**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, DC  20549**

 

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**FORM10-Q**

** **

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| **(Mark One)** |
|----------------|
|           |   |
| **ý**     | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

** **

**Forthe Quarter ended September 30, 2002**

** **

**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 its charter)

 

| **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 by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15 (d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days. Yes ýNo o

 

As of November 7, 2002, there were 32,258,467 sharesof the Registrant’s Common Stock issued and outstanding.

 

 

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**BROADVISION, INC. AND SUBSIDIARIES**

**FORM 10-Q**

**Quarter Ended September 30, 2002**

** **

**TABLE OF CONTENTS**

 
| **PART I.**    | **FINANCIAL INFORMATION**                                                                                                             |
|----------------|---------------------------------------------------------------------------------------------------------------------------------------|
| Item 1.        | Financial Statements                                                                                                                  |
|           | Condensed  Consolidated Balance Sheets—September 30, 2002 and December 31, 2001                                             |
|           | Condensed  Consolidated Statements of Operations and Comprehensive Loss—Three and nine  months ended September 30, 2002 and 2001 |
|           | Condensed  Consolidated Statements of Cash Flows—Nine months ended September 30, 2002  and 2001                                  |
|           | 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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**PART I.**  FINANCIAL INFORMATION

 

**Item 1.**          Financial Statements

 

**BROADVISION, INC. ANDSUBSIDIARIESCONDENSED CONSOLIDATED BALANCESHEETS(In thousands, except per share data)**

 
|                                                                                                                                            |   | **September  30,  2002** |    | **December  31,  2001** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|---------|-------------------------|--------|
|                                                                                                                                            |   | **(unaudited)**          |    |                    |   |
| **ASSETS**                                                                                                                                      |   |                     |    |                    |   |
|                                                                                                                                            |   |                     |    |                    |   |
| Cash and cash equivalents                                                                                                                       |   | $                        | 83,114  |                    | $      | 75,758 |   |
| Short-term investments                                                                                                                          |   | 26,135                   |    | 65,705                  |   |
| Accounts receivable, less reserves of  $6,288 and $8,194 for 2002 and 2001, respectively                                                        |   | 18,903                   |    | 39,768                  |   |
| Prepaids and other                                                                                                                              |   | 9,665                    |    | 12,816                  |   |
|                                                                                                                                            |   |                     |    |                    |   |
| Total current assets                                                                                                                            |   | 137,817                  |    | 194,047                 |   |
|                                                                                                                                            |   |                     |    |                    |   |
| Property and equipment, net                                                                                                                     |   | 30,502                   |    | 67,219                  |   |
| Deferred tax asset                                                                                                                              |   | —                   |    | 2,857                   |   |
| Long-term investments                                                                                                                           |   | 2,273                    |    | 22,135                  |   |
| Restricted cash and investments                                                                                                                 |   | 16,645                   |    | 29,949                  |   |
| Equity investments                                                                                                                              |   | 3,000                    |    | 5,583                   |   |
| Goodwill and other intangibles, net                                                                                                             |   | 58,207                   |    | 60,867                  |   |
| Other assets                                                                                                                                    |   | 4,772                    |    | 9,760                   |   |
|                                                                                                                                            |   |                     |    |                    |   |
| Total assets                                                                                                                                    |   | $                        | 253,216 |                    | $      | 392,417 |   |
|                                                                                                                                            |   |                     |    |                    |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                   |   |                     |    |                    |   |
|                                                                                                                                            |   |                     |    |                    |   |
| Accounts payable                                                                                                                                |   | $                        | 9,704   |                    | $      | 11,276 |   |
| Accrued expenses                                                                                                                                |   | 55,622                   |    | 61,712                  |   |
| Unearned revenue                                                                                                                                |   | 15,410                   |    | 22,580                  |   |
| Deferred maintenance                                                                                                                            |   | 23,839                   |    | 30,337                  |   |
| Bank borrowings and current portion of  long-term debt                                                                                          |   | 25,977                   |    | 977                     |   |
|                                                                                                                                            |   |                     |    |                    |   |
| Total current liabilities                                                                                                                       |   | 130,552                  |    | 126,882                 |   |
|                                                                                                                                            |   |                     |    |                    |   |
| Long-term debt, net of current portion                                                                                                          |   | 2,190                    |    | 2,922                   |   |
| Other noncurrent liabilities                                                                                                                    |   | 70,984                   |    | 59,466                  |   |
|                                                                                                                                            |   |                     |    |                    |   |
| Total liabilities                                                                                                                               |   | 203,726                  |    | 189,270                 |   |
|                                                                                                                                            |   |                     |    |                    |   |
| Commitments                                                                                                                                     |   |                     |    |                    |   |
|                                                                                                                                            |   |                     |    |                    |   |
| 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; 32,258 and 31,643 shares issued and outstanding for 2002  and 2001, respectively |   | 3                        |    | 3                       |   |
| Additional paid-in capital                                                                                                                      |   | 1,210,002                |    | 1,207,071               |   |
| Accumulated other comprehensive loss, net  of tax                                                                                               |   | (1,288                   | )       | (5,245                  | )      |
| Accumulated deficit                                                                                                                             |   | (1,159,227               | )       | (998,682                | )      |
| Total stockholders’ equity                                                                                                                 |   | 49,490                   |    | 203,147                 |   |
|                                                                                                                                            |   |                     |    |                    |   |
| Total liabilities and stockholders’ equity                                                                                                 |   | $                        | 253,216 |                    | $      | 392,417 |   |

 

***See Accompanying Notes to Condensed Consolidated FinancialStatements***

 

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**BROADVISION, INC. ANDSUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTSOF OPERATIONSAND COMPREHENSIVE LOSS(In thousands, except per share amounts; Unaudited)**

 
|                                                                                                           |   | **Three Months Ended  September 30,** |    | **Nine Months Ended****September 30,** |   |
|----------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|---------|----------------------------------------|--------|
|                                                                                                           |   | **2002**                              |    | **2001**                               |   | **2002** |   | **2001** |   |
|                                                                                                           |   |                                  |    |                                   |   |   |   |   |   |
| **Revenues:**                                                                                                  |   |                                  |    |                                   |   |   |   |   |   |
| Software licenses                                                                                              |   | $                                     | 10,756  |                                   | $      | 16,292 |   | $ | 29,244 |   | $ | 80,461 |   |
| Services                                                                                                       |   | 16,483                                |    | 32,437                                 |   | 57,869 |   | 119,032 |   |
| Total revenues                                                                                                 |   | 27,239                                |    | 48,729                                 |   | 87,113 |   | 199,493 |   |
|                                                                                                           |   |                                  |    |                                   |   |   |   |   |   |
| **Cost of revenues:**                                                                                          |   |                                  |    |                                   |   |   |   |   |   |
| Cost of software licenses                                                                                      |   | 1,414                                 |    | 1,713                                  |   | 3,417 |   | 6,608 |   |
| Cost of services                                                                                               |   | 8,751                                 |    | 15,661                                 |   | 31,507 |   | 85,234 |   |
| Total cost of revenues                                                                                         |   | 10,165                                |    | 17,374                                 |   | 34,924 |   | 91,842 |   |
|                                                                                                           |   |                                  |    |                                   |   |   |   |   |   |
| Gross profit                                                                                                   |   | 17,074                                |    | 31,355                                 |   | 52,189 |   | 107,651 |   |
|                                                                                                           |   |                                  |    |                                   |   |   |   |   |   |
| **Operating expenses:**                                                                                        |   |                                  |    |                                   |   |   |   |   |   |
| Research and development                                                                                       |   | 7,774                                 |    | 16,230                                 |   | 34,755 |   | 63,817 |   |
| Sales and marketing                                                                                            |   | 9,384                                 |    | 25,895                                 |   | 41,365 |   | 120,142 |   |
| General and administrative                                                                                     |   | 2,573                                 |    | 10,849                                 |   | 13,775 |   | 35,707 |   |
| Goodwill and intangible amortization                                                                           |   | 887                                   |    | 66,493                                 |   | 2,661 |   | 199,070 |   |
| Restructuring charge                                                                                           |   | 63,205                                |    | 9,847                                  |   | 103,150 |   | 133,320 |   |
| Impairment of goodwill and other  intangibles                                                                  |   | —                                |    | 336,379                                |   | — |   | 336,379 |   |
| Impairment of assets                                                                                           |   | 853                                   |    | —                                 |   | 3,129 |   | — |   |
| Total operating expenses                                                                                       |   | 84,676                                |    | 465,693                                |   | 198,835 |   | 888,435 |   |
|                                                                                                           |   |                                  |    |                                   |   |   |   |   |   |
| Operating loss                                                                                                 |   | (67,602                               | )       | (434,338                               | )      | (146,646 | ) | (780,784 | ) |
|                                                                                                           |   |                                  |    |                                   |   |   |   |   |   |
| Other income (expense), net                                                                                    |   | 7                                     |    | 1,797                                  |   | (6,680 | ) | 1,418 |   |
|                                                                                                           |   |                                  |    |                                   |   |   |   |   |   |
| Loss before provision for income taxes                                                                         |   | (67,595                               | )       | (432,541                               | )      | (153,326 | ) | (779,366 | ) |
|                                                                                                           |   |                                  |    |                                   |   |   |   |   |   |
| Provision for income taxes                                                                                     |   | 138                                   |    | 406                                    |   | 7,219 |   | 1,568 |   |
|                                                                                                           |   |                                  |    |                                   |   |   |   |   |   |
| Net loss                                                                                                       |   | $                                     | (67,733 | )                                      | $      | (432,947 | ) | $ | (160,545 | ) | $ | (780,934 | ) |
|                                                                                                           |   |                                  |    |                                   |   |   |   |   |   |
| Basic and diluted net loss per share                                                                           |   | $                                     | (2.11   | )                                      | $      | (13.99 | ) | $ | (5.02 | ) | $ | (25.62 | ) |
|                                                                                                           |   |                                  |    |                                   |   |   |   |   |   |
| **Shares used in computing:**                                                                                  |   |                                  |    |                                   |   |   |   |   |   |
| Basic and diluted net loss per share                                                                           |   | 32,171                                |    | 30,941                                 |   | 31,961 |   | 30,483 |   |
|                                                                                                           |   |                                  |    |                                   |   |   |   |   |   |
| **Comprehensive loss:**                                                                                        |   |                                  |    |                                   |   |   |   |   |   |
| Net loss                                                                                                       |   | $                                     | (67,733 | )                                      | $      | (432,947 | ) | $ | (160,545 | ) | $ | (780,934 | ) |
| Other comprehensive gain (loss), net of  tax:                                                                  |   |                                  |    |                                   |   |   |   |   |   |
| Unrealized investment gains (losses) less  reclassification adjustment for gains (losses) included in net loss |   | 17                                    |    | (358                                   | )      | 3,957 |   | (4,143 | ) |
| Total comprehensive loss                                                                                       |   | $                                     | (67,716 | )                                      | $      | (433,305 | ) | $ | (156,588 | ) | $ | (785,077 | ) |

 

*See Accompanying Notes to CondensedConsolidated Financial Statements*

 

