                          |   | 15.4   |   |
| 2005                          |   | 15.3   |   |
| 2006                          |   | 14.3   |   |
| 2007                          |   | 6.7    |   |
| 2008 and thereafter           |   | 28.4   |   |
| Total minimum lease payments  |   | $      | 89.2   |   |

 

Of theseamounts, $17.8 million is due within the twelve months ending June 30, 2004,and has been classified as a current liability in the accompanying condensedconsolidated balance sheet.  Actualfuture cash requirements may differ materially from the accrual at June 30,2003, particularly if actual sublease income is significantly different fromprospective estimates.

 

During the three months ended June 30, 2003, theCompany recorded a facilities-related restructuring charge of $7.4 million.This charge primarily related to the Company’s revision of some of itsestimates with respect to anticipated

 

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futuresubleases.  This revision was necessary due to a further decline in themarket for commercial real estate.  The Company estimated future subleasetiming and rates based upon current market indicators and information obtainedfrom a third party real estate expert.

 

Other—TheCompany has recorded charges for various incremental costs incurred as a directresult of the restructuring plan. The remaining reserve balance of $40,000 isexpected to be paid in full by June, 2004.

 

**Note7. ****    Goodwill and Other IntangibleAssets**

 

Goodwill andother intangibles consist of the following (in thousands):

 
|                                |   | **June 30,  2003** |    | **December 31,****2002** |   |
|-------------------------------------|--------|--------------------|---------|--------------------------|--------|
|                                |   | **(unaudited)**    |    |                     |   |
| Goodwill                            |   | $                  | 437,207 |                     | $      | 437,206 |   |
| Other intangibles                   |   | 22,732             |    | 22,732                   |   |
|                                |   | 459,939            |    | 459,938                  |   |
| Less: Accumulated amortization |   | (403,505           | )       | (402,618                 | )      |
| Goodwill and other intangibles, net |   | $                  | 56,434  |                     | $      | 57,320 |   |

 

OnJanuary 1, 2002, the Company adopted SFAS No. 142, *Goodwill and Intangible Assets.*Under SFASNo. 142, goodwill and intangible assets with indefinite lives are nolonger subject to amortization but are tested for impairment at least annuallyusing a fair value approach, and whenever there is an impairment indicator.Other intangible assets continue to be valued and amortized over theirestimated lives.

 

Pursuant toSFAS No. 142, the Company is required to test its goodwill for impairmentupon adoption and annually or more often if events or changes in circumstancesindicate that the asset might be impaired. While there was no accounting chargeto record upon adoption, at September 30, 2002, the Company concludedthat, based on the existence of impairment indicators, including a decline inits market value, it would be required to test goodwill for impairment. SFASNo. 142 provides for a two-stage approach to determining whether and byhow much goodwill has been impaired. Since the Company has only one reportingunit for purposes of applying SFAS No. 142, the first stage requires acomparison of the fair value of the Company to its net book value. If the fairvalue is greater, then no impairment is deemed to have occurred. If the fairvalue is less, then the second stage must be completed to determine the amount,if any, of actual impairment. The Company completed the first stage and hasdetermined that its fair value at September 30, 2002 exceeded its net bookvalue on that date, and as a result, no impairment of goodwill was recorded inthe consolidated financial statements. The Company obtained an independentappraisal of fair value to support its conclusion. Additionally, the Companyconcluded that, based upon the market value of its stock in relation to theCompany’s net book value at June 30, 2003 and December 31, 2002, there wasno additional impairment of goodwill warranted.

 

The process ofevaluating the potential impairment of goodwill is highly subjective andrequires significant judgment. In estimating the fair value of the Company, theCompany made estimates and judgments about future revenues and cash flows. TheCompany’s forecasts were based on assumptions that are consistent with theplans and estimates the Company is using to manage the business. Changes inthese estimates could change the Company’s conclusion regarding impairment ofgoodwill and potentially result in a non-cash goodwill impairment charge forall or a portion of the goodwill balance at June 30, 2003.

 

Upon adoptionof SFAS No. 142, on January 1, 2002, the Company no longer amortizesgoodwill. Additionally, upon adoption of SFAS No. 141 and 142, the Companyno longer amortizes its non-technology based intangible asset, or assembledworkforce. The remaining other intangible assets have been fully amortized asof June 30, 2003.

 

**Item 2.****           Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

*This report on Form 10-Q contains forward-looking statements within themeaning of Section 27A of the Securities Act of 1933, as amended, and withinthe meaning of Section 21E of the Securities Exchange Act of 1934, as amended,which are subject to the “safe harbor” created by those sections. Theseforward-looking statements are generally identified by words such as “expect,”“anticipate,” “intend,” “believe,” “hope,” “assume,” “estimate,” “plan,” “will”and other similar words and expressions. These forward-looking statementsinvolve risks and uncertainties that could cause our*

 

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*actual results to differ materially from those expressed or implied inthe forward-looking statements as a result of certain factors, including thosedescribed herein and in the Company’s Annual Report on Form 10-K and otherdocuments filed with the Securities and Exchange Commission.  We undertake no obligation to publiclyrelease any revisions to the forward-looking statements or to reflect eventsand circumstances after the date of this document.*

 

**Overview**

 

BroadVision develops,markets and supports enterprise portal applications that enable companies tounify their e-business infrastructure and conduct both interactions andtransactions with employees, partners, and customers through a personalizedself-service model that increases revenues, reduces costs, and improvesproductivity. As of June 30 2003, BroadVision had approximately 1,000 customersand government entities around the globe using the Company’s applications tofacilitate their portal-based commerce and information access initiatives.

 

BroadVision was founded in1993 and has been a publicly traded corporation since 1996. BroadVisionpioneered web-based e-commerce and was among the first to offer pre-integrated,packaged applications to power enterprise business portals.

 

BroadVision’s enterpriseportal applications allow organizations to unify and extend their key businessapplications, information, and business processes by taking advantage of thepower of the web and new wireless and mobile devices to allow customers,partners, and employees to do business on their own terms, in a personalizedand collaborative way.  BroadVisionsolutions allow multiple constituents to serve themselves from anywhere, atanytime, through any web device. BroadVision enterprise portal applications enable organizations tocreate business value by transforming the way they do business; moving businessinteractions and transactions from a manual, human-assisted paradigm to anautomated, personalized self-service model that enhances growth, reduces costsand improves productivity.

 

The Company believes itsproducts improve its customers’ revenue opportunities by enabling them toestablish more effective and efficient one-to-one relationships with theircustomers and business partners. Web and wireless users are engaged by highlypersonalized real-time interactions, able to transact business securely andencouraged to remain online and make return visits.  The Company’s applications also improve the cost-effectiveness ofone-to-one relationship management by enabling non-technical managers to modifybusiness rules and content in real-time and by helping to reduce the cost ofcustomer acquisition and retention, business development, technical support andemployee workplace initiatives. Because the Company provides pre-integrated,packaged solutions, time to deployment is shorter and customers are able to manageand maintain their web and wireless applications in a cost-effective manner.Because of the Company’s commitment to open standards and open architecture,BroadVision applications integrate with its customers’ existing systems andexpand as its customers’ needs and businesses grow.

 

Supportingthis application infrastructure, as of June 30, 2003, are more than 100 partnerfirms around the world who are working to ensure the Company’s joint customers’success through complementary technology, applications, tools and servicesofferings that extend and enhance BroadVision customers’ implementations.

 

BroadVision markets itsproducts and services worldwide through a direct sales force and independentdistributors, value-added resellers (“VARs”) and application service providers(“ASPs”). In addition, its sales are promoted through independent professionalconsulting organizations, known as systems integrators. The Company hasoperations in North America, Europe, and Asia/Pacific.

 

BroadVision Global Services (“BVGS”)organization provides a full spectrum of global services to help ensure successfor businesses, including strategic services, implementation services,migration services and ongoing training and maintenance.

 

**RecentEvents**

 

We haveexperienced a general downturn in the economy, our industry and our businesssince the beginning of 2001. This downturn is likely to continue in the futureand has had and is likely to continue to have an impact on our financialresults. As discussed in Note 6 of Notes to Condensed ConsolidatedFinancial Statements, we have recorded significant restructuring charges inconnection with our reduction in workforce and abandonment of certain operatingfacilities as part of our program to restructure our operations and relatedfacilities initiated in the second quarter of fiscal 2001. Pre-tax charges of$7.8 million and $34.6 million were recorded during the three months endedJune 30, 2003 and June 30, 2002, respectively, to provide for these actions andother related items. Costs for the abandoned facilities were estimated toinclude the impairment of assets, remaining lease liabilities and brokeragefees, partially offset by estimated

 

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sublease income. Estimatesrelated to sublease costs and income are based on assumptions regarding theperiod required to locate and contract with suitable sublessees and subleaserates based upon market trend information analyses. Adjustments to therestructuring accrual will be made in future periods, if necessary, based uponthe then current actual events and circumstances.

 

In March,2003, the Company settled a dispute with Avalon Partners, Inc., doing businessas Cresa Partners (“Cresa”), with respect to broker commissions related to theCompany’s termination and restructuring of certain facilities leases associatedwith the Company’s restructuring plans taken during the second quarter of 2002.Under the terms of the settlement the Company made a one-time payment of $2.2million to Cresa in April 2003.

 

Werenewed and amended our revolving credit facility in June 2003. Borrowingsunder the revolving line of credit are collateralized by all of our assets andbear interest at the bank’s prime rate (floating with a floor of 4.25%).Interest is due monthly and principal is due at expiration in February 2004.The amended and restated loan and security agreement requires us to maintaincertain levels in cash and cash equivalents, short-term investments andlong-term investments (excluding equity investments). Additionally, the amendedand restated loan and security agreement requires us to maintain certain levelson deposit with our commercial lender and certain quarterly operating levelsand ratios.  At June 30, 2003 andDecember 31, 2002, $27.0 million and $25.0 million was outstanding under theline of credit.

 

**CriticalAccounting Policies**

 

Thismanagement’s discussion and analysis of our financial condition and results ofoperations is based upon our condensed consolidated financial statements, whichhave been prepared in accordance with generally accepted accounting principlesin the United States of America. In preparing these financial statements, weare required to make estimates and judgments that affect the reported amountsof assets, liabilities, revenues and expenses, and related disclosures ofcontingent assets and liabilities. On an ongoing basis, we evaluate ourestimates, including those related to doubtful accounts, product returns,investments, goodwill and intangible assets, income taxes and restructuring, aswell as contingencies and litigation. We base our estimates on historicalexperience and on various other assumptions that we believe are reasonable, theresults of which form the basis for making judgments about the carrying valuesof assets and liabilities that are not readily apparent from other sources.Actual results may differ from these estimates using different assumptions orconditions. We believe the following critical accounting policies reflect themore significant judgments and estimates used in the preparation of ourconsolidated financial statements.

 

*Revenue Recognition*

 

*Overview*— Ourrevenue consists of fees for licenses of our software products, maintenance,consulting services and customer training. We generally charge fees forlicenses of our software products either based on the number of personsregistered to use the product or based on the number of Central ProcessingUnits (“CPUs”) on which the product is installed. Our revenue recognitionpolicies comply with the provisions of Statement of Position (“SOP”)No. 97-2, *Software Revenue Recognition*,as amended; SOP No. 98-9, *SoftwareRevenue Recognition, With Respect to Certain Transactions*and theSecurities and Exchange Commission’s Staff Accounting Bulletin No. 101, *Revenue Recognition in Financial Statements.*

 

*Software License Revenue*—We license our products through our direct sales force and indirectly throughresellers. In general, software license revenues are recognized when anon-cancelable license agreement has been signed under which the customeracknowledges an unconditional obligation to pay, the software product has beendelivered, there are no uncertainties surrounding product acceptance, the feesare fixed and determinable and collection is considered probable. Delivery isconsidered to have occurred when title and risk of loss have been transferredto the customer, which generally occurs when media containing the licensedprograms is provided to a common carrier. In the case of electronic delivery,delivery occurs when the customer is given access to the licensed programs. Ifcollectibility is not considered probable, revenue is recognized when the feeis collected. Subscription-based license revenues are recognized ratably overthe subscription period. We enter into reseller arrangements that typicallyprovide for sublicense fees payable to us based upon a percentage of listprice. We do not grant our resellers the right of return.

 

We recognizerevenue using the residual method pursuant to the requirements of SOPNo. 97-2, as amended by SOP No. 98-9. Revenues recognized frommultiple-element software arrangements are allocated to each element of thearrangement based on the fair values of the elements, such as licenses forsoftware products, maintenance, consulting services or customer training. Thedetermination of fair value is based on objective evidence, which is specificto us. We limit our assessment of objective evidence for each element to eitherthe price charged when the same element is sold separately or the priceestablished by management having the relevant authority to do so, for anelement not yet sold

 

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separately. If evidence of fairvalue of all undelivered elements exists but evidence does not exist for one ormore delivered elements, then revenue is recognized under the residual method.Under the residual method, the fair value of the undelivered elements isdeferred and the remaining portion of the arrangement fee is recognized asrevenue.

 

We recorddeferred revenue for software arrangements when cash has been received from thecustomer and the arrangement does not qualify for revenue recognition under ourrevenue recognition policy. We record accounts receivable for software arrangementswhen the arrangement qualifies for revenue recognition but cash or otherconsideration has not been received from the customer.

 

*Services Revenue*—Consulting services revenues and customer training revenues are recognized assuch services are performed. Maintenance revenues, which include revenuesbundled with software license agreements that entitle the customers totechnical support and future unspecified enhancements to our products, aredeferred and recognized ratably over the related agreement period, generallytwelve months. Our professional services which consist of consulting,maintenance and training are delivered through BVGS. This group providesconsulting services, manages projects and client relationships, manages theneeds of our partner community, provides training-related services toemployees, customers and partners, and also provides software maintenanceservices, including technical support, to our customers and partners. We recordreimbursement by our customers for out-of-pocket expenses as a component ofservices revenue.  Services that weprovide are not essential to the functionality of our software.

 

*Allowances and Reserves*

 

Occasionally,our customers experience financial difficulty after we record the revenue butbefore we are paid. We maintain allowances for doubtful accounts for estimatedlosses resulting from the inability of our customers to make required payments.Our normal payment terms are 30 to 90 days from invoice date. If thefinancial condition of our customers were to deteriorate, resulting in animpairment of their ability to make payments, additional allowances may berequired. We record reductions to revenue for estimated returns of products byour customers and related allowances. If market conditions were to decline, wemay experience larger volumes of returns resulting in an incremental reductionof revenue at the time the return occurs.

 

*Impairment Assessments*

 

We adoptedStatement of Financial Accounting Standard (“SFAS”) No. 142, “Goodwill andOther Intangible Assets,” on January 1, 2002. This standard requires thatgoodwill no longer be amortized, and instead, be tested for impairment on aperiodic basis.

 

Pursuant toSFAS No. 142, we are required to test goodwill for impairment uponadoption and annually or more often if events or changes in circumstancesindicate that the asset might be impaired. While there was no accounting chargeto record upon adoption, at September 30, 2002, we concluded that, basedon the existence of impairment indicators, including a decline in our marketvalue, we would be required to test goodwill for impairment. SFAS No. 142provides for a two-stage approach to determining whether and by how muchgoodwill has been impaired. Since we have only one reporting unit for purposesof applying SFAS No. 142, the first stage requires a comparison of thefair value of the Company to its net book value. If the fair value is greater,then no impairment is deemed to have occurred. If the fair value is less, thenthe second stage must be completed to determine the amount, if any, of actualimpairment. We completed the first stage and determined that our fair value atSeptember 30, 2002 exceeded our net book value on that date, and as aresult, no impairment of goodwill was recorded in the consolidated financialstatements. We obtained an independent appraisal of fair value to support ourconclusion. We also determined that our fair value exceeded our net book valueas of June 30, 2003 and December 31, 2002, and therefore, no additional impairmentwas warranted.

 

The process ofevaluating the potential impairment of goodwill is highly subjective andrequires significant judgment. In estimating our fair value, we made estimatesand judgments about future revenues and cash flows. Our forecasts were based onassumptions that are consistent with the plans and estimates we are using tomanage our business. Changes in these estimates could change our conclusionregarding impairment of goodwill and potentially result in a non-cash goodwillimpairment charge, for all or a portion of the goodwill balance at June 30,2003. For long-lived assets, accounting standards dictate that assets becomeimpaired when the undiscounted future cash flows expected to be generated bythem are less than their carrying amounts. When that occurs, the affectedassets are written down to their estimated fair value.

 

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*Deferred Tax Assets*

 

We analyze ourdeferred tax assets with regard to potential realization. We have established avaluation allowance on our deferred tax assets to the extent that we determinedthat it is more likely than not that some portion or all of the deferred taxassets will not be realized based upon the uncertainty of their realization. Wehave considered estimated future taxable income and ongoing prudent andfeasible tax planning strategies in assessing the amount of the valuationallowance. Based upon this analysis, we recorded a charge of $6.3 millionas an additional a valuation allowance for our deferred tax assets during thethree months ended June 30, 2002.

 

*Accounting for Stock-Based Compensation*

 

We applyAccounting Principles Board (“APB”) Opinion Number 25, *Accounting for Stock Issued to Employees*,and related interpretations when accounting for our stock option and stockpurchase plans. In accordance with APB No. 25, we apply the intrinsicvalue method in accounting for employee stock options. Accordingly, wegenerally recognize no compensation expense with respect to stock-based awardsto employees.

 

During the sixmonths ended June 30, 2003, the Company recorded compensation expense of$49,000. This charge was recorded as a result of granting a third-partyconsultant common stock in the Company. The charge was calculated based upon the market value of the underlyingstock.  During the six months ended June30, 2002, the Company recorded compensation expense of $770,000. This chargewas recorded as a result of granting terminated employees continued vesting oftheir stock options for a period beyond their actual termination date. Thecompensation charge was calculated using the Black-Scholes model.

 

We havedetermined pro forma information regarding net income and earnings per share asif we had accounted for employee stock options under the fair value method asrequired by SFAS Number 123, *Accounting forStock Compensation*. The fair value of these stock-based awards toemployees was estimated using the Black-Scholes option pricing model. Hadcompensation cost for the Company’s stock option plan and employee stockpurchase plan been determined consistent with SFAS No. 123, the Company’sreported net loss and net loss per share would have been changed to the amountsindicated below (in thousands, except per share data):

 
|                                                                                                                                          |   | **Three Months Ended  June 30,** |    | **Six Months Ended  June 30,** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------|---------|--------------------------------|--------|
|                                                                                                                                          |   | **2003**                         |    | **2002**                       |   | **2003** |   | **2002** |   |
| Net loss as reported                                                                                                                          |   | $                                | (7,595  | )                              | $      | (56,690 | ) | $ | (6,258 | ) | $ | (92,812 | ) |
| Add: Stock-based employee compensation  expense included in reported net loss, net of related tax effects                                     |   | —                           |    | 162                            |   | 49 |   | 770 |   |
| Deduct: Total stock-based employee  compensation expense determined under fair value based method for all awards,  net of related tax effects |   | (3,055                           | )       | (11,245                        | )      | (3,432 | ) | (34,993 | ) |
| Pro forma  net loss                                                                                                                           |   | $                                | (10,650 | )                              | $      | (67,773 | ) | $ | (9,641 | ) | $ | (127,035 | ) |
|                                                                                                                                          |   |                             |    |                           |   |   |   |   |   |
| Loss per share:                                                                                                                               |   |                             |    |                           |   |   |   |   |   |
| Basic—as reported                                                                                                                        |   | $                                | (0.23   | )                              | $      | (1.77 | ) | $ | (0.19 | ) | $ | (2.91 | ) |
| Basic—pro forma                                                                                                                          |   | $                                | (0.33   | )                              | $      | (2.12 | ) | $ | (0.30 | ) | $ | (3.99 | ) |
|                                                                                                                                          |   |                             |    |                           |   |   |   |   |   |
| Diluted—as reported                                                                                                                      |   | $                                | (0.23   | )                              | $      | (1.77 | ) | $ | (0.19 | ) | $ | (2.91 | ) |
| Diluted—pro forma                                                                                                                        |   | $                                | (0.33   | )                              | $      | (2.12 | ) | $ | (0.30 | ) | $ | (3.99 | ) |