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**BROADVISION, INC. ANDSUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS****(In thousands)**

 
|                                                                          |   | **Nine  Months Ended September 30,** |     |
|-------------------------------------------------------------------------------|--------|--------------------------------------|----------|
|                                                                          |   | **2002**                             |     | **2001** |   |
|                                                                          |   | **(unaudited)**                      |     |
| **Cash flows from operating activities:**                                     |   |                                 |     |   |   |
| Net loss                                                                      |   | $                                    | (160,545 | ) | $ | (780,934 | ) |
| Adjustments to reconcile net loss to net  cash used for operating activities: |   |                                 |     |   |   |
| Depreciation and amortization                                                 |   | 14,512                               |     | 19,238 |   |
| Provision for doubtful accounts                                               |   | (1,945                               | )        | 6,333 |   |
| Provision for sales returns                                                   |   | 1,524                                |     | 2,742 |   |
| Amortization of prepaid royalties                                             |   | 2,730                                |     | 2,763 |   |
| Amortization of prepaid compensation                                          |   | —                               |     | 512 |   |
| Realized loss on cost method long-term  investments                           |   | 10,328                               |     | 3,979 |   |
| Equity in net loss from unconsolidated  subsidiary                            |   | —                               |     | 2,438 |   |
| Amortization of goodwill and other  intangibles                               |   | 2,661                                |     | 199,070 |   |
| Stock-based compensation charge                                               |   | 847                                  |     | 350 |   |
| Restructuring charge, non cash                                                |   | 18,651                               |     | 118,730 |   |
| Loss on sale of assets                                                        |   | 344                                  |     | 1,147 |   |
| Impairment of goodwill and other  intangibles                                 |   | —                               |     | 336,379 |   |
| Impairment of assets                                                          |   | 3,129                                |     | — |   |
| Provision for deferred tax asset valuation                                    |   | 6,279                                |     | — |   |
| Changes in operating assets and liabilities  (net of acquisitions):           |   |                                 |     |   |   |
| Accounts receivable                                                           |   | 21,286                               |     | 60,549 |   |
| Prepaids and other                                                            |   | 3,151                                |     | 8,563 |   |
| Accounts payable and accrued expenses                                         |   | (6,877                               | )        | (29,028 | ) |
| Restructuring reserves                                                        |   | 7,583                                |     | 2,817 |   |
| Unearned revenue and deferred maintenance                                     |   | (13,668                              | )        | (3,531 | ) |
| Other noncurrent assets                                                       |   | (464                                 | )        | (2,258 | ) |
| Net cash used for operating activities                                        |   | (90,474                              | )        | (50,141 | ) |
|                                                                          |   |                                 |     |   |   |
| **Cash flows from investing activities:**                                     |   |                                 |     |   |   |
| Purchase of property and equipment                                            |   | (1,065                               | )        | (50,304 | ) |
| Proceeds from the sale of assets                                              |   | 247                                  |     | — |   |
| Purchase of long-term investments                                             |   | (2,349                               | )        | (39,573 | ) |
| Sales/maturity of long-term investments                                       |   | 22,519                               |     | 84,299 |   |
| Purchase of short-term investments                                            |   | (31,141                              | )        | (95,853 | ) |
| Sales/maturity of short-term investments                                      |   | 69,198                               |     | 100,367 |   |
| Cash acquired in purchase transaction                                         |   | —                               |     | 7,171 |   |
| Transfer from restricted cash/investments                                     |   | 13,304                               |     | — |   |
| Net cash provided by investing activities                                     |   | 70,713                               |     | 6,107 |   |
|                                                                          |   |                                 |     |   |   |
| **Cash flows from financing activities:**                                     |   |                                 |     |   |   |
| Proceeds from issuance of common stock, net                                   |   | 2,849                                |     | 15,331 |   |
| Proceeds from borrowings                                                      |   | 25,000                               |     | — |   |
| Repayments of borrowings                                                      |   | (732                                 | )        | (731 | ) |
| Net cash provided by financing activities                                     |   | 27,117                               |     | 14,600 |   |
|                                                                          |   |                                 |     |   |   |
| Net increase (decrease) in cash and cash  equivalents                         |   | 7,356                                |     | (29,434 | ) |
| Cash and cash equivalents at beginning of  period                             |   | 75,758                               |     | 153,137 |   |
| Cash and cash equivalents at end of period                                    |   | $                                    | 83,114   |   | $ | 123,703 |   |
|                                                                          |   |                                 |     |   |   |
| **Supplemental disclosures of cash flow  information:**                       |   |                                 |     |   |   |
| Cash paid for interest                                                        |   | $                                    | 164      |   | $ | 347 |   |
| Cash paid for income taxes                                                    |   | $                                    | 941      |   | $ | 1,568 |   |

 

*See Accompanying Notes to CondensedConsolidated Financial Statements*

 

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**BROADVISION, INC. ANDSUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**Note 1.**          Organization and Summary of Significant Accounting Policies

 

***Nature of Business***

 

BroadVision (collectively with its subsidiaries, the “Company”) develops and sells a comprehensive suite ofenterprise business portal applications and technology that enable companies tomanage interactions with, conduct transactions with and provide services toemployees, customers and vendors in a personalized and collaborativeself-service model.  BroadVision’s enterprise business portal applicationsenable companies to organize dynamic profiles of web and wireless users from volunteereddata and observed behavior, deliver highly specialized content in response tothese profiles and securely execute transactions.  As of September 30,2002, more than 1,200 companies and government entities around the globe usethe Company’s applications to enable their enterprise self-service initiatives.They are leveraging web and wireless technology in conjunction with BroadVisionsoftware to unify and extend their legacy applications, information andbusiness processes to better serve their employees, partners and customers in apersonalized and collaborative way.

 

Business managers are able to modify business rulesand content in real time, offering a personalized experience to each visitor.Because of BroadVision’s fundamental belief and adherence to standards-baseddevelopment and open architecture design, the Company’s applications are easilyintegrated with BroadVision’s customers’ existing systems and easily expandedas these customers’ needs and businesses grow.

 

The Company believes itsproducts enhance revenue opportunities for customers by enabling more effectiveand efficient “one-to-one” relationships between an enterprise and itsemployees, customers and business partners. Web and wireless users are engagedby highly personalized real-time interactions, are able to transact businesssecurely and are encouraged to remain online and make return visits.BroadVision’s applications also improve the cost-effectiveness of one-to-onerelationship management by enabling non-technical managers to modify businessrules and content in real time and by helping to reduce costs of customeracquisition and retention, business development and technical support as wellas employee workplace initiatives. In addition, the packaged solution nature ofthe Company’s products decreases its customers’ time to deployment and allowsthem to easily manage and expand their web and wireless application usage in acost-effective manner.

 

As of September 30, 2002,the Company had developed key strategic business alliances with over 75 systemintegration, design, consulting and other services organizations throughout theworld.  The Company’s  platformalliances are partnerships formed to integrate technologies to drive business growth. Additionally, the Company has developed key technology partnerships withleading web- and wireless-focused companies in areas complementary to itssolutions, such as data analysis and reporting, enterprise applicationintegration, enterprise web management, payment processing and Extensible MarkupLanguage.  These technology partnerships enhance the Company’s ability tobase products on industry standards and to take advantage of current andemerging technologies.

 

The Company sells 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, South America, Europe and Asia/Pacific.

 

BroadVision Global Services(“BVGS”) organization provides a full spectrum of global services to helpensure success for businesses, including consulting services and ongoingtraining and maintenance.  The BVGS organization consists of business,content and technical consultants with extensive experience in the design ofonline businesses and in the implementation of enterprise self-serviceapplications.

 

There has been a generaldownturn in the economy since the beginning of 2001.  This downturn islikely to continue in the future and has and could continue to have an impacton the Company’s future financial results.  Comparisons of financialperformance made in this document are not necessarily indicative of futureperformance.  The Company announced a corporate-wide reorganization andreduction in force and incurred a charge in fiscal 2001 of $153.3 million andduring the nine months ended September 30, 2002 of $103.2 million, related tothese actions and to consolidation of the Company’s facilities.  Pleasesee Note 7 of Notes to Condensed Consolidated Financial Statements.

 

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***Basis of Presentation and Use ofEstimates***

 

The accompanying consolidatedfinancial statements include the accounts of the Company and its wholly-ownedsubsidiaries. All significant intercompany transactions have been eliminated inconsolidation.  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.  Thepreparation of consolidated financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make certain assumptions and estimates that affect reportedamounts of assets and liabilities as of the date of the financial statementsand the reported amounts of revenues and expenses during the reportingperiod.  Actual results could differ from estimates.  The financialresults and related information as of September 30, 2002 and for the three andnine months ended September 30, 2002 and 2001 are unaudited. The balance sheetat December 31, 2001 has been derived from the audited consolidated financialstatements as of that date but does not necessarily reflect all of theinformational disclosures previously reported in accordance with accountingprinciples generally accepted in the United States of America.

 

The accompanyingconsolidated 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. The results of the Company’s operations for the interimperiods presented are not necessarily indicative of operating results for thefull fiscal year or any future periods.

 

*Reclassifications—*Certain prior period balances have beenreclassified to conform to the current period presentation.

 

***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 fees for licenses of its software productseither based on the number of persons registered to use the product or based onthe number of CPUs on which the product is installed.  Licenses for software whereby fees charged are based upon thenumber of persons registered to use the product are differentiated betweenlicenses for development use and licenses for use in deployment of thecustomer’s website.  Licenses forsoftware whereby fees charged are on a per-CPU basis do not differentiatebetween development and deployment usage. The Company’s revenue recognition policies are in accordance withStatement of Position (“SOP”) No. 97-2, *SoftwareRevenue Recognition*, as amended; SOP No. 98-9, *Software Revenue Recognition, With Respect to CertainTransactions*and the Securities and Exchange Commission’s StaffAccounting Bulletin No. 101, *RevenueRecognition in Financial Statements*.

 

*Software License Revenue*

 

TheCompany licenses its products through its direct sales force and indirectlythrough resellers. In general, software license revenues are recognized when anon-cancelable license agreement has been signed and the customer acknowledgesan unconditional obligation to pay, the software product has been delivered,there are no uncertainties surrounding product acceptance, the fees are fixedand determinable and collection is considered probable. Delivery is consideredto have occurred when title and risk of loss have been transferred to the customer,which generally occurs when media containing the licensed programs is providedto a common carrier.  In case of electronic delivery, delivery occurs whenthe customer is given access to the licensed programs.  If collectibilityis not considered probable, revenue is recognized when the fee is collected.Subscription-based license revenues are recognized ratably over thesubscription period.  The Company enters into reseller arrangements thattypically provide for sublicense fees payable to the Company based upon apercentage 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-elementsoftware arrangements are allocated to each element of the arrangement based onthe fair values of the elements, such as licenses for software products,maintenance, consulting services or customer training. The determination offair value is based on objective evidence, which is specific to the Company.The Company limits its assessment of objective evidence for each element toeither the 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 separately. If evidence of fair value of all

 

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undelivered elements exists but evidence doesnot exist for one or more delivered elements, then revenue is recognized usingthe residual method. Under the residual method, the fair value of theundelivered elements is deferred and the remaining portion of the arrangementfee is recognized as revenue.

 

The Company records unearnedrevenue for software license agreements when cash has been received from thecustomer and the agreement does not qualify for revenue recognition under theCompany’s revenue recognition policy. The Company records accounts receivablefor software license agreements when the agreement qualifies for revenuerecognition but cash or other consideration has not been received from thecustomer.

 

*Services Revenue*

 

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 consultingservices, which consist of consulting, maintenance and training, are deliveredthrough BVGS. Services that the Company provides are not essential to thefunctionality of the software.  In accordance with Financial AccountingStandards Board (“FASB”) Topic D-103, which the Company adopted as ofJanuary 1, 2002, the Company records reimbursement by its customers forout-of-pocket expenses as an increase to services revenues.  Prior toJanuary 1, 2002, the Company recorded reimbursement by its customers forout-of-pocket expenses as a decrease to cost of services.  The Company’sresults of operations for the three and nine months ended September 30, 2001have been reclassified for comparable purposes in accordance with TopicD-103.  The effect of this reclassification was to increase servicesrevenues and increase cost of services for the three and nine months endedSeptember 30, 2001 by $1.0 million and $3.2 million, respectively.

 

***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 waseffective as of 8:00 p.m. Eastern Daylight Time onJuly 29, 2002.  Each nine shares of outstanding common stock ofthe Company automatically converted into one share of common stock.  TheCompany’s common stock began trading on a post-split basis at the opening oftrading on the Nasdaq National Market on July 30, 2002.  Theaccompanying consolidated financial statements and related financialinformation contained herein have been retroactively restated to give effectfor the July 2002 stock split.

 

***Net Earnings (Loss) Per Share***

 

Statement of FinancialAccounting Standard (“SFAS”) No. 128, *EarningsPer Share*, requires the presentation of basic and diluted earningsper share. Earnings per share are calculated by dividing net income availableto common stockholders by a weighted average number of shares outstanding forthe period. Basic earnings per share are determined solely on common shareswhereas diluted earnings per share include common equivalent shares, asdetermined under the treasury stock method.

 

8

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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  September 30,** |    | **Nine  Months Ended  September 30,** |   |
|-----------------------------------------------------------------------------------------------|--------|---------------------------------------------|---------|--------------------------------------------|--------|
|                                                                                          |   | **2002**                                    |    | **2001**                                   |   | **2002** |   | **2001** |   |
|                                                                                          |   |                                        |    |                                       |   |   |   |   |   |
| Net loss                                                                                      |   | $                                           | (67,733 | )                                          | $      | (432,947 | ) | $ | (160,545 | ) | $ | (780,934 | ) |
|                                                                                          |   |                                        |    |                                       |   |   |   |   |   |
| Weighted average common shares outstanding  utilized for basic and diluted net loss per share |   | 32,171                                      |    | 30,941                                     |   | 31,961 |   | 30,483 |   |
|                                                                                          |   |                                        |    |                                       |   |   |   |   |   |
| Basic and diluted net loss per share                                                          |   | $                                           | (2.11   | )                                          | $      | (13.99 | ) | $ | (5.02 | ) | $ | (25.62 | ) |

 

31,937 and 266,844 potential common shares are excluded from thedetermination of diluted net loss per share for the three months and ninemonths ended September 30, 2002, respectively, as the effect of such shares isanti-dilutive.  751,826 and 1,369,790 potential common shares are excludedfrom the determination of diluted net loss per share for the three and ninemonths ended September 30, 2001, respectively, as the effect of such shares isanti-dilutive.

 

***Allowances and Reserves***

 

Occasionally, the Company’scustomers experience financial difficulty after the Company records the salebut before payment has been received.  The Company maintains allowancesfor doubtful accounts for estimated losses resulting from the inability of itscustomers to make required payments.  The Company’s normal payment termsare 30 to 90 days from invoice date.  If the financial condition of theCompany’s customers were to deteriorate, resulting in an impairment of theirability to make payments, additional allowances may be required.  TheCompany records estimated reductions to revenue for potential returns ofproducts by its customers.  If market conditions were to decline, theCompany may experience larger volumes of returns resulting in an incremental reductionof revenue at the time the return occurs.

 

***Restructuring***

 

Based on the downturn in theeconomy, the Company’s industry and its business, the Company has recordedrestructuring charges to align its cost structure with these changing marketconditions and to create a more efficient organization.  To the extentactual events and circumstances, such as the amount and timing of futuresublease income, differ from estimates made when the restructuring charges arerecorded, the Company may increase or decrease income in the period when suchchanges are noted.

 

***Legal Matters***

 

The Company’s currentestimated range of liability related to pending litigation is based on claimsfor which it is probable that a liability has been incurred and the Company canestimate the amount and range of loss.  The Company has recorded theminimum estimated liability related to those claims, where there is a range ofloss.  Because of the uncertainties related to both the determination ofthe probability of an unfavorable outcome and the amount and range of loss inthe event 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 functional currency ofthe Company’s foreign subsidiaries is the U.S. dollar.  Foreign exchangegains and losses resulting from the remeasurement of foreign currency assetsand liabilities are included in other income (expense), net in the CondensedConsolidated Statements of Operations.

 

9

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

 

The Company periodicallyassesses the impairment of long-lived assets in accordance with the provisionsof SFAS No. 121, *Accounting for theImpairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of*.  The Company assesses the impairment ofgoodwill and identifiable intangible assets in accordance with SFAS No. 121,SFAS No. 141, *Business Combinations*andSFAS No. 142, *Goodwill and Other IntangibleAssets*.  The Company adoptedthe provisions of SFAS No. 142 as of January 1, 2002.  Please see Note 8 of Notes to CondensedConsolidated Financial Statements for additional information.

 

***Fair Value of Financial Instruments***

 

The Company’s financialinstruments consist of cash and cash equivalents, short-term investments,restricted cash and investments, long-term investments, equity investments,accounts receivable, accounts payable and debt.  The Company does not haveany derivative financial instruments.  The Company believes the reportedcarrying amounts of its financial instruments approximates fair value, basedupon the maturities and nature of its cash equivalents, short-term investments,long-term investments, accounts receivable and payable, and based on thecurrent rates available to it on similar debt issues.  Additionally, theCompany periodically evaluates the carrying value of all of its investments forother-than-temporary impairment when events and circumstances indicate that thebook value of an asset may not be recoverable.  If such assets areconsidered to be impaired, the impairment to be recognized is measured by theamounts by which the carrying amount exceeds its fair market value.  TheCompany’s equity investments are comprised of investments in public andnon-public technology-related companies.  The Company may record futureimpairment charges due to continued economic decline and the potentialresulting negative impact on these companies.  During the three monthsended September 30, 2002, the Company recorded $503,000 in impairment chargeson its cost method equity investments.  During the three months endedSeptember 30, 2001, the Company recorded $837,000 in impairment charges on itscost method equity investments.  During the nine months ended September30, 2002, the Company recorded $10.3 million in impairment charges on its costmethod equity investments.  During the nine months ended September 30,2001, the Company recorded $3.9 million on its cost method equity investmentsand $2.4 million in equity in net losses of its equity method investee. The Company recorded no equity in net losses charges during the three and ninemonths ended September 30, 2002 and during the three months ended September 30,2001 as the Company did not have an equity method investment as of and duringthese periods.

*** ***

***New AccountingPronouncements***

 

On June 29, 2001, the FASBapproved for issuance SFAS No. 141, *BusinessCombination*s, and SFAS No. 142, *Goodwilland Intangible Assets.*Major provisions of these Statements are asfollows: all business combinations initiated after June 30, 2001 must use thepurchase method of accounting; the pooling of interest method of accounting isprohibited except for transactions initiated before July 1, 2001; intangibleassets acquired in a business combination must be recorded separately fromgoodwill if they arise from contractual or other legal rights or are separablefrom the acquired entity and can be sold, transferred, licensed, rented orexchanged, either individually or as part of a related contract, asset orliability; goodwill and intangible assets with indefinite lives are notamortized but are tested for impairment at least annually using a fair value approach,except in certain circumstances, and whenever there is an impairment indicator;other intangible assets will continue to be valued and amortized over theirestimated lives except assembled workforce which, pursuant to SFAS No. 141,will not be recognized as an intangible asset apart from goodwill; in-processresearch and development will continue to be written off immediately; allacquired goodwill must be assigned to reporting units for purposes ofimpairment testing and segment reporting and effective January 1, 2002,existing goodwill will no longer be subject to amortization. Upon adoption ofSFAS No. 142, on January 1, 2002, the Company no longer amortizes goodwill.Amortization of goodwill for the three and nine months ended September 30, 2001was $64.1 million and $191.8 million, respectively.  Additionally, uponadoption of SFAS No. 141 and 142, the Company no longer amortizes itsnon-technology based intangible asset, or assembled workforce. Amortization forthe non-technology based intangible asset was $709,000 and $2.1 million for thethree and nine months ended September 30, 2001, respectively. During fiscal2001, the Company recorded an impairment charge of $330.2 million related togoodwill and $6.2 million related to other intangible assets primarily as partof the Interleaf acquisition that closed on April 14, 2000. Pursuant to SFASNo. 142, the Company is required to test its goodwill for impairment uponadoption and, if impairment is indicated, record such impairment as acumulative effect of an accounting change. There was no accounting charge torecord upon adoption.

 

In August 2001, the FASBissued SFAS No. 144, *Accounting for theImpairment or Disposal of Long-Lived Assets*, which supersedes bothSFAS No. 121, *Accounting for the Impairmentof Long-Lived Assets and for*

 

10

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*Long-LivedAssets to Be Disposed Of*and the accounting and reporting provisions of Accounting PrinciplesBoard ("APB") Opinion No. 30, *Reportingthe Results of Operations—Reporting the Effects of Disposal of a Segment of aBusiness, and Extraordinary, Unusual and Infrequently Occurring Events andTransaction*s, for the disposal of a segment of a business (aspreviously defined in that Opinion). SFAS No. 144 retains the fundamentalprovisions in SFAS No. 121 for recognizing and measuring impairment losses onlong-lived assets held for use and long-lived assets to be disposed of by sale,while also resolving significant implementation issues associated with SFAS No.121. For example, SFAS No. 144 provides guidance on how a long-lived asset thatis used as part of a group should be evaluated for impairment, establishescriteria for when a long-lived asset is held for sale, and prescribes theaccounting for a long-lived asset that will be disposed of other than by sale.SFAS No. 144 retains the basic provisions of APB Opinion No. 30 on how topresent discontinued operations in the statement of operations but broadensthat presentation to include a component of an entity (rather than a segment ofa business). Unlike SFAS No. 121, an impairment assessment under SFAS No. 144will never result in a write-down of goodwill. Rather, goodwill is evaluatedfor impairment under SFAS No. 142, *Goodwilland Other Intangible Asset*s. The Company adopted SFAS No. 144 as ofJanuary 1, 2002.  There was no material impact on the Company’sconsolidated results of operations and financial position as a result of theadoption of SFAS No. 144.

 

In November 2001, the staffof the FASB reached consensus on Topic No. D-103 on the topic of *Income Statement Characterization of ReimbursementsReceived for Out of Pocket Expenses Incurred*. This topic addresseswhether reimbursements received for out-of-pocket expenses incurred should becharacterized in the income statement as revenue or as a reduction of expensesincurred. The FASB staff concluded that reimbursements received for out ofpocket expenses incurred should be characterized as revenue in the incomestatement. This announcement will be applied in financial reporting periodsbeginning after December 15, 2001, and comparative financial statements forprior periods will be reclassified to comply with the guidance in thisannouncement. The Company is currently recording reimbursement by its customersfor out-of-pocket expenses as a component of services revenue.  Prior toadoption of Topic No. D-103 on January 1, 2002, the Company recordedreimbursement by its customers for out-of-pocket expenses as a reduction tocost of sales. Prior periods have been reclassified to comply with the guidanceof Topic No. D-103.  The effect of this reclassification was to increaseservices revenues and increase cost of services for the three and nine monthsended September 30, 2001 by $1.0 million and $3.2 million, respectively.

 

In June 2002, the FASBissued SFAS No. 146, *Accounting for CostsAssociated with Exit Activities*, which addresses financialaccounting and reporting for costs associated with exit activities andsupersedes Emerging Issues Task Force (“EITF”) 94-3, *Liability Recognition for Certain Employee Termination Benefits andOther Costs to Exit an Activity (including Certain Costs Incurred in aRestructuring). *SFAS No. 146requires that a liability for a cost associated with an exit or disposalactivity be recognized and measured initially at fair value only when theliability 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. However, under SFAS No.146, a liability for one-time termination benefits is recognized when an entityhas committed to a plan of termination, provided certain other requirementshave been met.  In addition, under SFASNo. 146, a liability for costs to terminate a contract is not recognized untilthe contract has been terminated, and a liability for costs that will continueto be incurred under a contract’s remaining term without economic benefit tothe entity is recognized when the entity ceases to use the right conveyed bythe contract.  SFAS No. 146 is effectivefor exit or disposal activities initiated after December 31, 2002.  The Company will adopt the provisions ofSFAS No. 146 for restructuring activities initiated after December 31,2002.  The Company does not expect the adoption of SFAS No. 146 will havea material impact on its consolidated results of operations or financialposition.

 

**Note2.           SelectiveBalance Sheet Detail**

 

Property and equipmentconsisted of the following (in thousands):

 
|                                            |   | **September  30,  2002** |   | **December  31,********2001** |   |
|-------------------------------------------------|--------|--------------------------|--------|-------------------------------|--------|
|                                            |   | **(unaudited)**          |   |                          |   |
| Furniture and fixtures                          |   | $                        | 9,138  |                          | $      | 9,646 |   |
| Computers and software                          |   | 49,683                   |   | 59,182                        |   |
| Leasehold improvements                          |   | 21,326                   |   | 38,440                        |   |
|                                            |   | 80,147                   |   | 107,268                       |   |
| Less accumulated  depreciation and amortization |   | (49,645                  | )      | (40,049                       | )      |
|                                            |   | $                        | 30,502 |                          | $      | 67,219 |   |

 

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Accrued expenses consistedof the following (in thousands):

 
|                       |   | **September  30,********2002** |   | **December  31,********2001** |   |
|----------------------------|--------|--------------------------------|--------|-------------------------------|--------|
|                       |   | **(unaudited)**                |   |                          |   |
| Employee benefits          |   | $                              | 2,170  |                          | $      | 3,121 |   |
| Commissions and bonuses    |   | 2,242                          |   | 5,543                         |   |
| Sales and other taxes      |   | 10,918                         |   | 7,620                         |   |
| Restructuring (See Note 7) |   | 27,375                         |   | 32,454                        |   |
| Other                      |   | 12,917                         |   | 12,974                        |   |
|                       |   | $                              | 55,622 |                          | $      | 61,712 |   |

 

Other noncurrent liabilitiesconsisted of the following (in thousands):

 
|                       |   | **September  30,********2002** |   | **December  31,********2001** |   |
|----------------------------|--------|--------------------------------|--------|-------------------------------|--------|
|                       |   | **(unaudited)**                |   |                          |   |
| Restructuring (See Note 7) |   | $                              | 70,100 |                          | $      | 58,335 |   |
| Other                      |   | 884                            |   | 1,131                         |   |
|                       |   | $                              | 70,984 |                          | $      | 59,466 |   |

 

**Note3.           CommercialCredit Facilities**

 

The Company has variouscredit facilities with a commercial lender which include term debt in the formof notes payable and a revolving line of credit. In March 2002, the Companyrenewed and amended its revolving credit facility. The amount available underthe revolving line of credit was increased from $10.0 million to $25.0 million.Borrowings under the revolving line of credit are collateralized by all of theCompany’s assets and bear interest at the bank’s prime rate (4.75% as ofSeptember 30, 2002). At September 30, 2002, $25.0 million was outstanding andthe revolving credit facility is due to expire in March 2003. There were nooutstanding borrowings under the revolving line of credit as of December 31,2001.  Interest is due monthly and principal is due at expiration. Theamended and restated loan and security agreement requires the Company tomaintain $80.0 million in unrestricted cash and cash equivalents, short-terminvestments and long-term investments (excluding equity investments) and $30.0million on deposit with the Company’s commercial lender.  The Company was in compliance with thesecovenants as of September 30, 2002. As of September 30, 2002 and December 31,2001, outstanding term debt borrowings were approximately $3.2 million and $3.9million, respectively and consist of two borrowings.  Borrowings bearinterest at the bank’s prime rate (4.75% as of September 30, 2002 and December31, 2001) and prime rate plus 1.25% (6.0% as of September 30, 2002 and December31, 2001). Principal and interest are due in consecutive monthly paymentsthrough maturity based on the terms of the facilities. Principal payments of$977,000 are due annually from 2000 through 2004, $611,000 due in 2005, and afinal payment of $357,000 due in 2006.