 

*Restructuring*

 

The Companyhas approved certain restructuring plans to, among other things, reduce itsworkforce and consolidate facilities. These restructuring charges were taken toalign the Company’s cost structure with changing market conditions and tocreate a more efficient organization. The Company’s restructuring charges arecomprised primarily of: (i) severance and benefits termination costsrelated to the reduction of the Company’s workforce; (ii) lease terminationcosts and/or costs associated with permanently vacating its facilities; (iii)other incremental costs incurred as a direct result of the restructuring plan;and (iv) impairment costs related to certain long-lived assets abandoned.The Company accounts for each of these costs in accordance with SEC StaffAccounting Bulletin No. 100, *Restructuringand Impairment Charges.*

 

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The Companyaccounts for severance and benefits termination costs in accordance with EITFIssue No. 94-3, *Liability Recognitionfor Certain Employee Termination Benefits and Other Costs to Exit an Activity(Including Certain Costs Incurred in a Restructuring)* for exit ordisposal activities initiated prior to December 31, 2002. Accordingly, theCompany records the liability related to these termination costs when thefollowing conditions have been met: (i) management with the appropriatelevel of authority approves a termination plan that commits the Company to suchplan and establishes the benefits the employees will receive upon termination;(ii) the benefit arrangement is communicated to the employees insufficient detail to enable the employees to determine the terminationbenefits; (iii) the plan specifically identifies the number of employeesto be terminated, their locations and their job classifications; and(iv) the period of time to implement the plan does not indicate changes tothe plan are likely. The termination costs recorded by the Company are notassociated with nor do they benefit continuing activities.  The Company accounts for severance andbenefits termination costs for exit or disposal activities initiated afterDecember 31, 2002 in accordance with SFAS No. 146, *Accounting for Costs Associated with Exit Activities*.  SFAS No. 146 requires that a liability for acost associated with an exit or disposal activity be recognized and measuredinitially at fair value only when the liability is incurred.  This differs from EITF 94-3, which requiredthat a liability for an exit cost be recognized at the date of an entity’scommitment to an exit plan.

 

Prior to theadoption on January 1, 2003 of SFAS No. 146, the Company accounted for thecosts associated with lease termination and/or abandonment in accordance withEITF 88-10, *Costs Associated with LeaseModification or Termination*. Accordingly, the Company recorded thecosts associated with lease termination and/or abandonment when the leasedproperty has no substantive future use or benefit to the Company.

 

Inherent inthe estimation of the costs related to the Company’s restructuring efforts areassessments related to the most likely expected outcome of the significantactions to accomplish the restructuring. In determining the charges related tothe restructuring, the majority of estimates made by management related tocharges for excess facilities. In determining the charge for excess facilities,the Company was required to estimate future sublease income, future netoperating expenses of the facilities, and brokerage commissions, among otherexpenses. The most significant of these estimates related to the timing andextent of future sublease income in which to reduce the Company’s leaseobligations. Specifically, in determining the restructuring obligations relatedto facilities as of June 30, 2003, the Company reduced its lease obligations byestimated sublease income of $46.8 million. The Company based itsestimates of sublease income, in part, on the opinions of independent realestate experts, current market conditions and rental rates, an assessment ofthe time period over which reasonable estimates could be made, the status ofnegotiations with potential subtenants, and the location of the respectivefacility, among other factors.

 

Theseestimates, along with other estimates made by management in connection with therestructuring, may vary significantly depending, in part, on factors that maybe beyond the Company’s control. Specifically, these estimates will depend onthe Company’s success in negotiating with lessors, the time periods required tolocate and contract suitable subleases and the market rates at the time of suchsubleases. Adjustments to the facilities reserve will be required if actuallease exit costs or sublease income differ from amounts currently expected. TheCompany will review the status of restructuring activities on a quarterly basisand, if appropriate, record changes to its restructuring obligations in currentoperations based on management’s most current estimates.

 

The followingtable summarizes the restructuring accrual activity recorded during the threemonths ended June 30, 2003 (in thousands):

 
|                             |   | **Severance  and Benefits** |   | **Facilities** |   | **Other** |   | **Total** |   |
|----------------------------------|--------|-----------------------------|--------|----------------|--------|-----------|--------|-----------|--------|
| Accrual balances, March 31, 2003 |   | $                           | 1,113  |           | $      | 88,905    |   | $         | 32     |   | $ | 90,050 |   |
| Restructuring charges            |   | 398                         |   | 7,445          |   | (26       | )      | 7,817     |   |
| Cash payments                    |   | (511                        | )      | (7,134         | )      | 34        |   | (7,610    | )      |
| Accrual balances, June 30, 2003  |   | $                           | 1,000  |           | $      | 89,216    |   | $         | 40     |   | $ | 90,257 |   |

 

Included inthe cash payments for the quarter was a brokerage commission of $2.2 millionpaid to settle a prior dispute.  Thenature of the charges summarized above is as follows:

 

Severance andbenefits – As of June 30, 2003, the Company has accrued $1.0 million ofestimated severance and benefits costs as a restructuring accrual.  These costs represent severance, payrolltaxes and COBRA benefits related to restructuring plans implemented prior toJune 30, 2003.  The Company recorded arelated charge of $398,000 during the three months ended June 30, 2003. This charge related to workforce reductions as a component of the Company’srestructuring plans executed during the quarter.  The Company estimatesthat the $1.0 million accrual will be paid in full by June, 2004.

 

22

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Facilities –As of June 30, 2003, the Company has accrued $89.2 million of estimated futurefacilities costs as a restructuring accrual. Of this accrual, $70.4 million relates to future minimum lease payments,net of estimated sublease income and planned company occupancy, and theremaining $18.8 million relates to estimated allowances, fees andexpenses.  The estimated sublease incomenetted against the restructuring accrual consists of the following (inmillions):

 
| Sublease income to be received under  non-cancelable sublease agreements signed prior to June 30, 2003 |   | $    | 16.8   |   |
|--------------------------------------------------------------------------------------------------------|--------|------|--------|--------|
| Estimated sublease income for sublease  agreements yet to be negotiated                                |   | 30.0 |   |
| Total estimated sublease income                                                                        |   | $    | 46.8   |   |

 

We expect topay the following future minimum lease payment amounts related to restructuredor abandoned leased space through October 2013 (in millions):

 
| **Years Ending December 31,** |   |   |   |
|-------------------------------|--------|--------|--------|
| 2003                          |   | $      | 9.1    |   |
| 2004                          |   | 15.4   |   |
| 2005                          |   | 15.3   |   |
| 2006                          |   | 14.3   |   |
| 2007                          |   | 6.7    |   |
| 2008 and thereafter           |   | 28.4   |   |
| Total minimum lease payments  |   | $      | 89.2   |   |

 

Of theseamounts, $17.8 million is due within the twelve months ending June 30, 2004,and has been classified as a current liability in the accompanying condensedconsolidated balance sheet.  Actualfuture cash requirements may differ materially from the accrual at June 30,2003, particularly if actual sublease income is significantly different fromprospective estimates.

 

During thethree months ended June 30, 2003, the Company recorded a facilities-relatedrestructuring charge of $7.4 million. This charge primarily related to the Company’s revision of some of itsestimates with respect to anticipated future subleases.  This revision wasnecessary due to a further decline in the market for commercial realestate.  The Company estimated future sublease timing and rates based uponcurrent market indicators and information obtained from a third party realestate expert.

 

Other—TheCompany has recorded charges for various incremental costs incurred as a directresult of the restructuring plan. The remaining reserve balance of $40,000 isexpected to be paid in full by June, 2004.

 

***Legal Matters***

 

Management’scurrent estimated range of liability related to pending litigation is based onclaims for which it is probable that a liability has been incurred and ourmanagement can estimate the amount and range of loss. We have recorded theminimum estimated liability related to those claims, where there is a range ofloss. Because of the uncertainties related to both the determination of theprobability of an unfavorable outcome and the amount and range of loss in theevent of an unfavorable outcome, management is unable to make a reasonableestimate of the liability that could result from the remaining pendinglitigation. As additional information becomes available, we will assess theprobability and the potential liability related to our pending litigation andrevise our estimates, if necessary. Such revisions in our estimates of thepotential liability could materially impact our results of operations andfinancial position.