 

Commitments totaling $16.6million and $25.0 million in the form of standby letters of credit were issuedon the Company’s behalf from financial institutions as of September 30, 2002and December 31, 2001 in favor of the Company’s various landlords to secureobligations under the Company’s facility leases. The commercial credit facilitiesinclude covenants which impose certain restrictions on the payment of dividendsand other distributions and require the Company to meet a financial covenant tomaintain certain levels of available cash, cash equivalents, short-terminvestments and long-term investments (excluding equity investments).Borrowings are collateralized by a security interest in substantially all ofthe Company’s owned assets.

 

**Note4.           Commitments andContingencies**

 

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 forrelief under the United States Bankruptcy Code, or materially breaches theagreement, Hewlett-Packard will have rights to a limited term license forBroadVision’s business-to-business customer portals software products and alimited use license for BroadVision’s One-to-One Enterprise softwareproduct.  Hewlett-Packard’s license will be limited in term until suchtime as Hewlett-Packard has received monies for sale of the products up to amaximum of $12.0 million.  In addition, the Company will pay back prepaypayments received in

 

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prior periods totaling approximately $2.4million.  This amount was included in Unearned Revenue as of December 31,2001, and this amount was reclassified to Accrued Liabilities in fiscal2002.  The amount due is payable in quarterly installments by December 31,2003.

 

***Leases***

 

The Company leases itsheadquarters facility and its other facilities under noncancelable operatinglease agreements expiring through the year 2013.  Under the terms of theagreements, the Company is required to pay property taxes, insurance and normalmaintenance costs.

 

A summary of future minimumlease payments is as follows (in thousands); properties that are part of therestructuring have been excluded:

 
| **Year Ended  December 31,** |   | **Operating  leases** |   |
|-----------------------------------|--------|-----------------------|--------|
| 2002                              |   | $                     | 1,152  |   |
| 2003                              |   | 3,422                 |   |
| 2004                              |   | 3,378                 |   |
| 2005                              |   | 2,939                 |   |
| 2006                              |   | 2,304                 |   |
| 2007 and thereafter               |   | 59,014                |   |
| Total minimum lease  payments     |   | $                     | 72,209 |   |

 

As of September 30, 2002,$94.6 million of lease termination costs, net of anticipated sublease income,is accrued in the Company’s restructuring reserves and is expected to be paidby the end of the second quarter of fiscal 2013.  The Company expects topay approximately $24.5 million over the next twelve months and the remaining$70.1 million from October 1, 2003 through June of fiscal 2013.  The $24.5million and $70.1 million include approximately $48.8 million of estimatedsublease income of which approximately $31.7 million represents subleaseagreements yet to be negotiated.

 

Capital expenditures were$1.1 million and $50.3 million for the nine months ended September 30, 2002 and2001, respectively.  The Company’s capital expenditures consisted ofpurchases of operating resources to manage its operations and included computerhardware and software, communications equipments, office furniture and fixturesand leasehold improvements.  The Company has no other significant capitalcommitments.  The Company has consolidated various facilities as part ofits restructuring plan.  Please refer to Note 7 for additionalinformation.

 

***Standby Letter of Credit Commitments***

 

As of September 30, 2002,the Company had $16.6 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***

 

In April 2001, the Companyfiled a Form 8-K with the Securities and Exchange Commission reporting thatseveral purported class action lawsuits had been filed against the Company andcertain of its officers and directors. In each of the lawsuits, the plaintiffssought to assert claims on behalf of a class of all persons who purchasedsecurities of BroadVision between January 26, 2001 and April 2, 2001. Thecomplaints alleged that BroadVision and the individual defendants violated federalsecurities laws in connection with its reporting of financial results for thequarter ended December 31, 2000. The lawsuits were consolidated into a singleaction.  On November 5, 2001,BroadVision and the individual defendants filed motions to dismiss theconsolidated complaint.  On February 22,2002, the Court granted these motions, dismissed the consolidated complaintwithout prejudice and ordered the lead plaintiff to file an amended complaintwithin 30 days. On March 25, 2002, the plaintiff filed its Second AmendedConsolidated Complaint, which added claims for breach of fiduciary duty andnamed members of the Company’s board of directors as additional defendants. Alldefendants filed motions to dismiss the Second Amended Consolidated Complaint onMay 10, 2002.  The hearing on the defendant’s motion to dismiss was heardon August 30, 2002.  On September 11,2002, the Court (1) dismissed with prejudice the claims that the defendantsviolated federal securities laws, on the basis that the complaint failed tostate a claim upon which relief could be granted, and (2) dismissed withoutprejudice the claims for breach of fiduciary duty, on the basis that the claimswere made under

 

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state law and, in the absence of anyremaining federal law claims, the Court would decline to exercise supplementaljurisdiction.  The Company is not awareof plaintiffs filing an appeal of the Court’s September 11, 2002 decision or filinganother complaint in any other court. The Company believes that the action was without merit and will continueto defend itself vigorously should plaintiffs continue to pursue any of theseclaims.

 

On June 7, 2001, Verity,Inc. filed suit against the Company alleging copyright infringement, breach ofcontract, unfair competition and other claims. The Company has answered thecomplaint denying all allegations and is defending itself vigorously.

 

On July 18, 2002, AvalonPartners, Inc., doing business as Cresa Partners, filed a suit against theCompany claiming broker commissions related to the Company’s termination andrestructuring of certain facilities leases associated with the Company’srestructuring plans taken during the second quarter of 2002.  The Companyhas answered the complaint and is defending itself vigorously.

 

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 Company operates in onesegment, electronic business commerce solutions.  The Company’s reportablesegment includes the Company’s facilities in North and South America(Americas), Europe and Asia Pacific and The Middle East (Asia/Pacific). The Company’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.

 

The disaggregated revenueinformation on a product basis reviewed by the CEO is as follows (in thousands;unaudited):

 
|              |   | **Three  Months Ended  September 30,** |   | **Nine Months  Ended********September 30,** |   |
|-------------------|--------|---------------------------------------------|--------|--------------------------------------------------|--------|
|              |   | **2002**                                    |   | **2001**                                         |   | **2002** |   | **2001** |   |
| Revenues:         |   |                                        |   |                                             |   |   |   |   |   |   |   |   |   |
| Software licenses |   | $                                           | 10,756 |                                             | $      | 16,292 |   | $ | 29,244 |   | $ | 80,461 |   |
| Services          |   | 7,092                                       |   | 17,219                                           |   | 28,532 |   | 72,264 |   |
| Maintenance       |   | 9,391                                       |   | 15,218                                           |   | 29,337 |   | 46,768 |   |
| Total Revenues    |   | $                                           | 27,239 |                                             | $      | 48,729 |   | $ | 87,113 |   | $ | 199,493 |   |
|              |   |                                        |   |                                             |   |   |   |   |   |
| Americas          |   | $                                           | 16,319 |                                             | $      | 25,876 |   | $ | 53,373 |   | $ | 123,459 |   |
| Europe            |   | 9,005                                       |   | 17,406                                           |   | 28,846 |   | 58,155 |   |
| Asia/Pacific      |   | 1,915                                       |   | 5,447                                            |   | 4,894 |   | 17,879 |   |
| Total Company     |   | $                                           | 27,239 |                                             | $      | 48,729 |   | $ | 87,113 |   | $ | 199,493 |   |

 
|                               |   | **September  30,********2002** |   | **December  31,********2001** |   |
|------------------------------------|--------|--------------------------------|--------|-------------------------------|--------|
|                               |   | **(unaudited)**                |   |                          |   |
| Long-lived assets (in  thousands): |   |                           |   |                          |   |
| Americas                           |   | $                              | 90,839 |                          | $      | 131,874 |   |
| Europe                             |   | 1,646                          |   | 3,547                         |   |
| Asia/Pacific                       |   | 996                            |   | 2,425                         |   |
| Total Company                      |   | $                              | 93,481 |                          | $      | 137,846 |   |

 

During the three and ninemonths ended September 30, 2002 and 2001, no single customer accounted for morethan 10% of the Company’s total revenues.

 

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**Note6.           Acquisitions andDispositions**

 

***E-Publishing Corporation***

 

On April 30, 2001 and May15, 2001, the Company entered into agreements with third parties to sellcertain assets and liabilities of E-Publishing Corporation, a wholly-ownedsubsidiary of the Company, which the Company acquired as part of theacquisition of Interleaf in April 2000.  The Company recorded a loss onsale of assets of approximately $1.3 million.  The loss was included inother expense in the Company’s second quarter of 2001 Condensed ConsolidatedStatements of Operations.

 

***Keyeon***

 

On June 29, 2001, theCompany completed its acquisition of Keyeon, LLC (“Keyeon”), formerly acorporate joint venture in which the Company held an interest of approximately36%.  The acquisition was completed primarily to obtain technology toextend functionality of the Company’s existing products.  As considerationfor the remaining interest in Keyeon, the Company issued 301,475 shares of itscommon stock valued at $13.6 million to the other former participants in thejoint venture which resulted in the Company owning 100% of the outstandingshares of Keyeon.  The acquisition was accounted for as a purchase. The acquired assets and assumed liabilities, and the related results ofoperations, are included in the consolidated financial statements of theCompany from the date of acquisition.  The purchase price allocation is asfollows (in thousands):

 
| Purchase  price, net of cash acquired                                          |   | $      | 6,395  |   |
|--------------------------------------------------------------------------------|--------|--------|--------|--------|
| Add: fair value of  liabilities assumed                                        |   | 4,007  |   |
| Total purchase  consideration                                                  |   | 10,402 |   |
| Less: fair value allocated  to acquired assets                                 |   | 3,104  |   |
| Excess of purchase  consideration over acquired assets and assumed liabilities |   | 7,298  |   |
| Excess allocated to:                                                           |   |   |   |
| Acquired in-process  technology                                                |   | $      | 6,418  |   |
| Goodwill                                                                       |   | $      | 880    |   |

 

At September 30, 2002,accumulated amortization related to goodwill acquired in the Keyeon acquisitiontotaled $246,000.  Amortization of goodwill ceased as of December 31,2001.  As discussed in Note 1, the Company will no longer amortizegoodwill in accordance with SFAS No. 142 but will periodically test forimpairment under the provisions of SFAS No. 142.  The Company estimatedthat $6.4 million of the purchase price for Keyeon represented acquiredin-process technology that had not yet reached technological feasibility andhad no alternative future use.  Accordingly, this amount was immediatelycharged to expense in the Consolidated Statements of Operations during the fourthquarter of 2001.  The income approach methodology was used to value theacquired in-process technology.  Under the income approach, fair valuereflects the present value of the projected free cash flows that will begenerated by the products, incorporating the acquired technologies underdevelopment, assuming they will be successfully completed.  These cashflows are discounted at a rate appropriate for the risk of the asset.  Therate of return depends upon the stage of completion which was estimated atfifty percent.  An overall after-tax discount rate of thirty percent wasapplied to the cash flows expected to be generated by the productsincorporating technology currently under development.

 

The following summary,prepared on an unaudited pro forma basis, reflects the condensed consolidatedresults of operations for the nine month period ended September 30, 2001assuming Keyeon had been acquired at the beginning of the period presented (inthousands, except per share data):

 
|                                  |   | **For the  nine  months ended  September 30,  2001** |    |
|---------------------------------------|--------|------------------------------------------------------|---------|
| Revenue                               |   | $                                                    | 199,493 |   |
| Net loss                              |   | (785,485                                             | )       |
| Basic and diluted net loss  per share |   | $                                                    | (25.77  | ) |

 

The pro forma results arenot necessarily indicative of what would have occurred if the acquisition hadbeen in effect for the period presented.  In addition, they are notintended to be a projection of future results and do

 

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not reflect any synergies that might be affected from combinedoperations.

 

**Note7.           RestructuringCharges and Asset Impairments**

 

During the first, second andthird quarters of 2002, the Company approved restructuring plans to, amongother things, reduce its workforce and consolidate facilities.  Theserestructuring and asset impairment charges were taken to align the Company’scost structure with changing market conditions and to create a more efficientorganization.  A pre-tax charge of $63.2 million was recorded during thethree months ended September 30, 2002 and a pre-tax charge of $103.2 million wasrecorded during the nine months ended September 30, 2002 to provide for theseactions and other related items.  The Company recorded the low-end of arange of assumptions modeled for the restructuring charges, in accordance withSFAS No. 5, *Accounting for Contingencies*. The high-end of the range was estimated at $68.4 million for the charge relatedto the three months ended September 30, 2002 and $110.0 million related to thecharges for the nine months ended September 30, 2002.  Adjustments to therestructuring reserves will be made in future periods, if necessary, based uponthe then current actual events and circumstances. The following tablesummarizes charges recorded during the first, second and third quarters of 2002for exit activities and asset write-downs (in thousands):

 
|                                                     |   | **Severance  and Benefits** |   | **Facilities/Excess  Assets** |   | **Other** |   | **Total** |   |
|----------------------------------------------------------|--------|-----------------------------|--------|-------------------------------|--------|-----------|--------|-----------|--------|
|                                                     |   |                        |   |                          |   |      |   |      |   |
| Reserve balances,  December 31, 2001                     |   | $                           | 817    |                          | $      | 89,859    |   | $         | 113    |   | $ | 90,789 |   |
| Restructuring charges, quarter ended March 31, 2002      |   | 1,130                       |   | 4,095                         |   | 155       |   | 5,380     |   |
|                                                     |   |                        |   |                          |   |      |   |      |   |
| Cash payments                                            |   | (700                        | )      | (12,342                       | )      | (6        | )      | (13,048   | )      |
|                                                     |   |                        |   |                          |   |      |   |      |   |
| Non-cash portion                                         |   | —                      |   | (1,003                        | )      | —    |   | (1,003    | )      |
|                                                     |   |                        |   |                          |   |      |   |      |   |
| Reserve balances, March  31, 2002                        |   | $                           | 1,247  |                          | $      | 80,609    |   | $         | 262    |   | $ | 82,118 |   |
|                                                     |   |                        |   |                          |   |      |   |      |   |
| Restructuring charges,  quarter ended June 30, 2002      |   | 3,765                       |   | 30,480                        |   | 320       |   | 34,565    |   |
|                                                     |   |                        |   |                          |   |      |   |      |   |
| Cash payments                                            |   | (1,878                      | )      | (54,010                       | )      | (359      | )      | (56,247   | )      |
|                                                     |   |                        |   |                          |   |      |   |      |   |
| Non-cash portion                                         |   | (107                        | )      | (17,240                       | )      | —    |   | (17,347   | )      |
|                                                     |   |                        |   |                          |   |      |   |      |   |
| Reserve balances, June  30, 2002                         |   | $                           | 3,027  |                          | $      | 39,839    |   | $         | 223    |   | $ | 43,089 |   |
|                                                     |   |                        |   |                          |   |      |   |      |   |
| Restructuring charges,  quarter ended September 30, 2002 |   | 2,241                       |   | 60,465                        |   | 499       |   | 63,205    |   |
|                                                     |   |                        |   |                          |   |      |   |      |   |
| Cash payments                                            |   | (2,695                      | )      | (5,274                        | )      | (442      | )      | (8,411    | )      |
|                                                     |   |                        |   |                          |   |      |   |      |   |
| Non-cash portion                                         |   | —                      |   | (408                          | )      | —    |   | (408      | )      |
|                                                     |   |                        |   |                          |   |      |   |      |   |
| Reserve balances,  September 30, 2002                    |   | $                           | 2,573  |                          | $      | 94,622    |   | $         | 280    |   | $ | 97,475 |   |

 

The nature of the charges summarized above is as follows:

 

Severance and benefits — TheCompany recorded charges of approximately $2.2 million and $7.1 million duringthe three and nine months ended September 30, 2002, respectively, related toseverance benefits to terminated employees in the United States and variousinternational locations.  Costs incurred include severance, payroll taxesand COBRA benefits.  Included in the $7.1 million is $107,000 of non-cashcharges.  These non-cash charges represent a one-time compensation chargetaken as a result of granting certain terminated employees extended vesting ofstock options beyond the standard vesting schedule for terminatedemployees.  The compensation charge was calculated using the Black-Schoolsoption pricing model.  Approximately $817,000 of severance and benefitsrelated costs remained accrued as of December 31, 2001 as a result of theCompany’s 2001 restructuring plan.  Approximately $5.3 million of severanceand benefits costs had been paid out during the nine months ended September 30,2002 and the remaining $2.6 million of severance, payroll taxes and COBRAbenefits is expected to be paid in full by September 30, 2003.  TheCompany’s restructuring plan included plans to terminate the employment ofapproximately 395 employees in North and South America and approximately 85employees throughout Europe and

 

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Asia/Pacific during the first three quartersof fiscal 2002, impacting all departments within the Company.  Theemployment of approximately 480 employees was terminated during the nine monthsended September 30, 2002.  As a result of these reductions, the Companyexpects annual salary savings of approximately $40.8 million.

 

Facilities/Excess Assets —During the third, second and first quarters of 2002, the Company revised itsestimates and expectations with respect to its facilities disposition effortsdue to further consolidation and abandonment of additional facilities and toaccount for changes in estimates used in the Company’s 2001 restructuring planbased upon actual events and circumstances.  Total lease termination costsinclude the impairment of related assets, remaining lease liabilities and brokeragefees offset by estimated sublease income.  The estimated costs ofabandoning these leased facilities, including estimated sublease income, werebased on market information analyses provided by a commercial real estatebrokerage firm retained by the Company.  Based on the factors above, afacilities/excess assets charge of $60.5 million and $95.0 million was recordedduring the three and nine months ended September 30, 2002, respectively, andincludes non-cash asset impairment charges of approximately $408,000 and $18.7million during the three and nine months ended September 30, 2002,respectively.

 

Approximately $89.9 millionof facilities related costs remained accrued as of December 31, 2001 as aresult of the Company’s 2001 restructuring plan.  Net cash paymentsthrough September 30, 2002 related to abandoned facilities amounted to $71.6million.  Actual future cash requirements may differ materially from theaccrual at September 30, 2002, particularly if actual sublease income issignificantly different from historical estimates.  As of September 30,2002, $94.6 million of lease termination costs, net of anticipated subleaseincome, is expected to be paid by the end of the second quarter of fiscal2013.  The Company expects to pay approximately $24.5 million over thenext twelve months and the remaining $70.1 million from October 1, 2003 throughJune of fiscal 2013.  The $24.5 million and $70.1 million includeapproximately $48.8 million of estimated sublease income of which approximately$31.7 million represents sublease agreements yet to be negotiated.

 

Other — The Company recordedcharges of approximately $499,000 and $974,000 during the three and nine monthsended September 30, 2002, respectively, for various incremental costs incurredas a direct result of the restructuring plan.  The remaining reservebalance of $280,000 is expected to be paid in full by the end of the firstquarter of 2003.

 

**Note8.           Goodwill andOther Intangible Assets**

 

Goodwill and otherintangibles consist of the following (in thousands):

 
|                                 |   | **September  30,********2002** |    | **December  31,********2001** |   |
|--------------------------------------|--------|--------------------------------|---------|-------------------------------|--------|
|                                 |   | **(unaudited)**                |    |                          |   |
| Goodwill                             |   | $                              | 437,206 |                          | $      | 437,206 |   |
| Completed technology                 |   | 15,236                         |    | 15,236                        |   |
| Assembled workforce                  |   | 7,496                          |    | 7,496                         |   |
|                                 |   | 459,938                        |    | 459,938                       |   |
| Less:                                |   |                           |    |                          |   |
| Accumulated amortization             |   | (401,731                       | )       | (399,071                      | )      |
| Goodwill and other  intangibles, net |   | $                              | 58,207  |                          | $      | 60,867 |   |

 

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On January 1, 2002, the Company adopted SFAS No.142, *Goodwill and Intangible Assets.*Under**SFAS No. 142, goodwill and intangibleassets with indefinite lives are no longer subject to amortization but aretested for impairment at least annually using a fair value approach, andwhenever there is an impairment indicator. Other intangible assets continue tobe valued and amortized over their estimated lives.  The following schedule shows the Company’s reported net loss forperiods prior to adoption of SFAS No. 142 as adjusted to add back goodwill andassembled workforce amortization as if SFAS No. 142 had been adopted:

 
|                                  |   | **Three  Months Ended********September  30,** |    | **Nine  Months Ended  September 30,** |   |
|---------------------------------------|--------|-----------------------------------------------|---------|---------------------------------------|--------|
|                                  |   | **2002**                                      |    | **2001**                              |   | **2002** |   | **2001** |   |
|                                  |   | **(unaudited)**

**(in thousands)**           |    |
| Reported net loss                     |   | $                                             | (67,733 | )                                     | $      | (432,947 | ) | $ | (160,545 | ) | $ | (780,934 | ) |
| Add back amortization:                |   |                                          |    |                                  |   |   |   |   |   |
| Goodwill                              |   | —                                        |    | 64,080                                |   | — |   | 191,839 |   |
| Assembled workforce                   |   | —                                        |    | 709                                   |   | — |   | 2,128 |   |
| Adjusted net loss                     |   | $                                             | (67,733 | )                                     | $      | (368,158 | ) | $ | (160,545 | ) | $ | (586,967 | ) |
|                                  |   |                                          |    |                                  |   |   |   |   |   |
| Basic and diluted net loss per share: |   |                                          |    |                                  |   |   |   |   |   |
| Reported net loss                     |   | $                                             | (2.11   | )                                     | $      | (13.99 | ) | $ | (5.02 | ) | $ | (25.62 | ) |
| Goodwill                              |   | —                                        |    | 2.07                                  |   | — |   | 6.29 |   |
| Assembled workforce                   |   | —                                        |    | 0.02                                  |   | — |   | 0.07 |   |
| Adjusted net income                   |   | $                                             | (2.11   | )                                     | $      | 11.90 |   | $ | (5.02 | ) | $ | (19.26 | ) |

 

During fiscal 2001, the Company recorded animpairment charge of $330.2 million related to goodwill and $6.2 millionrelated to other intangible assets originally recorded primarily as part of theInterleaf acquisition that closed on April 14, 2000.

 

Pursuant to SFAS No. 142, the Company isrequired to test its goodwill for impairment upon adoption and annually or moreoften if events or changes in circumstancesindicate that the asset might be impaired. While there was no accounting charge to record uponadoption, at September 30, 2002,the Company concluded that, based on the decline in its stock price, it wouldbe 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 the Company has only one reporting unit forpurposes of applying SFAS No.142, the first stage requires a comparison ofthe fair value of the Company to its net book value.  If the fair value is greater, then no impairment is deemed tohave occurred. If the fair value is less, then the second stage must becompleted to determine the amount, if any, of actual impairment. The Companyhas completed the first stage and has determined that its fair value atSeptember 30, 2002 exceeded its net book value on that date, and as a result,no impairment of goodwill was recorded in the consolidated financialstatements. The Company obtained an independent appraisal of fair value tosupport its conclusion.

 

The process of evaluatingthe potential impairment of goodwill is highly subjective and requiressignificant judgment. In estimating the fair value of the Company, the Companymade 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 September 30, 2002.

 

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**Note9.           Deferred TaxAssets**

 

The Company analyzes itsdeferred tax assets with regard to potential realization.  The Company hasestablished a valuation allowance on its deferred tax assets to the extent thatmanagement has determined that it is more likely than not that some portion orall of the deferred tax asset will not be realized based upon the uncertaintyof their realization.  The Company has considered estimated future taxableincome and ongoing prudent and feasible tax planning strategies in assessingthe amount of the valuation allowance.  Based upon this analysis, theCompany recorded a valuation allowance for its deferred tax assets during thethree months ended June 30, 2002, which increased to 100% its valuation allowanceand resulted in a charge of $6.3 million included in the provision for incometaxes in the Company’s Condensed Consolidated Statements of Operations andComprehensive Loss.

 

**Note 10.        Subsequent Events**

 

In October 2002, the Companyannounced plans for further facility consolidations in the fourth quarter of2002.  The Company estimates that it will record a restructuring charge inthe range of $5.0 million to $10.0 million during the fourth quarter of 2002.