 

***Results ofOperations***

 

Threeand six months ended June 30, 2003 and 2002

 

*Revenues*

 

*Total revenues*decreased 26% during the quarter ended June 30, 2003 to $21.8 million ascompared to $29.4 million for the quarter ended June 30, 2002.  A summary of our revenues by geographicregion is as follows (dollars in thousands, unaudited):

 

23

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|                |   | **Software  Licenses** |       | **%**  |       | **Services** |       | **%**  |       | **Total** |       | **%**  |       |
|---------------------|--------|------------------------|------------|--------|------------|--------------|------------|--------|------------|-----------|------------|--------|------------|
| Three Months Ended: |   |                   |       |   |       |         |       |   |       |      |       |   |       |
|                |   |                   |       |   |       |         |       |   |       |      |       |   |       |
| June 30, 2003       |   |                   |       |   |       |         |       |   |       |      |       |   |       |
| Americas            |   | $                      | 2,426      |   | 36         | %            | $          | 7,944  |       | 53        | %          | $      | 10,370     |   | 48 | % |
| Europe              |   | 3,403                  |       | 50     |       | 6,246        |       | 42     |       | 9,648     |       | 44     |       |
| Asia Pacific        |   | 995                    |       | 14     |       | 791          |       | 5      |       | 1,787     |       | 8      |       |
| Total               |   | $                      | 6,824      |   | 100        | %            | $          | 14,981 |       | 100       | %          | $      | 21,805     |   | 100 | % |
|                |   |                   |       |   |       |         |       |   |       |      |       |   |       |
| June 30, 2002       |   |                   |       |   |       |         |       |   |       |      |       |   |       |
| Americas            |   | $                      | 6,386      |   | 62         | %            | $          | 12,467 |       | 66        | %          | $      | 18,852     |   | 64 | % |
| Europe              |   | 3,400                  |       | 33     |       | 5,598        |       | 29     |       | 8,998     |       | 31     |       |
| Asia Pacific        |   | 523                    |       | 5      |       | 1,045        |       | 5      |       | 1,569     |       | 5      |       |
| Total               |   | $                      | 10,309     |   | 100        | %            | $          | 19,110 |       | 100       | %          | $      | 29,419     |   | 100 | % |
|                |   |                   | ** ** |   | ** ** |         | ** ** |   | ** ** |      | ** ** |   | ** ** |
| Six Months Ended:   |   |                   |       |   |       |         |       |   |       |      |       |   |       |
|                |   |                   |       |   |       |         |       |   |       |      |       |   |       |
| June 30, 2003       |   |                   |       |   |       |         |       |   |       |      |       |   |       |
| Americas            |   | $                      | 6,821      |   | 46         | %            | $          | 16,856 |       | 54        | %          | $      | 23,678     |   | 51 | % |
| Europe              |   | 5,088                  |       | 34     |       | 12,882       |       | 41     |       | 17,969    |       | 39     |       |
| Asia Pacific        |   | 2,890                  |       | 20     |       | 1,723        |       | 5      |       | 4,613     |       | 10     |       |
| Total               |   | $                      | 14,799     |   | 100        | %            | $          | 31,461 |       | 100       | %          | $      | 46,260     |   | 100 | % |
|                |   |                   |       |   |       |         |       |   |       |      |       |   |       |
| June 30, 2002       |   |                   |       |   |       |         |       |   |       |      |       |   |       |
| Americas            |   | $                      | 10,345     |   | 56         | %            | $          | 26,710 |       | 64        | %          | $      | 37,054     |   | 62 | % |
| Europe              |   | 7,579                  |       | 41     |       | 12,262       |       | 30     |       | 19,841    |       | 33     |       |
| Asia Pacific        |   | 564                    |       | 3      |       | 2,414        |       | 6      |       | 2,979     |       | 5      |       |
| Total               |   | $                      | 18,488     |   | 100        | %            | $          | 41,386 |       | 100       | %          | $      | 59,874     |   | 100 | % |

 

The Companyoperates in a competitive industry. There have been declines in both the technology industry and in generaleconomic conditions since the beginning of 2001.  These declines may continue. Financial comparisons discussed herein may not be indicative of futureperformance.

 

*Softwarelicense revenues* decreased 34% during the quarterended June 30, 2003 to $6.8 million as compared to $10.3 million for thequarter ended June 30, 2002. Software license revenue decreased 20% during thesix months ended June 30, 2003 to $14.8 million as compared to $18.5 millionfor the six months ended June 30, 2002. These decreases are largelyattributable to declines in spending in the information technology market dueto economic and geopolitical uncertainties, including the conflicts in theMiddle East.  As a result, the Companyhas experienced a decline in license transactions and related revenue from newcustomers, while the proportion of revenue from existing customers hasincreased.

 

*Servicesrevenues* decreased 21% during the quarter ended June30, 2003 to $15.0 million as compared to $19.1 million for the quarterended June 30, 2002.  Services revenuedecreased 24% during the six months ended June 30, 2003 to $31.5 million ascompared to $41.4 million for the six months ended June 30, 2002. Thesedeclines were almost entirely due to decreases in consulting servicesrevenue.  Consulting services revenuesdecreased 40% for the three months ended June 30, 2003 to $5.9 million ascompared to $9.8 million for the three months ended June 30, 2002, and 43%during the six months ended June 30, 2003 to $12.3 million as compared to $21.4million for the six months ended June 30, 2002. These decreases are a result ofa corresponding decline in license revenues and of economic and geopoliticaluncertainties, including the conflicts in the Middle East.

 

*Cost of Revenues*

 

Cost oflicense revenues include the costs of product media, duplication, packaging andother manufacturing costs, as well as royalties payable to third parties forsoftware that is either embedded in, or bundled and licensed with, ourproducts.

 

Cost ofservices consists primarily of employee-related costs, third-party consultantfees incurred on consulting projects, post-contract customer support andinstructional training services.

 

24

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A summary ofthe cost of revenues for the periods presented is as follows, (in thousands):

 
|                           |   | **Three Months Ended  June 30,** |   | **Six Months Ended  June 30,** |   |
|--------------------------------|--------|---------------------------------------|--------|-------------------------------------|--------|
|                           |   | **2003**                              |   | **%**                               |   | **2002** |   | **%** |   | **2003** |   | **%** |   | **2002** |   | **%** |   |
| Cost of software  licenses (1) |   | $                                     | 495    |                                | 7      | % | $ | 903 |   | 9 | % | $ | 883 |   | 6 | % | $ | 2,003 |   | 11 | % |
| Cost of services  (2)          |   | 7,177                                 |   | 48                                  |   | 10,422 |   | 55 |   | 13,735 |   | 44 |   | 22,756 |   | 55 |   |
|                           |   |                                  |   |                                |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total cost of  revenues (3)    |   | $                                     | 7,672  |                                | 35     | % | $ | 11,325 |   | 38 | % | $ | 14,618 |   | 32 | % | $ | 24,759 |   | 41 | % |

 

----

(1)                                  Percentageis calculated based on total software license revenues for the period indicated

(2)                                  Percentageis calculated based on total services revenues for the period indicated

(3)                                  Percentage iscalculated based on total revenues for the period indicated

 

*Cost of softwarelicenses* decreased 45% in absolute dollar terms duringthe quarter ended June 30, 2003to $495,000 as compared to $903,000 for the quarter ended June 30, 2002.  The cost of software licenses decreased 56%in absolute dollar terms during the six months ended June 30, 2003 to $883,000as compared to $2.0 million for the six months ended June 30, 2002. Thesedecreases were principally a result of lower software license revenue,including revenue generated from the Company’s products that embed or includethird-party products.

 

*Cost of services*decreased 31% in absolute dollar terms during the quarter ended June 30, 2003 to $7.2 million ascompared to $10.4 million for the quarter ended June 30, 2002. The cost of services decreased 40% in absolutedollar terms during the six months ended June 30, 2003 to $13.7 million ascompared to $22.8 million for the six months ended June 30, 2002.  These decreases were the result ofreductions in force that occurred primarily throughout the first, second andthird quarters of 2002, resulting in decreased salary and related expenses, inaddition to a decrease in the use of third party consultants.  The declines in cost of services as apercentage of services revenue for the three and eix-month periods wereprincipally due to improved operating efficiencies.  Also contributing to thesix-month decline was an aggregate $1.4 million credit related totelecommunications costs renegotiated and recorded during the three monthsended March 31, 2003, of which $473,000 was recorded in cost of services**.**

 

*Operating Expenses and Other Income, net*

 

Research anddevelopment expenses consist primarily of salaries, employee-related benefitcosts and consulting fees incurred in association with the development of ourproducts. Costs incurred for the research and development of new softwareproducts are expensed as incurred until technological feasibility, in the formof a working model, is established, at which time such costs are capitalizedand recorded at the lower of unamortized cost or net realizable value. Thecosts incurred subsequent to the establishment of a working model but prior togeneral release of the product have not been significant. To date, we have notcapitalized any costs related to the development of software for external use.

 

Sales andmarketing expenses consist primarily of salaries, employee-related benefitcosts, commissions and other incentive compensation, travel and entertainmentand marketing program-related expenditures, such as collateral materials, tradeshows, public relations, advertising and creative services.

 

General andadministrative expenses consist primarily of salaries, employee-related benefitcosts, provisions and credits related to uncollectible accounts receivable andprofessional service fees.

 

Operatingexpenses consisted of the following: (in thousands)

 
|                                  |   | **Three Months Ended June 30,** |   | **Six Months Ended June 30,** |   |
|---------------------------------------|--------|--------------------------------------|--------|------------------------------------|--------|
|                                  |   | **2003**                             |   | **% (1)**                          |   | **2002** |   | **% (1)** |   | **2003** |   | **% (1)** |   | **2002** |   | **% (1)** |   |
| Research and  development             |   | $                                    | 6,063  |                               | 28     | % | $ | 13,006 |   | 44 | % | $ | 12,214 |   | 26 | % | $ | 26,981 |   | 45 | % |
| Sales and  marketing                  |   | 6,043                                |   | 27                                 |   | 15,803 |   | 54 |   | 12,875 |   | 28 |   | 31,981 |   | 53 |   |
| General and  administrative           |   | 2,413                                |   | 11                                 |   | 5,009 |   | 17 |   | 4,701 |   | 10 |   | 11,202 |   | 19 |   |
| Goodwill and  intangible amortization |   | —                               |   | —                             |   | 887 |   | 3 |   | 887 |   | 2 |   | 1,774 |   | 3 |   |
| Restructuring  charge                 |   | 7,817                                |   | 36                                 |   | 34,565 |   | 117 |   | 8,852 |   | 19 |   | 39,945 |   | 67 |   |
| Impairment of  assets                 |   | —                               |   | —                             |   | — |   | — |   | — |   | — |   | 2,276 |   | 4 |   |
| Total operating  expenses             |   | $                                    | 22,336 |                               | 102    | % | $ | 69,270 |   | 235 | % | $ | 39,529 |   | 85 | % | $ | 114,159 |   | 191 | % |
|                                       |        |                                      |        |                                    |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1)                                  Expressed as apercent of total revenues for the period indicated

 

25

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*Research anddevelopment expenses* decreased 53% during the quarterended June 30, 2003 to $6.1 million as compared to $13.0 million for thequarter ended June 30, 2002.  Researchand development expenses decreased  55%during the six months ended June 30, 2003 to $12.2 million as compared to $27.0million for the six months ended June 30, 2002.  The decreases in research and development expenses were primarilyattributable to compensation reductions through reductions in force as well asother cost-cutting efforts put in place, including reductions in facilities andcommunications costs.