 

On October 23 and 30, 2002, the Company granted, under theEquity Incentive Plan and the Non-Officer Equity Incentive Plan, optionsto purchase a total of 3.7 million shares of Common Stock to its employeesand Board of Director members.  The option exercise prices for theseoptions are $1.50 for non-executive employees for a total of 2.2 millionoptions and $2.16 for executive employees and directors for a total of 1.5million options.  The exercise price ofthe options represents the fair market value of the underlying stock as of theopening price on the day of grant.  The options vest monthly over 4 yearsfor employees and officers with at least one year of employment.

 

**Item 2.****          Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

 

*Except for the historical information contained**herein,the following discussion contains forward-looking statements that involve risksand uncertainties. The Company’s actual results could differ significantly fromthose discussed herein. Factors that could cause or contribute to suchdifferences include, but are not limited to, those discussed herein and in theCompany’s annual report on Form 10-K and other documents filed with theSecurities and Exchange Commission. Any such forward-looking statements speakonly as of the date such statements are made.*

 

***Overview***

 

We developand sell a comprehensive suite of enterprise business portal applications andtechnology that enable companies to manage interactions with, conducttransactions with and provide services to employees, customers and vendors in apersonalized and collaborative self-service model.  Our enterprisebusiness portal applications enable companies to organize dynamic profiles ofweb and wireless users from volunteered data and observed behavior, deliverhighly specialized content in response to these profiles and securely executetransactions.  As of September 30, 2002, more than 1,200 companies andgovernment entities around the globe use our applications to enable theirenterprise self-service initiatives. They are leveraging web and wirelesstechnology in conjunction with our software to unify and extend their legacyapplications, information and business processes to better serve theiremployees, partners and customers in a personalized and collaborative way.

 

Business managers areable to modify business rules and content in real time, offering a personalizedexperience to each visitor. Because of our fundamental belief and adherence tostandards-based development and open architecture design, our applications areeasily integrated with our customers’ existing systems and easily expanded asthese customers’ needs and businesses grow.

 

We believe our productsenhance revenue opportunities for customers by enabling more effective andefficient “one-to-one” relationships between an enterprise and its employees,customers and business partners. Web and wireless users are engaged by highlypersonalized real-time interactions, are able to transact business securely andare encouraged to remain online and make return visits. Our applications alsoimprove the cost-effectiveness of one-to-one relationship management byenabling non-technical managers to modify business rules and content in realtime and by helping to reduce costs of customer acquisition and retention, businessdevelopment and technical support as well as employee workplace initiatives. Inaddition, the packaged solution nature of our products decreases our customers’time to deployment and allows them to easily manage and expand their web andwireless application usage in a cost-effective manner.

 

As of September 30, 2002, wehad developed key strategic business alliances with over 75 system integration,design, consulting and other services organizations throughout the world. Our platform alliances are

 

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partnerships formed to integrate technologiesto drive business growth.  Additionally, we have developed key technologypartnerships with leading web- and wireless-focused companies in areascomplementary to our solutions, such as data analysis and reporting, enterpriseapplication integration, enterprise web management, payment processing andExtensible Markup Language.  These technology partnerships enhance ourability to base products on industry standards and to take advantage of currentand emerging technologies.

 

We sell our products andservices worldwide through a direct sales force and independent distributors,value-added resellers (“VARs”) and application service providers (“ASPs”). Inaddition, our sales are promoted through independent professional consultingorganizations, known as systems integrators.  We have operations in NorthAmerica, South America, Europe and Asia/Pacific.

 

BroadVision Global Services(“BVGS”) organization provides a full spectrum of global services to helpensure success for businesses, including consulting services and ongoingtraining and maintenance.  The BVGS organization consists of business,content and technical consultants with extensive experience in the design of onlinebusinesses and in the implementation of enterprise self-service applications.

 

***Recent Events***

 

We have experienced ageneral downturn in the economy, our industry and our business since thebeginning of 2001. This downturn is likely to continue in the future and hashad and could continue to have an impact on our future financial results. Asdiscussed in Note 7 of Notes to Condensed Consolidated Financial Statements, wehave recorded significant restructuring charges in connection with ourreduction in workforce and abandonment of certain operating facilities as partof our program to restructure our operations and related facilities initiatedin the second quarter of fiscal 2001.  A pre-tax charge of $153.3 millionwas recorded during 2001 and $63.2 million and $103.2 million was recordedduring the three and nine months ended September 30, 2002, respectively, toprovide for these actions and other related items. Costs for the abandonedfacilities were estimated to include the impairment of assets, remaining leaseliabilities and brokerage fees partially offset by estimated sublease income.Estimates related to sublease costs and income are based on assumptionsregarding the period required to locate and contract with suitable sublesseesand sublease rates which were based upon market trend information analyses.Adjustments to the restructuring reserve will be made in future periods, ifnecessary, based upon the then current actual events and circumstances. In October 2002, we announced plans for further facility consolidations in thefourth quarter of 2002.  We estimate that we will record a restructuringcharge in the range of $5.0 million to $10.0 million during the fourth quarterof 2002.

 

On July 18, 2002, AvalonPartners, Inc., doing business as Cresa Partners, filed a suit against usclaiming broker commissions related to our termination and restructuring ofcertain facilities leases associated with our restructuring plans taken duringthe second quarter of 2002.  We haveanswered the complaint and are defending ourselves vigorously.

 

During thefirst 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 toverify the amount and location of our computer hardware.  As a result ofthe findings of the physical inventory and related reconciliation with ourasset records, we recorded an asset impairment charge of approximately $2.3million net book value related to computer hardware.  During the third quarter of 2002, we conducted an additionalreview of remaining computer and communication-related assets not reviewedduring the first quarter inventory and recorded an asset impairment charge of$853,000 as a result of the findings of our inventory and relatedreconciliation with our asset records.

 

***Critical Accounting Policies***

 

BroadVision management’sdiscussion and analysis of our financial condition and results of operationsare based upon our consolidated financial statements, which have been preparedin accordance with accounting principles generally accepted in the UnitedStates of America. In preparing these financial statements, we are required tomake estimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses, and related disclosures of contingentassets and liabilities. On an on-going basis, we evaluate our estimates,including those related to doubtful accounts, product returns, investments,goodwill and intangible assets, income taxes and restructuring, as well ascontingencies and litigation. We base our estimates on historical experienceand on various other assumptions that we believe are reasonable, the results ofwhich form the basis for making judgments about the carrying values of assetsand liabilities that are not readily apparent from other sources. Actualresults may differ

 

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from these estimates using differentassumptions or conditions. We believe the following critical accountingpolicies reflect the more significant judgments and estimates used in thepreparation of our consolidated financial statements.

 

**Revenue Recognition**

 

*Overview*—Our revenues are derived from fees forlicenses of our software products, maintenance, consulting services andcustomer training.  We generally chargefees for licenses of our software products either based on the number ofpersons registered to use the product or based on the number of CPUs on whichthe product is installed.  Licenses forsoftware whereby fees charged are based upon the number of persons registeredto use the product are differentiated between licenses for development use andlicenses for use in deployment of the customer’s website.  Licenses for software whereby fees chargedare on a per-CPU basis do not differentiate between development and deploymentusage.  Our revenue recognition policiesare in accordance with Statement of Position (“SOP”) No. 97-2, *Software Revenue Recognition*, as amended;SOP No. 98-9, *Software Revenue Recognition,With Respect to Certain Transactions*and the Securities and ExchangeCommission’s Staff Accounting Bulletin No. 101, *Revenue Recognition in Financial Statements*.

 

*Software License Revenue*—We license our products through our directsales force and indirectly through resellers. In general, software licenserevenues are recognized when a non-cancelable license agreement has been signedand the customer acknowledges an unconditional obligation to pay, the softwareproduct has been delivered, there are no uncertainties surrounding productacceptance, the fees are fixed and determinable and collection is consideredprobable. Delivery is considered to have occurred when title and risk of losshave been transferred to the customer, which generally occurs when mediacontaining the licensed programs is provided to a common carrier.  In caseof electronic delivery, delivery occurs when the customer is given access tothe licensed programs.  If collectibility is not considered probable,revenue is recognized when the fee is collected. Subscription-based licenserevenues are recognized ratably over the subscription period.  We enter into reseller arrangements that typically provide for sublicense feespayable to us based upon a percentage of list price.  We do not grant our resellers the right of return.

 

We recognize revenue usingthe residual method pursuant to the requirements of SOP No. 97-2, as amended bySOP 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 us. We limit our assessmentof objective evidence for each element to either the price charged when thesame element is sold separately or the price established by management havingthe relevant authority to do so, for an element not yet sold separately. Ifevidence of fair value of all undelivered elements exists but evidence does notexist for one or more delivered elements, then revenue is recognized under theresidual method.  Under the residual method, the fair value of theundelivered elements is deferred and the remaining portion of the arrangementfee is recognized as revenue.

 

We record unearned revenuefor software arrangements when cash has been received from the customer and thearrangement does not qualify for revenue recognition under our revenuerecognition policy. We record accounts receivable for software arrangementswhen the arrangement qualifies for revenue recognition but cash or other considerationhas not been received from the customer.

 

*ServicesRevenue*—Consultingservices revenues and customer training revenues are recognized as suchservices are performed. Maintenance revenues, which include revenues bundledwith software license agreements that entitle the customers to technicalsupport and future unspecified enhancements to our products, are deferred andrecognized ratably over the related agreement period, generally twelve months.Our professional services which consist of consulting, maintenance and trainingare delivered through BVGS.  Services that we provide are not essential tothe functionality of our software. This group provides consulting services,manages projects and client relationships, manages the needs of our partnercommunity, provides training-related services to employees, customers andpartners, and also provides software maintenance services, including technicalsupport, to our customers and partners. We record reimbursement by ourcustomers for out-of-pocket expenses as a component of services revenue.

 

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**Allowances and Reserves**

 

Occasionally, our customersexperience financial difficulty after we record the sale but before we arepaid. We maintain allowances for doubtful accounts for estimated lossesresulting from the inability of our customers to make required payments. Ournormal payment terms are 30 to 90 days from invoice date. If the financialcondition of our customers were to deteriorate, resulting in an impairment oftheir ability to make payments, additional allowances may be required. Werecord estimated reductions to revenue for potential returns of products by ourcustomers. If market conditions were to decline, we may experience largervolumes of returns resulting in an incremental reduction of revenue at the timethe return occurs.

 

**Impairment Assessments**

 

As discussed inNote 8 to our Condensed Consolidated Financial Statements, we adoptedStatement of Financial Accounting Standard ("SFAS") No. 142,“Goodwill and Other Intangible Assets,” on January 1, 2002. This standardrequires that goodwill no longer be amortized, and instead, be tested forimpairment on a periodic basis.

 

Pursuantto SFAS No. 142, we are required to test goodwill for impairment upon adoptionand annually or more often if events or changes incircumstances indicate that the asset might be impaired. While there was no accounting charge to recordupon adoption, at September 30, 2002, weconcluded that, based on the decline in our stock price, we would be requiredto test goodwill for impairment. SFAS No. 142 provides for a two-stage approachto determining whether and by how much goodwill has been impaired. Since wehave only one reporting unit for purposes of applying SFAS No.142, the firststage requires a comparison of the fair value of the Company to its net bookvalue.  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 a result,no impairment of goodwill was recorded in the condensed consolidated financialstatements. We obtained an independent appraisal of fair value to support ourconclusion.

 

The process of evaluatingthe potential impairment of goodwill is highly subjective and requiressignificant judgment. In estimating the fair value of the Company, we madeestimates and judgments about future revenues and cash flows. Our forecastswere based on assumptions that are consistent with the plans and estimates weare using to manage the Company. Changes in these estimates could change our conclusion regardingimpairment of goodwill and potentially result in a non-cash goodwill impairmentcharge, for all or a portion of the goodwill balance at September 30,2002.  For long-lived assets, accountingstandards dictate that assets become impaired when the undiscounted future cashflows expected to be generated by them are less than their carrying amounts.When that occurs, the affected assets are written down to their estimated fairvalue. As described in “Recent Accounting Pronouncements” in this document, ouraccounting for goodwill changed in 2002 upon adoption of SFAS No. 142.

 

**Deferred Tax Assets**

 

We analyze our deferred taxassets with regard to potential realization. We have established a valuationallowance on our deferred tax assets to the extent that we determined that itis more likely than not that some portion or all of the deferred tax asset willnot be realized based upon the uncertainty of their realization. We haveconsidered estimated future taxable income and ongoing prudent and feasible taxplanning strategies in assessing the amount of the valuation allowance. Based upon this analysis, we recorded a valuation allowance for our deferredtax assets during the three months ended June 30, 2002, which resulted in acharge of $6.3 million.

 

**Restructuring**

 

Based on the downturn in theeconomy, our industry and our business, we have recorded restructuring chargesto align our cost structure with these changing market conditions and to createa more efficient organization. To the extent actual events and circumstances,such as the amount and timing of future sublease income, differ from estimatesmade when the restructuring charges are recorded, we may increase or decreaseincome in the period such changes are noted.

 

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**Legal Matters**

 

Management’s currentestimated range of liability related to pending litigation is based on claimsfor which it is probable that a liability has been incurred and our managementcan estimate the amount and range of loss. We have 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, management is unable to make a reasonableestimate of the liability that could result from the remaining pendinglitigation.  As additional informationbecomes available, we will assess the probability and the potential liabilityrelated to our pending litigation and revise our estimates, if necessary. Suchrevisions in our estimates of the potential liability could materially impactour results of operations and financial position.

 

***Results of Operations***

 

*Three andnine months ended September 30, 2002 and September 30, 2001*

 

Comparisons of financialperformance made in this document are not necessarily indicative of futureperformance.

 

***Revenues***

 

*Totalrevenues*decreased44% during the quarter ended September 30, 2002 to $27.2 million as compared to$48.7 million for the quarter ended September 30, 2001. Total revenuesdecreased 56% during the nine months ended September 30, 2002 to $87.1 millionas compared to $199.5 million for the nine months ended September 30, 2001.  Asummary of our revenues by geographic region is as follows:

 
|                     |   | **Software**                |   | **%**  |   | **Services** |   | **%**   |   | **Total** |   | **%**  |    |
|--------------------------|--------|-----------------------------|--------|--------|--------|--------------|--------|---------|--------|-----------|--------|--------|---------|
|                     |   | **(dollars in  thousands)** |   |
| **Three  Months Ended:** |   |                        |   |   |   |         |   |    |   |      |   |   |    |
| September 30, 2002       |   |                        |   |   |   |         |   |    |   |      |   |   |    |
| Americas                 |   | $                           | 6,511  |   | 61     | %            | $      | 9,808   |   | 60        | %      | $      | 16,319  |   | 60 | % |
|                     |   |                        |   |   |   |         |   |    |   |      |   |   |    |
| Europe                   |   | 3,508                       |   | 32     |   | 5,497        |   | 33      |   | 9,005     |   | 33     |    |
| Asia/Pacific             |   | 737                         |   | 7      |   | 1,178        |   | 7       |   | 1,915     |   | 7      |    |
| Total                    |   | $                           | 10,756 |   | 100    | %            | $      | 16,483  |   | 100       | %      | $      | 27,239  |   | 100 | % |
|                     |   |                        |   |   |   |         |   |    |   |      |   |   |    |
| September 30, 2001       |   |                        |   |   |   |         |   |    |   |      |   |   |    |
| Americas                 |   | $                           | 4,754  |   | 29     | %            | $      | 21,122  |   | 65        | %      | $      | 25,876  |   | 53 | % |
|                     |   |                        |   |   |   |         |   |    |   |      |   |   |    |
| Europe                   |   | 8,393                       |   | 52     |   | 9,013        |   | 28      |   | 17,406    |   | 36     |    |
| Asia/Pacific             |   | 3,145                       |   | 19     |   | 2,302        |   | 7       |   | 5,447     |   | 11     |    |
| Total                    |   | $                           | 16,292 |   | 100    | %            | $      | 32,437  |   | 100       | %      | $      | 48,729  |   | 100 | % |
|                     |   |                        |   |   |   |         |   |    |   |      |   |   |    |
| **Nine  Months Ended:**  |   |                        |   |   |   |         |   |    |   |      |   |   |    |
| September 30, 2002       |   |                        |   |   |   |         |   |    |   |      |   |   |    |
| Americas                 |   | $                           | 16,855 |   | 58     | %            | $      | 36,518  |   | 63        | %      | $      | 53,373  |   | 61 | % |
|                     |   |                        |   |   |   |         |   |    |   |      |   |   |    |
| Europe                   |   | 11,087                      |   | 38     |   | 17,759       |   | 31      |   | 28,846    |   | 33     |    |
| Asia/Pacific             |   | 1,302                       |   | 4      |   | 3,592        |   | 6       |   | 4,894     |   | 6      |    |
| Total                    |   | $                           | 29,244 |   | 100    | %            | $      | 57,869  |   | 100       | %      | $      | 87,113  |   | 100 | % |
|                     |   |                        |   |   |   |         |   |    |   |      |   |   |    |
| September 30, 2001       |   |                        |   |   |   |         |   |    |   |      |   |   |    |
| Americas                 |   | $                           | 42,567 |   | 53     | %            | $      | 80,892  |   | 68        | %      | $      | 123,459 |   | 62 | % |
|                     |   |                        |   |   |   |         |   |    |   |      |   |   |    |
| Europe                   |   | 29,447                      |   | 37     |   | 28,708       |   | 24      |   | 58,155    |   | 29     |    |
| Asia/Pacific             |   | 8,447                       |   | 10     |   | 9,432        |   | 8       |   | 17,879    |   | 9      |    |
| Total                    |   | $                           | 80,461 |   | 100    | %            | $      | 119,032 |   | 100       | %      | $      | 199,493 |   | 100 | % |

 

23

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*Softwarelicense revenues*decreased34% during the quarter ended September 30, 2002 to $10.8 million as compared to$16.3 million for the quarter ended September 30, 2001.   Softwarelicense revenues decreased 64% during the nine months ended September 30, 2002to $29.2 million as compared to $80.5 million for the nine months endedSeptember 30, 2001.  The decreases are attributable to an overall andcontinued decline in the economy throughout the first nine months of 2002 incomparison to the same period of 2001.  Continued uncertainty surroundingthe economic and information technology spending environment significantlyaffected our license revenue during the first three quarters of 2002.

 

*Total*s*ervicesrevenues*decreased 49% during the quarter ended September 30, 2002to $16.5 million as compared to $32.4 million for the quarter endedSeptember 30, 2001.  Total services revenues decreased 51% during the ninemonths ended September 30, 2002 to $57.9 million as compared to $119.0 millionfor the nine months ended September 30, 2001.

 

Consulting and educationservices revenues decreased $10.1 million to $7.1 million for the three monthsended September 30, 2002 as compared to $17.2 million for the three monthsended September 30, 2001.  Consultingand education services revenues decreased $43.8 million to $28.5 million forthe nine months ended September 30, 2002 as compared to $72.3 million for thenine months ended September 30, 2001. The decreases in consulting and education services revenues are a resultof decreased business volume associated with decreased software licenserevenues and an overall and continued decline in the economy.

 

Maintenance related revenuesfor technical support and product upgrades, which are included in servicesrevenues, were $9.4 million for the three months ended September 30, 2002 ascompared to $15.2 million for the three months ended September 30, 2001. Maintenance related revenues were $29.3 million for the nine months endedSeptember 30, 2002 as compared to $46.8 million for the nine months endedSeptember 30, 2001.  The decreases inmaintenance related revenues is a result of decreased business volume associatedwith decreased software license revenues combined with a decrease in the numberof maintenance renewals and an overall and continued decline in the economy.

 

***Cost of Revenues***

 

Cost of license revenuesinclude the costs of product media, duplication, packaging and othermanufacturing costs as well as royalties payable to third parties for softwarethat is either embedded in, or bundled and sold with, our products.

 

Cost of services consistsprimarily of employee-related costs or consulting fees incurred to supportconsulting projects, post-contract customer support and instructional trainingservices.

 

A summary of the cost ofrevenues for the periods presented is as follows:

 
|                          |   | **Three  Months Ended September 30,** |   | **Nine Months  Ended September 30,** |   |
|-------------------------------|--------|--------------------------------------------|--------|-------------------------------------------|--------|
|                          |   | **2002**                                   |   | **%**                                     |   | **2001** |   | **%** |   | **2002** |   | **%** |   | **2001** |   | **%** |   |
|                          |   | **(dollars in  thousands)**                |   |
| Cost of software  licenses(1) |   | $                                          | 1,414  |                                      | 13     |   | $ | 1,713 |   | 11 |   | $ | 3,417 |   | 12 |   | $ | 6,608 |   | 8 |   |
| Cost of services(2)           |   | 8,751                                      |   | 53                                        |   | 15,661 |   | 48 |   | 31,507 |   | 54 |   | 85,234 |   | 72 |   |
| Total cost of revenues(3)     |   | $                                          | 10,165 |                                      | 37     |   | $ | 17,374 |   | 36 |   | $ | 34,924 |   | 40 |   | $ | 91,842 |   | 46 |   |

 

----

(1)        Percentage is calculatedbased on total software license revenues for the period indicated

 

(2)        Percentage is calculatedbased on total services revenues for the period indicated

 

(3)        Percentage is calculatedbased on total revenues for the period indicated

 

*Cost ofsoftware licenses*decreased17% during the quarter ended September 30, 2002 to $1.4 million as compared to$1.7 million for the quarter ended September 30, 2001.  Cost of softwarelicenses decreased 48% during the nine months ended September 30, 2002 to $3.4million as compared to $6.6 million for the nine months ended September 30,2001.  The decrease in cost of software licenses was principally a resultof decreased sales with associated royalties due with third partyproducts.  Cost of software licenses, asa percentage of software license revenues, increased during the three and ninemonths ended September 30, 2002 compared to the same periods in 2001.  This increase is primarily a result ofcertain fixed royalty obligations with third-party vendors combined withdeclining software license revenues.

 

24

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*Cost ofservices*decreased44% during the quarter ended September 30, 2002 to $8.8 million as compared to$15.7 million for the quarter ended September 30, 2001. Cost of servicesdecreased 63% during the nine months ended September 30, 2002 to $31.5 millionas compared to $85.2 million during the nine months ended September 30,2001.  The decrease in cost of services for the three and nine monthsended September 30, 2002 was the result of reductions in force and relatedfacilities consolidations which resulted in decreased salary and facilityrelated expenses as well as decreased use of third-party consultants.

 

***Operating Expenses and Other Income,net***

 

Research and developmentexpenses consist primarily of salaries, employee-related benefit costs andconsulting fees incurred in association with the development of our products.Costs incurred for the research and development of new software products areexpensed as incurred until such time that technological feasibility, in theform of a working model, is established at which time such costs arecapitalized and recorded at the lower of unamortized cost or net realizablevalue. The costs incurred subsequent to the establishment of a working modelbut prior to general release of the product have not been significant. To date,we have not capitalized any costs related to the development of software forexternal use.

 

Sales and marketing expensesconsist primarily of salaries, employee–related benefit costs, commissions andother incentive compensation, travel and entertainment and marketingprogram-related expenditures such as collateral materials, trade shows, publicrelations, advertising and creative services.

 

General and administrativeexpenses consist primarily of salaries, employee–related benefit costs,accounts receivable reserves expense and professional service fees.

 

A summary of operatingexpenses for the periods presented is as follows:

 
|                                          |   | **Three  Months Ended September 30,** |   | **Nine Months  Ended September 30,** |   |
|-----------------------------------------------|--------|--------------------------------------------|--------|-------------------------------------------|--------|
|                                          |   | **2002**                                   |   | **%(1)**                                  |   | **2001** |   | **%(1)** |   | **2002** |   | **%(1)** |   | **2001** |   | **%(1)** |   |
|                                          |   | **(dollars in  thousands)**                |   |
| Research and development                      |   | $                                          | 7,774  |                                      | 29     |   | $ | 16,230 |   | 33 |   | $ | 34,755 |   | 40 |   | $ | 63,817 |   | 32 |   |
| Sales and marketing                           |   | 9,384                                      |   | 34                                        |   | 25,895 |   | 53 |   | 41,365 |   | 47 |   | 120,142 |   | 60 |   |
| General and administrative                    |   | 2,573                                      |   | 9                                         |   | 10,849 |   | 22 |   | 13,775 |   | 16 |   | 35,707 |   | 18 |   |
| Goodwill and intangible amortization          |   | 887                                        |   | 3                                         |   | 66,493 |   | 137 |   | 2,661 |   | 3 |   | 199,070 |   | 100 |   |
| Restructuring charge                          |   | 63,205                                     |   | 233                                       |   | 9,847 |   | 20 |   | 103,150 |   | 118 |   | 133,320 |   | 67 |   |
| Impairment of goodwill and  other intangibles |   | —                                     |   | —                                    |   | 336,379 |   | 691 |   | — |   | — |   | 336,379 |   | 168 |   |
| Impairment of assets                          |   | 853                                        |   | 3                                         |   | — |   | — |   | 3,129 |   | 4 |   | — |   | — |   |
| Total Operating Expenses                      |   | $                                          | 84,676 |                                      | 311    |   | $ | 465,693 |   | 956 |   | $ | 198,835 |   | 228 |   | $ | 888,435 |   | 445 |   |

 

----

(1)    Expressed as a percent of total revenues for theperiod indicated

 

*Researchand development expenses*decreased 52% during the quarter ended September 30, 2002 to $7.8million as compared to $16.2 million for the quarter ended September 30,2001.  Research and development expenses decreased 46% during the ninemonths ended September 30, 2002 to $34.8 million as compared to $63.8 millionfor the nine months ended September 30, 2001.  The decrease in researchand development expenses is primarily attributable to compensation reductionsthrough salary reductions and reductions in force as well as other cost-cuttingefforts, including facility consolidations, implemented commencing with thesecond quarter of fiscal 2001.