 

*Sales and marketingexpenses* decreased 61% during the quarter ended June30, 2003 to $6.0 million as compared to $15.8 million for the quarter endedJune 30, 2002.  Sales and marketingexpenses decreased  60% during the sixmonths ended June 30, 2003 to $12.9 million as compared to $32.0 million forthe six months ended June 30, 2002.  Thedecreases were primarily due to decreased salary expense as a result ofreductions in force, decreased variable compensation due to lower revenues, anddecreased facility, travel and marketing program costs as a result of variouscost-cutting actions.

 

*General andadministrative expenses* decreased 52% during thequarter ended June 30, 2003 to $2.4 million as compared to $5.0 million for thequarter ended June 30, 2002.  Generaland administrative expenses decreased 58% during the six months ended June 30, 2003 to $4.7 million ascompared to $11.2 million for the six months ended June 30, 2002.Thesedecreases are attributable to decreases in salary expense as a result ofreductions in force, decreases in the reserves of accounts receivable,decreases in facilities and professional services expenses as a result of costcutting measures, and a non-recurring compensation-related credit of $0.4 millionrecorded in the quarter ended June 30, 2003.

 

*Amortization of goodwill and otherintangibles.*****Asdescribed in Note 7 in the Notes to the Condensed Consolidated FinancialStatements, we no longer amortize goodwill or the assembled workforce as wehave identified the assembled workforce as an intangible asset which does notmeet the criteria of recognizable intangible asset as defined by SFAS No.142.  The remaining other intangibleassets have been fully amortized as of June30, 2003.  We periodically assessgoodwill and other intangibles for impairment as discussed in Note 7 of Notesto the Condensed Consolidated Financial Statements.  The remaining intangible assets that are being amortized are aresult of the acquisition of Interleaf, Inc. that was completed in April of2000.  We accounted for the acquisitionas a purchase business combination.  Itis possible that we may continue to expand our business through acquisitions andinternal development.  Any additionalacquisitions or impairment of goodwill and other purchased intangibles couldresult in additional merger and acquisition related expenses.

 

*Restructuringcharges***.**** **The Company has approved restructuring plans to,among other things, reduce its workforce and consolidate facilities in aneffort to respond to changing market conditions and to create a more efficientorganization.  As a result, pre-taxrestructuring charges of $7.8 million and $34.6 million were recorded duringthe three months ended June 30, 2003 and 2002, respectively, to provide for(i) severance and benefits termination costs related to the reduction ofthe Company’s workforce; (ii) lease termination costs and/or costsassociated with permanently vacating its facilities; (iii) other incrementalcosts incurred as a direct result of the restructuring plan; and(iv) impairment costs related to certain long-lived assets abandoned. TheCompany recorded the low-end of a range of assumptions modeled for therestructuring charges, in accordance with SFAS No. 5, *Accounting for Contingencies*.  Adjustments to the restructuring accrualswill be made in future periods, if necessary, based upon the then-currentactual events, estimates and circumstances. See Note 6 of the accompanyingNotes to Condensed Consolidated Financial Statements.

 

Restructuringcharges consisted of the following (in thousands):

 
|                |   | **Three Months Ended  June 30,** |   | **Six Months Ended  June 30,** |   |
|---------------------|--------|---------------------------------------|--------|-------------------------------------|--------|
|                |   | **2003**                              |   | **2002**                            |   | **2003** |   | **2002** |   |
| Facilities          |   | $                                     | 7,445  |                                | $      | 30,480 |   | $ | 8,618 |   | $ | 34,577 |   |
| Severance and other |   | 372                                   |   | 4,085                               |   | 234 |   | 5,368 |   |
| Total               |   | $                                     | 7,817  |                                | $      | 34,565 |   | $ | 8,852 |   | $ | 39,945 |   |

 

26

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Therestructuring accrual at June 30, 2003, included in the accompanying CondensedConsolidated Financial Statements was approximately $90.3 million.  Of this, $89.2 million related to facilitiesand $1.0 million related to severance and other.  The severance and other accrual is expected to be paid in full byJune 30, 2004.  The facilities accrualis expected to be paid as follows (in millions):

 
| **Years Ending December 31,** |   |   |   |
|-------------------------------|--------|--------|--------|
| 2003                          |   | $      | 9.1    |   |
| 2004                          |   | 15.4   |   |
| 2005                          |   | 15.3   |   |
| 2006                          |   | 14.3   |   |
| 2007                          |   | 6.7    |   |
| 2008 and thereafter           |   | 28.4   |   |
| Total minimum lease payments  |   | $      | 89.2   |   |

 

Actual futurecash requirements may differ materially from the accrual at June 30, 2003,particularly if actual sublease income is significantly different fromhistorical estimates.  Adjustments tothe restructuring accruals will be made in future periods, if necessary, basedupon the then current actual events and circumstances.

 

*Interest and other income (expense), net,*forthe three months ended June 30, 2003 was income of $722,000 as compared toincome of $1.4 million in 2002. Interest and other income (expense), netfor the six months ended June 30, 2003 was income of $1.8 million ascompared to expense of $6.7 million in 2002. Interest income has declinedyear-over-year due to lower cash balances. Other expense in 2002 included a realizedloss on cost method investments of $8.5 million that did not recur in 2003**.**

 

*Impairment of assets*—Duringthe first quarter of 2002, we engaged a third party firm to conduct a physicalinventory of our computer hardware assets located in North America. Weconducted an internal physical inventory on computer hardware assets locatedoutside of North America. The objective of the physical inventory was to verifythe amount and location of our computer hardware. As a result of the findingsof the physical inventory and related reconciliation with our asset records, werecorded an asset impairment charge of approximately $2.3 million net bookvalue related to computer hardware during the first quarter of fiscal 2002.

 

*Income Taxes*

 

During thequarter ended June 30, 2003, werecognized tax expense of $114,000.   The tax expense mainly relates to incometaxes in foreign jurisdictions that are not available to credit against USincome taxes.

 

*Liquidity and Capital Resources*

 
|                                                      |   | **June 30,****2003** |   | **December  31,****2002** |   |
|-----------------------------------------------------------|--------|----------------------|--------|---------------------------|--------|
|                                                      |   |                 |   |                      |   |
| Cash, cash equivalents and liquid  short-term investments |   | $                    | 95,528 |                      | $      | 101,870 |   |
| Long-term liquid investments                              |   | $                    | — |                      | $      | 587 |   |
| Restricted cash and investments                           |   | $                    | 16,761 |                      | $      | 16,704 |   |
| Working capital                                           |   | $                    | 12,584 |                      | $      | 5,616 |   |
| Working capital ratio                                     |   | 1.1                  |   | 1.0                       |   |

 

As of June 30, 2003, cash,cash equivalents, liquid short-term investments, liquid long-term investmentsand restricted cash and investments totaled $112.2 million, which represents adecrease of $7.0 million as compared to a balance of $118.6 million on December31, 2002. This decrease was attributable to net cash used for operations,partially offset by a $2 million increase in bank borrowings. We have a creditfacility with Silicon Valley Bank that includes term loans in the form ofpromissory notes and a revolving line of credit (the “SVB Facilities”) for upto $29.4 million as of June 30, 2003. Under the revolving line of creditportion of the SVB Facilities, amounts borrowed bear interest at the bank’sprime rate with a floor minimum rate of 4.25% and interest is due monthly, withthe principal due in February 2004. The amended and restated loan and securityagreement requires us to maintain certain levels in cash and cash equivalents,short-term investments and long-term investments (excluding equityinvestments). Additionally, the amended and restated loan and securityagreement requires us to maintain certain levels on deposit with our commerciallender and certain quarterly net income (loss) levels.  At June 30, 2003 and December 31, 2002,$27.0 million and $25.0 million were outstanding under the SVB Facilities,respectively.

 

27

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As of June 30,2003, the Company was not in compliance with the profitability covenant of theSVB Facilities.  The Company isnegotiating a waiver regarding non-compliance, which it believes it will obtainin the three-month period ending September 30, 2003.

 

Under the term loan portionof the SVB Facilities, we have two outstanding loans and the total outstandingamounts of these loans were $2.4 million as of June 30, 2003 and $2.9 millionas of December 31, 2002. Interest on these term loans are at the bank’s primerate (4.00% as of June 30, 2003 and December 31, 2002) and prime rate plus1.25%.  Principal and interest are duein consecutive monthly payments through maturity of these term loans in March31, 2005 and September 30, 2006, respectively. Principal payments of $977,000are due annually from 2000 through 2004, $611,000 is due in 2005, and a finalpayment of $357,000 is due in 2006.

 

Our exposure to market riskfor changes in interest rates relates primarily to our investment portfolio. Wehad no derivative financial instruments as of June 30, 2003 and December 31,2002. We place our investments in instruments that meet high credit qualitystandards and the amount of credit exposure to any one issue, issuer and type ofinstrument is limited.  Our interestrate risk related to borrowings historically has been minimal as interestexpense related to borrowings has been immaterial for the three months endedJune 30, 2003 and 2002.

 

As of June 30, 2003 and December 31,2002, commitments totaling $16.8 million and $16.7 million, respectively, inthe form of standby letters of credit were issued and outstanding fromfinancial institutions in favor of our various landlords to secure obligationsunder our facility leases. These letters of credit are collateralized by asecurity agreement, under which we are required to maintain an equal amount ofcash in a restricted specified interest bearing account.  Accordingly, $16.8 million and $16.7 millionhave been presented as restricted cash in the accompanying condensedconsolidated balance sheets at June 30,2003 and December 31, 2002, respectively.

 

*Cash Provided Used For Operating Activities*

 

Cash used foroperating activities was $8.6 million and $76.6 million for the six months endedJune 30, 2003 and 2002,respectively. The primary reason for the net cash used by operating activitiesfor the six months ended June 30,2003 is due to the net loss of $6.3 million, decreases in accounts payableand accrued expenses ($12.6 million) and a decrease in unearned revenue anddeferred maintenance ($10.7 million).  Offsetting these uses of cash was $8.5 million of non-cash items, suchas depreciation expense, amortization of prepaid royalties, and amortization ofintangibles, a decrease in accounts receivable ($8.6 million) and a decrease inprepaids and other ($3.4 million).  Theprimary reason for the cash used for operating activities for the six monthsended June 30, 2002 was due to the net loss of $92.8 million, decreases inaccounts payable and accrued expenses ($29.1 million) and a decrease inunearned revenue and deferred maintenance ($9.2 million).  Offsetting these uses of cash was $33.6million of non-cash items, such as depreciation expense, realized losses oncash investments and provision for deferred tax asset valuation, a decrease inaccounts receivable ($19.3 million) and a decrease in prepaids and other ($1.9million).

 

*Cash Provided By Investing Activities*

 

Cash providedby investing activities was $20.3 million for the six months ended June 30, 2003 and was primarily due tonet sales/maturities of investments of $22.6 million. Cash provided byinvesting activities was $47.4 million for the six months ended June 30, 2002, primarily consisting of$50.3 million of net sales/maturities of investments.

 

*Cash Provided By Financing Activities*

 

Cash providedby financing activities was $1.7 million for the six months ended June 30, 2003, consisting of $0.4million in proceeds from the issuance of common stock  and $1.3 million from proceeds from borrowings, net ofrepayments.  Cash provided by financingactivities for the six months ended June30, 2002 was $27.3 million, consisting of $2.8 million in proceeds fromthe issuance of common stock and $24.5 million proceeds from borrowings, net ofrepayments.

 

Capitalexpenditures were $127,000 and $1.1 million during the six months ended June 30, 2003 and 2002, respectively.Our capital expenditures consisted of purchases of operating resources tomanage our operations and consisted primarily of computer hardware andsoftware.

 

On May 9,2002, the Company and Pacific Shores Development (“PacShores”) entered into(i) the Buildings 4 and 5 Termination Agreement and (ii) the Building6 Amendment. Under the Buildings 4 and 5 Termination Agreement, the Triple NetBuilding Lease dated April 12, 2000 between PacShores, as Lessor, and theCompany, as Lessee, for

 

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Premises at Pacific ShoresCenter, Building 4, Redwood City, California and the Triple Net Building Leasedated February 16, 2000 between PacShores, as Lessor, and the Company, asLessee, for Premises at Pacific Shores Center, Building 5, Redwood City,California, were terminated. In conjunction with the termination, PacShoresreleased all security deposits held by it relating to those premises inexchange for our payment to PacShores a total of $45.0 million as thetermination fee. Under the Building 6 Amendment, the parties released eachother from all claims and we agreed to provide an additional $3.5 millionas security deposit in the form of letters of credit. This letter of credit isincluded as restricted cash in our Condensed Consolidated Balance Sheets as of June 30, 2003 and December 31,2002. We paid the termination fee in full during the second quarter of 2002 bypayment of approximately $20.0 million from existing cash and investmentsand by drawing down approximately $25.0 million from our line of credit.The $25.0 million line of credit, was amended during the second quarter of2003 to increase the facility by $2.0 million to $27.0 million, and is due inFebruary 2004.

 

We expect toincur significant operating expenses for the foreseeable future in order toexecute our business plan. A summary of total future minimum lease payments asof June 30, 2003, under noncancelable operating lease agreements, together withamounts included in restructuring reserves is as follows (in thousands):

 
| **Years Ended December 31,** |   | **Operating  Leases** |    |
|-----------------------------------|--------|-----------------------|---------|
|                              |   |                  |    |
| 2003                              |   | $                     | 11,484  |   |
| 2004                              |   | 23,320                |    |
| 2005                              |   | 23,586                |    |
| 2006                              |   | 21,204                |    |
| 2007                              |   | 18,372                |    |
| 2008 and thereafter               |   | 88,626                |    |
| Total minimum lease payments      |   | $                     | 186,592 |   |

 

As of June 30,2003, the Company has accrued $89.2 million of estimated future facilitiescosts as a restructuring accrual. See Note 6 in the Notes to CondensedConsolidated Financial Statements.

 

The followingtable summarizes our letters of credit and the effect such letters of creditcould have on our liquidity and cash flows in future periods if the letters ofcredit were drawn upon (in thousands):

 
| Less than 1 year |   | $      | 195    |   |
|------------------|--------|--------|--------|--------|
| 1-3 years        |   | 241    |   |
| 4-5 years        |   | 1,921  |   |
| Over 5 years     |   | 14,404 |   |
| Total            |   | $      | 16,761 |   |

 

Restrictedcash and investments represent collateral for these letters of credit.

 

Our net cashflows will depend heavily on the level of future revenues, our ability torestructure operations successfully and our ability to manage infrastructurecosts.

 

We currentlyexpect to fund our short-term working capital and operating resourceexpenditure requirements, for at least the next twelve months, from ourexisting cash and cash equivalents and short-term investment resources, ouranticipated cash flows from operations and anticipated cash flows fromsubleases. However, we could experience unforeseen circumstances, such as aworsening economic downturn, legal or lease settlements and less thananticipated cash inflows from operations, invested assets, and subleases thatmay increase our use of available cash or need to obtain additional financing.Also, we may find it necessary to obtain additional equity or debt financing inorder to support more rapid expansion, develop new or enhanced services,respond to competitive pressures, acquire complementary businesses ortechnologies or respond to unanticipated requirements.

 

We may seek toraise additional funds through private or public sales of securities, strategicrelationships, bank debt, financing under leasing arrangements or otherwise. Ifadditional funds are raised through the issuance of equity securities, thepercentage ownership of our stockholders will be reduced, stockholders mayexperience additional dilution or such equity securities may have rights,preferences or privileges senior to those of the holders of our common stock.There can be no assurance that additional financing will be available onacceptable terms, if at all. If adequate funds are not available or are notavailable on acceptable terms, we may be unable to develop our products, take

 

29

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advantage of futureopportunities or respond to competitive pressures or unanticipatedrequirements, which could have a material adverse effect on our business,financial condition and future operating results.

 

*Factors That May Affect Future Operating Results*

 

We may experiencesignificant fluctuations in quarterly operating results that may be caused bymany factors including, but not limited to, those discussed below and herein,as set out in Items 7 and 7A in our annual report on Form 10-K for the yearended December 31, 2002 and elsewhere therein and as disclosed in otherdocuments filed with the Securities and Exchange Commission.

 

Significantfluctuations in future quarterly operating results may be caused by manyfactors including, among others, the timing of introductions or enhancements ofproducts and services by us or our competitors, market acceptance of newproducts, the mix of our products sold, changes in pricing policies by us orour competitors, our ability to retain customers, changes in our salesincentive plans, budgeting cycles of our customers, customer order deferrals inanticipation of new products or enhancements by us or our competitors,nonrenewal of maintenance agreements (which generally automaticallyrenew for one year terms unless earlier terminated by either party upon 90-daysnotice), product life cycles, changes in strategy, seasonal trends, the mix ofdistribution channels through which our products are sold, the mix ofinternational and domestic sales, the rate at which new sales people becomeproductive, changes in the level of operating expenses to support projectedgrowth and general economic conditions. We anticipate that a significantportion of our revenues will be derived from a limited number of orders, andthe timing of receipt and fulfillment of any such orders is expected to causematerial fluctuations in our operating results, particularly on a quarterlybasis. Due to the foregoing factors, quarterly revenues and operating resultsare difficult to forecast, and we believe that period-to-period comparisons ofour operating results will not necessarily be meaningful and should not berelied upon as any indication of future performance. It is likely that ourfuture quarterly operating results from time to time will not meet theexpectations of market analysts or investors, which may have an adverse effecton the price of our common stock.

 

We are continuing efforts toreduce and control our expense structure. We believe strict cost containmentand expense reductions are essential to achieving positive cash flow andprofitability. A number of factors could preclude us from successfully bringingcosts and expenses in line with our revenues, including unplanned uses of cash,the inability to accurately forecast business activities and furtherdeterioration of our revenues. If we are not able to effectively reduce ourcosts and achieve an expense structure commensurate with our businessactivities and revenues, we may have inadequate levels of cash for operationsor for capital requirements, which could significantly harm our ability tooperate our business.

 

We renewed and amended theSVB Facility during the second quarter of fiscal 2003. The SVB Facility issecured by substantially all of our owned assets.  The primary financialcovenant under the SVB Facility obligates us to maintain certain levels ofavailable cash, cash equivalents, short-term investments and long-terminvestments (excluding equity investments). Falling below such levels would bean event of default for which Silicon Valley Bank may, among other things,accelerate the payment of the facility. While we plan to adhere to thefinancial covenants of the SVB Facility and avoid an event of default, in theevent that it appears we are unable to avoid an event of default, it may benecessary or advisable to retire and terminate the SVB Facility and pay off allremaining balances borrowed. Such a payoff would further limit our availablecash and cash equivalents.

 

Our successdepends largely on the skills, experience and performance of key personnel. Ifwe lose one or more key personnel, our business could be harmed. Our futuresuccess depends on our ability to continue attracting and retaining highlyskilled personnel. We may not be successful in attracting, assimilating andretaining qualified personnel in the future. Furthermore, the significantdownturn in our business environment had a negative impact on our operations.We are currently restructuring our operations and have taken actions to reduceour workforce and implement other cost containment activities. These actionscould lead to disruptions in our business, reduced employee morale andproductivity, increased attrition and problems with retaining existingemployees and recruiting future employees and increased financial costs.

 

We effected a one-for-ninereverse stock split in July 2002.  Prior to the effective time of thereverse stock split, our common stock was trading below $1.00 per share. The Nasdaq National Market has a $1.00 per share minimum bid requirement,pursuant to which our common stock could be de-listed from Nasdaq if it tradesbelow $1.00 for thirty consecutive trading days and does not subsequently tradeabove $1.00 for 10 consecutive days.  There can be no assurance that ourtrading price will remain above the $1.00 per share requirement for thenecessary time period mandated by Nasdaq.  If we do not meet the Nasdaqrequirements to maintain our listing on The Nasdaq National Market, our commonstock could trade on the OTC Bulletin Board or in the “pink sheets” maintained bythe National Quotation Bureau, Inc.

 

30

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Such alternatives are generally considered tobe less efficient markets, and our stock price, as well as the liquidity of ourcommon stock, would be adversely impacted by a Nasdaq delisting.

 

Some of theserisks and uncertainties relate to the rapidly evolving nature of the markets inwhich we operate. These related market risks include, among other things, theevolution of the online commerce market, the dependence of online commerce onthe development of the Internet and its related infrastructure, the uncertaintypertaining to widespread adoption of online commerce and the risk ofgovernment regulation of the Internet. Other risks and uncertainties relate toour ability to, among other things, successfully implement our marketingstrategies, respond to competitive developments, continue to develop andupgrade our products and technologies more rapidly than our competitors, andcommercialize our products and services by incorporating these enhancedtechnologies. There can be no assurance that we will succeed in addressing anyor all of these risks.

 

There has been a generaldownturn in the Unites States of America and global economy.  If the economic environment continues todecline or if the current global slowdown worsens or becomes prolonged, ourfuture results may be significantly impacted. We believe that the currenteconomic decline has increased the average length of our sales cycle and ouroperating results could suffer and our stock price could decline if we do notachieve the level of revenues we expect. Financial comparisons discussed herein may not be indicative of futureperformance.

 

Like otherU.S. companies, our business and operating results are subject to uncertaintiesarising out of the terrorist attacks on the United States, including theeconomic consequences of military actions or additional terrorist activitiesand associated political instability, and the impact of heightened securityconcerns on domestic and international travel and commerce. Such uncertaintiescould also lead to delays or cancellations of customer orders, a generaldecrease in corporate spending or our inability to effectively market and sellour products. Any of these results could substantially harm our business andresults of operations, causing a decrease in our revenues.

 

***Related Party Transactions***

 

Mr. Pehong Chen, our CEO andChairman of the Board, served as a director of Brience, Inc. a provider ofsoftware products.  From February 2001 to February 2002, we had a resellerrelationship with Brience whereby we agreed to resell the Brience productlicenses with our product.  One end-customer installation that resultedfrom the reseller relationship was not concluded until the three months endedSeptember 30, 2002.  During the three and six months ended September 30,2002, we paid to Brience approximately $175,000 in license fees for the resellof the Brience product to that end-customer.  During the three monthsended June 30, 2003, we paid no royalties to Brience.  Mr. Chen resignedfrom the Brience board of directors on September 12, 2002.

 

We also havean investment of 19.9% in Roundarch, a CRM services company. We have a resellerrelationship with Roundarch whereby Roundarch is an implementation partner whointegrates our software products with other third-party software products intoCRM customer installations.  During the three months ended June 30, 2003and 2002, transactions involving Roundarch comprised $179,000 and $17,000 ofour revenue, respectively. For the six months ended June 30, 2003 and 2002,revenues were $202,000 and $53,000, respectively.

 

**Item 3.  Quantitative and Qualitative Disclosures about Market Risk**

 

Our exposureto market risk for changes in interest rates relates primarily to ourinvestment portfolio. We had no derivative financial instruments as of June30, 2003 and December 31, 2002. We place our investments ininstruments that meet high credit quality standards and the amount of creditexposure to any one issue, issuer and type of instrument is limited.

 

***Cash and Cash Equivalents, Short-Term Investments, Long-TermInvestments***

 

We considerall debt and equity securities with maturities of three months or less at thedate of purchase to be cash equivalents. Our short-term investments consist ofdebt and equity securities that are classified as available-for-sale. Our debtsecurities are carried at fair value with related unrealized gains or lossesreported as other comprehensive income (loss), net of tax. Our long-terminvestments include debt securities that are classified as available-for-sale.These securities have remaining maturities greater than one year from June 30,2003. These investments are carried at fair value with related unrealized gainsor losses reported as other comprehensive income, net of tax.

 

**All short-term investments have a remaining maturity oftwelve months or less. Total short-term and long-term investment unrealizedgains (losses) were net losses of $1,000 and $1.5 million for the six months ended June 30, 2003 and 2002,respectively.**

 

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Our cash andcash equivalents, short-term investments and long-term investments consisted ofthe following as of June 30, 2003 (in thousands):

 
|                                  |   | **Amortized  costs** |    | **Unrealized  gains** |   | **Unrealized  losses** |   | **Fair  value** |   |
|---------------------------------------|--------|----------------------|---------|-----------------------|--------|------------------------|--------|-----------------|--------|
| Cash                                  |   | $                    | 71,379  |                  | $      | —                 |   | $               | — |   | $ | 71,379 |   |
| Money market                          |   | 24,012               |    | —                |   | —                 |   | 24,012          |   |
| Corporate notes/bonds                 |   | 12,165               |    | —                |   | 2                      |   | 12,163          |   |
| Government notes/bonds                |   | 4,734                |    | 1                     |   | —                 |   | 4,735           |   |
|                                  |   | 112,290              |    | 1                     |   | 2                      |   | 112,289         |   |
|                                  |   |                 |    |                  |   |                   |   |            |   |
| Included in cash and cash equivalents |   | 107,533              |    | —                |   | —                 |   | 107,533         |   |
| Included in short-term investments    |   | 4,757                |    | 1                     |   | 2                      |   | 4,756           |   |
| Included in long-term investments     |   | —               |    | —                |   | —                 |   | —          |   |
|                                  |   | $                    | 112,290 |                  | $      | 1                      |   | $               | 2      |   | $ | 112,289 |   |

 

Included in the table abovein cash and cash equivalents are $16.8 million of non-current restrictedcash and investments.

 

Our cash and cashequivalents, short-term investments and long-term investments consisted of thefollowing as of December 31, 2002 (in thousands):

 
|                                  |   | **Amortized  costs** |    | **Unrealized  gains** |   | **Unrealized  losses** |   | **Fair  value** |   |
|---------------------------------------|--------|----------------------|---------|-----------------------|--------|------------------------|--------|-----------------|--------|
| Cash                                  |   | $                    | 36,070  |                  | $      | —                 |   | $               | — |   | $ | 36,070 |   |
| Money market                          |   | 36,232               |    | —                |   | —                 |   | 36,232          |   |
| Corporate notes/bonds                 |   | 23,369               |    | 50                    |   | (1                     | )      | 23,418          |   |
| Government notes/bonds                |   | 23,430               |    | 11                    |   | —                 |   | 23,441          |   |
|                                  |   | $                    | 119,101 |                  | $      | 61                     |   | $               | (1     | ) | $ | 119,161 |   |
|                                  |   |                 |    |                  |   |                   |   |            |   |
| Included in cash and cash equivalents |   | $                    | 94,090  |                  | $      | —                 |   | $               | — |   | $ | 94,090 |   |
| Included in short-term investments    |   | 24,428               |    | 57                    |   | (1                     | )      | 24,484          |   |
| Included in long-term investments     |   | 583                  |    | 4                     |   | —                 |   | 587             |   |
|                                  |   | $                    | 119,101 |                  | $      | 61                     |   | $               | (1     | ) | $ | 119,161 |   |

 

Included in the table abovein short-term investments are non-current restricted cash and investments of$16.7 million.

 

***Concentrations of Credit Risk***

 

Financialassets that potentially subject us to significant concentrations of credit riskconsist principally of cash, cash equivalents, short-term investments, andtrade accounts receivable. We maintain our cash and cash equivalents andshort-term investments with four separate financial institutions. We market andsell our products throughout the world and perform ongoing credit evaluationsof our customers. We maintain reserves for potential credit losses. For thethree months and six months ended June 30, 2003 and 2002, no onecustomer accounted for more than 10% of total revenue.  For the three months and six months ended June 30, 2003, no one customeraccounted for more than 10% of accounts receivable. For the three months andsix months ended June 30, 2002,one customer accounted for more than 10% of accounts receivable.

 

***Fair Value of Financial Instruments***

 

Our financial instrumentsconsist of cash equivalents, short-term investments, accounts receivable,long-term investments, accounts payable and debt. We do not have any derivativefinancial instruments. We believe the reported carrying amounts of itsfinancial instruments approximates fair value, based upon the short maturity ofcash equivalents, short-term investments, long-term investments, accountsreceivable and payable, and based on the current rates available to it onsimilar debt issues.

 

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***Equity Investments***

 

Our equity investmentsconsist of investments in public and non-public companies that are accountedfor under the cost method of accounting. Equity investments are accounted forunder the cost method of accounting when we have a minority interest and do nothave the ability to exercise significant influence. These investments areclassified as available for sale and are carried at fair value when readilydeterminable market values exist or at cost when such market values do notexist. Adjustments to fair value are recorded as a component of othercomprehensive income unless the investments are considered permanently impairedin which case the adjustment is recorded as a component of other income(expense), net in the condensed consolidated statement of operations.

 

The total fairvalue of our cost method long-term equity investments in public and non-publiccompanies as of June 30, 2003 was $1.9 million.. There were no unrealizedgains or losses recorded during the three months ended June 30, 2003 related tolong-term equity investments.

 

Our exposure to market riskfor changes in interest rates relates primarily to our investment portfolio. Wehad no derivative financial instruments as of June 30, 2003 and December 31,2002. We place our investments in instruments that meet high credit qualitystandards and the amount of credit exposure to any one issue, issuer and typeof instrument is limited.  Our interest rate risk related to borrowingshistorically has been minimal as interest expense related to borrowings hasbeen immaterial for the six months ended June 30, 2003 and 2002.

 

During the second quarter offiscal 2003, we drew down $27.0 million on our revolving line of credit. Interest is payable monthly at the bank’s prime rate with a floor minimum of4.25% (4.25% annually as of June 30, 2003) and principal is due in full inFebruary 2004.  Additionally, we have two outstanding term loans as ofJune 30, 2003.  Interest on those term loans are at the bank’s prime rate(4.00% as of June 30, 2003) and prime rate plus 1.25%.

 

**ITEM4.   Controls and Procedures**

 

Based on theirevaluation of our disclosure controls and procedures (as defined in the rulespromulgated under the Securities Exchange Act of 1934), our chief executiveofficer and our chief financial officer concluded that our disclosure controlsand procedures were effective as of the end of the period covered by thisreport.

 

There were nosignificant changes in our internal control over financial reporting during theperiod covered by this report that have materially affected, or are reasonablylikely to materially affect, our internal control over financial reporting.

 

*Limitations on the Effectiveness of Controls*

 

Ourmanagement, including our Chief Executive Officer and Chief Financial Officer,does not expect that our disclosure controls and procedures or our internalcontrols will prevent all error and fraud. A control system, no matter how wellconceived and operated, can provide only reasonable, not absolute, assurancethat the objectives of the control system are met. Further, the design of acontrol system must reflect the fact that there are resource constraints, andthe benefits of controls must be considered relative to their costs. Because ofthe inherent limitations in all control systems, no evaluation of controls canprovide absolute assurance that all control issues and instances of fraud, ifany, within the company have been detected. These inherent limitations includethe realities that judgments in decision-making can be faulty, and thatbreakdowns can occur because of simple error or mistake. Additionally, controlscan be circumvented by the individual acts of some persons, by collusion of twoor more people, or by management override of the control. The design of anysystem of controls also is based in part upon certain assumptions about thelikelihood of future events, and there can be no assurance that any design willsucceed in achieving its stated goals under all potential future conditions;over time, control may become inadequate because of changes in conditions, orthe degree of compliance with the policies or procedures may deteriorate.Because of the inherent limitations in a cost-effective control system,misstatements due to error or fraud may occur and not be detected. TheCompany’s disclosure controls and procedures are designed to provide reasonableassurance of achieving their objectives, and the Chief Executive Officer andthe Chief Financial Officer have concluded that these controls and proceduresare effective at the “reasonable assurance” level.

 

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**PART II.  OTHER INFORMATION**

 

**Item 1.****          ****Legal Proceedings**

 

**During Q2 2003, the Company settled a dispute with AvalonPartners, Inc., doing business as Cresa Partners (“Cresa”) with respect tobroker commissions related to the Company’s termination and restructuring ofcertain facilities leases associated with the Company’s restructuring planstaken during the second quarter of 2002. Under the terms of the settlement theCompany made a one-time payment of $2.2 million to Cresa in April 2003.**

 

The Company isalso subject to various other claims and legal actions arising in the ordinarycourse of business. In the opinion of management, after consultation with legalcounsel, the Company has adequate defenses for each of the claims and actions,and believes that their ultimate disposition is not expected to have a materialeffect on our business, financial condition or results of operations. Althoughmanagement currently believes that the outcome of other outstanding legalproceedings, claims and litigation involving us will not have a materialadverse effect on our business, results of operations or financial condition,litigation is inherently uncertain, and there can be no assurance that existingor future litigation will not have a material adverse effect on our business,results of operations or financial condition.

 

**Item 2.****          ****Changes in Securities andUse of Proceeds**

Not applicable.

 

**Item 3.****          ****Defaults Upon SeniorSecurities**

Not applicable.

 

**Item 4.****          ****Submission of Matters to aVote of Security Holders**

(a)          The Annual Meeting of Stockholders of the Company was held on June 11,2003.

(b)         David L. Anderson, Pehong Chen, James D. Dixon, Todd A. Garrett,  Koh Boon Hwee, T. Michael Nevens and CarlPascarella were elected as Directors.

(c)          The matters voted upon and the voting of stockholders with respectthereto are as follows:

 

i.          The election of Directors:

 
|              |   | **For**    |   | **Withheld** |
|-------------------|--------|------------|--------|--------------|
| David L. Anderson |   | 24,191,159 |   | 104,778      |
| Pehong Chen       |   | 24,012,272 |   | 283,665      |
| James D. Dixon    |   | 24,191,110 |   | 104,827      |
| Todd A. Garrett   |   | 24,191,032 |   | 104,905      |
| Koh Boon Hwee     |   | 24,191,131 |   | 104,806      |
| T. Michael Nevens |   | 24,191,099 |   | 104,838      |
| Carl Pascarella   |   | 23,984,567 |   | 311,370      |

 

ii.         To approve the Company’s Employee Stock Purchase Plan, as amended, (i) toincrease the aggregate number of shares of Common Stock authorized for issuanceunder such plan by 750,000 shares; and (ii) to include an evergreenprovision that automatically increases the number of shares authorized forissuance under such plan, subject to certain limitations, by the lesser of 1.5%of the outstanding Common Stock of the Company on the first day of each fiscalyear or 800,000 shares of Common Stock, beginning in 2004 and ending in 2014. 

 
| For:     |   | 6,852,706 |   | Against:   |   | 787,197    |
|----------|--------|-----------|--------|------------|--------|------------|
| Abstain: |   | 46,008    |   | Not Voted: |   | 16,610,026 |

 

iii.        To ratify the appointment of BDO Seidman LLP to serve as independent auditorsof the Company for the fiscal year ending December 31, 2003:

 
| For:     |   | 24,190,688 |   | Against: |   | 58,056 |
|----------|--------|------------|--------|----------|--------|--------|
| Abstain: |   | 47,193     |   | :        |   |   |

 

 

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**Item 5.****          ****Other Information**

Not applicable.

 

**Item 6.****          ****Exhibits and Reports on Form8-K**

(a)                                  Exhibits

 
| **Exhibits** |   | **Description**                                                                                                                                |
|--------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.5(1)      |   | 1996 Employee Stock  Purchase Plan as amended March 25, 2003.                                                                                  |
| 10.20        |   | 2000 Non-Officer Incentive  Plan as amended September 11, 2002.                                                                                |
| 10.35        |   | First Amendment to the  Amended and Restated Loan and Security Agreement dated February 28, 2003  between the Company and Silicon Valley Bank. |
| 10.36        |   | Second Amendment to the  Amended and Restated Loan and Security Agreement dated June 30, 2003 between  the Company and Silicon Valley Bank.    |
| 10.37        |   | BroadVision,  Inc. Change in Control Severance Benefit Plan, established effective May 22,  2003.                                              |
| 10.38        |   | BroadVision,  Inc. Executive Severance Benefit Plan, established effective May 22, 2003.                                                       |
| 10.39        |   | Second Amendment to the  Amended and Restated Loan and Security Agreement dated June 30, 2003 between  the Company and Silicon Valley Bank.    |
| 31.1         |   | Certification  of the Chief Executive Officer of BroadVision pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                       |
| 31.2         |   | Certification  of the Chief Financial Officer of BroadVision pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002                        |
| 32.1         |   | Certification  of the Chief Executive Officer and Chief Financial Officer.                                                                     |

 

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(1) Incorporated by reference to the Company’s Proxy Statement filed onMay 15, 2003.

 

(b)                                 Reportson Form 8-K

On April 23,2003, the Company filed a current report on Form 8-K related to theannouncement of its financial results for the quarter ended March 31, 2003.

On July 23,2003, the Company filed a current report on Form 8-K related to theannouncement of its financial results for the quarter ended June 30, 2003.

 

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**SIGNATURES**

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized.

 

 
|                  |   | **BROADVISION,  INC.**                                                                              |
|-----------------------|--------|-----------------------------------------------------------------------------------------------------|
|                  |   |                                                                                                |
| Date: August 14, 2003 | By:    | /s/  Pehong Chen                                                                               |   |   |
|                  |   | Pehong Chen                                                                                         |
|                  |   | Chairman of the Board,  President and Chief Executive Officer (Principal Executive  Officer)        |
|                  |   |                                                                                                |
| Date: August 14, 2003 | By:    | /s/  William E. Meyer                                                                          |   |   |
|                  |   | William E. Meyer                                                                                    |
|                  |   | Executive Vice President  and Chief Financial Officer  (Principal Financial and Accounting Officer) |

 

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**BROADVISION, INC. QUARTERLY REPORT ONFORM 10-Q JUNE 30, 2003**

 

**INDEX TO EXHIBITS**

 
| **Exhibit** |   | **Description**                                                                                                                                |
|-------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.5(1)     |   | 1996 Employee Stock  Purchase Plan as amended May 1, 2002.                                                                                |
| 10.20       |   | 2000 Non-Officer Incentive  Plan as amended September 11, 2002.                                                                                |
| 10.35       |   | First Amendment to the  Amended and Restated Loan and Security Agreement dated February 28, 2003  between the Company and Silicon Valley Bank. |
| 10.36       |   | Second Amendment to the  Amended and Restated Loan and Security Agreement dated June 30, 2003 between  the Company and Silicon Valley Bank.    |
| 10.37       |   | BroadVision,  Inc. Change in Control Severance Benefit Plan, established effective May 22,  2003.                                              |
| 10.38       |   | BroadVision,  Inc. Executive Severance Benefit Plan, established effective May 22, 2003.                                                       |
| 10.39       |   | Third Amendment to the  Amended and Restated Loan and Security Agreement dated June 30, 2003 between  the Company and Silicon Valley Bank.     |
| 31.1        |   | Certification  of the Chief Executive Officer of BroadVision pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                       |
| 31.2        |   | Certification  of the Chief Financial Officer of BroadVision pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002                        |
| 32.1        |   | Certification  of the Chief Executive Officer and Chief Financial Officer.                                                                     |
|        |   |                                                                                                                                           |

 

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(1) Incorporated by reference to theCompany’s Proxy Statement filed on May 15, 2003.

 

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