 

*Sales andmarketing expenses*decreased64% during the quarter ended September 30, 2002 to $9.4 million as compared to$25.9 million for the quarter ended September 30, 2001.  Sales andmarketing expenses decreased 66% during the nine months ended September 30,2002 to $41.4 million as compared to $120.1 million during the nine monthsended September 30, 2001.  The decreases were primarily a result ofdecreased salary expenses as a result of the reductions in force in addition todecreased commission expense as a result of decreased license revenue.  Inaddition, marketing expenses declined due to fewer marketing-relatedactivities.

 

25

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*Generaland administrative expenses*decreased 76% during the quarter ended September 30, 2002 to $2.6million as compared to $10.8 million for the quarter ended September 30,2001.  General and administrative expenses decreased 61% during the ninemonths ended September 30, 2002 to $13.8 million as compared to $35.7 millionduring the nine months ended September 30, 2001.  The decrease in generaland administrative expenses is primarily attributable to a decrease in our baddebt reserve recorded during the third quarter of 2002 and decreased salaryexpense as a result of reductions in force. The decrease in the bad debt reserves is due to better than expectedcollection efforts and declining accounts receivable balances.  In addition, there were decreases infacilities costs as a result of continued facilities consolidations anddecreases in professional services expenses.

 

We are attempting to reduceexpenses in an effort to return to profitability during a period when revenueshave been less than originally expected.  Therefore, operating costs maydecline in the near future but there can be no assurance that such decline willbe enough to return the Company to profitability.  Should revenuesincrease significantly, we would expect our expenses to increase commensuratewith such increases in revenues.

 

*Goodwilland intangible amortization.*As described in Note 8 in the Notes to the Condensed ConsolidatedFinancial Statements, we no longer amortize goodwill or the assembled workforceas we have identified the assembled workforce as an intangible asset which doesnot meet the criteria of recognizable intangible asset as defined by SFAS No.142.  The remaining other intangible assets are being amortized on astraight-line basis over their remaining useful life of six months as ofSeptember 30, 2002.  We periodically assess goodwill and other intangiblesfor impairment as discussed in Note 8 of Notes to the Condensed ConsolidatedFinancial Statements.  The remaining intangible assets that are beingamortized are a result of the Interleaf acquisition that was completed in Aprilof 2000.  We have accounted for the acquisition as a purchase businesscombination.  Amortization expense is estimated to be $3.5 million in 2002and $887,000 in 2003.

 

*RestructuringCharge. *Duringthe first, second and third quarters of 2002, we approved restructuring plansto, among other things, reduce our workforce and consolidate facilities. Apre-tax charge of $63.2 million and $103.2 million was recorded during thethree and nine months ended September 30, 2002, respectively, which includesseverance and benefits charges, lease abandonment costs, asset impairmentcharges and other charges incurred as a direct result of the restructuring.  These restructuring and asset impairmentcharges were taken to align our cost structure with changing market conditionsand to create a more efficient organization. We determined a range ofexpected losses on lease abandonment.  We accrued for losses at the low-endof the range in accordance with SFAS No. 5, *Accountingfor Contingencies*.  The high-end of the range was estimated at$68.4 million for the charge recorded during the three months ended September30, 2002 and $110.0 million for the charge recorded during the nine monthsended September 30, 2002.

 

Total severance and benefitscosts were $2.2 million during the third quarter of fiscal 2002 and $7.1million during the nine months ended September 30, 2002.  $817,000 ofseverance and benefits costs were unpaid as of December 31, 2001 as a result ofour 2001 restructuring.  Approximately $5.3 million was paid out duringthe nine months ended September 30, 2002 resulting in $2.6 million of unpaidseverance and benefits as of September 30, 2002 which is expected to be paid infull by September 30, 2003.  During the three months ended September 30,2002, our restructuring plan included plans to terminate the employment of 130employees in North and South America and 15 employees throughout Europe andAsia/Pacific. The employment of these employees was terminated as ofSeptember 30, 2002.  As a result of these reductions, we expect to saveapproximately $12.3 million in annual salaries costs.  These terminationsimpacted all departments within the Company.  During the nine months endedSeptember 30, 2002, our restructuring plan included plans to terminate theemployment of 395 employees in North and South America and approximately 85employees throughout Europe and the Asia Pacific impacting all departmentswithin the Company. The employment of 480 employees was terminated as ofSeptember 30, 2002.  As a result of the reduction in force completedduring the nine months ended September 30, 2002, we expect annual salarysavings of approximately $40.8 million.

 

Total facilities and excessassets charges were $60.5 million and $95.0 million during the three and ninemonths ended September 30, 2002, respectively, and included $408,000 and $18.7million of asset impairment charges during the three and nine months ended September30, 2002, respectively.  Approximately $89.9 million of facilities relatedcosts were unpaid as of December 31, 2001 as a result of the Company’s 2001restructuring.  Approximately $71.6 million was paid out during the ninemonths ended September 30, 2002, resulting in a remaining accrual balance of$94.6 million, $24.5 million of which is expected to be paid out over the nexttwelve months and $70.1 million from October 1, 2003 through June 2013. The $24.5 million and $70.1 million include approximately $48.8 million ofestimated sublease income of which approximately $31.7 million representssublease agreements yet to be negotiated.

 

We recorded otherrestructuring charges of $499,000 and $974,000 during the three and nine monthsended

 

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September 30, 2002, respectively, for variousincremental costs incurred as a direct result of the restructuring.  As ofSeptember 30, 2002, approximately $280,000 of other restructuring costs remainsunpaid and is expected to be paid by the end of the first quarter of fiscal2003.

 

Actual future cashrequirements may differ materially from the accrual at September 30, 2002,particularly if actual sublease income is significantly different from currentestimates.  Adjustments to the restructuring reserves will be made infuture periods, if necessary, based upon the then current actual events andcircumstances.

 

*Impairmentof 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 toverify the amount and location of our computer hardware.  As a result ofthe findings of the physical inventory and related reconciliation with ourasset records, we recorded an asset impairment charge of approximately $2.3million net book value related to computer hardware during the first quarter offiscal 2002.  During the third quarterof 2002, we conducted an additional review of remaining computer andcommunication related assets not reviewed during the first quarter inventoryand recorded an asset impairment charge of $853,000 as a result of the findingsof our inventory and related reconciliation with our asset records.

 

*Otherincome (expense), net.  *Other income (expense), net consists of interest income, interestexpense and other non-operating expenses.  Other income (expense), netdecreased to $7,000 for the three months ended September 30, 2002 ascompared to $1.8 million during the three months ended September 30,2001.  Other income (expense), net decreased to ($6.7 million) for thenine months ended September 30, 2002 as compared to $1.4 million for thenine months ended September 30, 2001.  Interest income decreased $2.1million to $698,000 for the quarter ended September 30, 2002 as compared to$2.7 million for the quarter ended September 30, 2001 and interest incomedecreased $5.8 million to $3.5 million for the nine months ended September 30,2002 as compared to $9.3 million for the nine months ended September 30,2001 as a result of a decrease in overall cash and investments.  Losses onasset disposals decreased approximately $1.2 million for the nine months endedSeptember 30, 2002 as compared to the same period in 2001.  Thisdecrease is primarily related to a loss of approximately $1.3 million on thesale of various computers and related equipment and furniture of E-PublishingCorporation, a wholly owned subsidiary of the Company which was included in thesecond quarter of fiscal 2001.  Currency losses have decreasedapproximately $1.0 million for the nine months ended September 30, 2002 ascompared to the same period in 2001. There was a decrease in equity in net losses from an unconsolidatedsubsidiary of $2.4 million for the nine months ended September 30, 2002 and anincrease in realized losses on cost-method investments of $6.4 million for thenine months ended September 30, 2002.

 

***Income Taxes***

 

During the quarter endedSeptember 30, 2002, we recognized tax expense of $138,000.   Werecognized income tax expense of $7.2 million during the nine months endedSeptember 30, 2002, which includes a valuation provision for our deferred taxasset in the amount of $6.3 million recorded in the second quarter of fiscal2002.  The tax expense during both periods, excluding the deferred taxasset valuation provision, mainly relates to foreign withholding taxes andstate income taxes.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 
|                                                      |   | **September  30,********2002** |    | **December 31,********2001** |   |
|-----------------------------------------------------------|--------|--------------------------------|---------|-----------------------------------|--------|
|                                                      |   | **(in  thousands)**            |    |
| Cash, cash equivalents and  liquid short-term investments |   | $                              | 109,249 |                              | $      | 141,463 |   |
| Long-term liquid  investments                             |   | $                              | 2,273   |                              | $      | 22,135 |   |
| Restricted cash and investments                           |   | $                              | 16,645  |                              | $      | 29,949 |   |
| Working capital                                           |   | $                              | 7,265   |                              | $      | 67,165 |   |
| Working capital ratio                                     |   | 1.1 : 1                        |    | 1.5 : 1                           |   |

 

At September 30, 2002, wehad $128.2 million of cash, cash equivalents, liquid short-term investments,long-term investments, and restricted cash and investments, which represents adecrease of $65.4 million as compared to December 31, 2001. We have a creditfacility with Silicon Valley Bank ("SVB") that includes term loans inthe form of promissory notes and a revolving line of credit (the “SVBFacility”) for up to $25.0 million. Under the revolving line of credit portionof the SVB Facility, amounts borrowed bear interest at the bank’s prime rate(4.75% as of September 30, 2002) and interest is due monthly, with theprincipal due in March 2003.  We

 

27

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have two outstanding term loans under the SVBFacility. The total outstanding amount of these term loans were $3.2 million asof September 30, 2002 and $3.9 million as of December 31, 2001.  Intereston these term loans are at the bank’s prime rate (4.75% as of September 30,2002 and December 31, 2001) and prime rate plus 1.25% (6.0% as of September 30,2002 and December 31, 2001). Principal and interest are due in consecutivemonthly payments through maturity of these term loans in March 31, 2005 andSeptember 30, 2006, respectively. Principal payments of $977,000 are dueannually from 2000 through 2004, $611,000 due in 2005, and a final payment of$357,000 due in 2006.

 

Borrowings under the SVBFacility are collateralized by substantially all of our owned assets and we aresubject to certain covenants, including restrictions on payment of dividendsand other distributions as well as an obligation to maintain $80.0 million inunrestricted cash and cash equivalents, short-term investments and long-terminvestments (excluding equity investments) and maintain $30.0 million ondeposit with SVB.  As of September 30,2002, we were in compliance with all specified financial covenants. During the second quarter of 2002, we drew down $25.0 million on our revolvingline of credit as partial funding of our PacShores Building 4 and 5 TerminationAgreement.  See discussion below formore information.  Interest is payablemonthly at the bank’s prime rate (4.75% annually as of September 30, 2002) andprincipal is due in full in March 2003.  $25.0 million was outstanding asof September 30, 2002.  There were no outstanding amounts under therevolving line of credit as of December 31, 2001.  As of September 30, 2002and December 31, 2001, commitments totaling $16.6 million and $25.0 million,respectively, in the form of standby letters of credit were issued andoutstanding from financial institutions in favor of our various landlords tosecure obligations under our facility leases.  These letters of credit arecollateralized by a security agreement, under which we are required to maintainin a restricted specified interest bearing account approximately $16.6 millionand $29.9 million of available cash equivalents and short-term investments asof September 30, 2002 and December 31, 2001, respectively. The $16.6 millionand the $29.9 million have been presented as restricted cash and investments inthe accompanying condensed consolidated balance sheet at September 30, 2002 andDecember 31, 2001, respectively.

 

Cash used for operatingactivities was $90.5 million for the nine months ended September 30, 2002 and$50.1 million for the nine months ended September 30, 2001, respectively. Theprimary reason for the increase in cash used for operating activities for thenine months ended September 30, 2002 is due to the net loss of $160.5 millionadjusted by approximately $59.1 million for certain non-cash items such asdepreciation expense, amortization of intangibles, impairment of assets,non-cash restructuring charge, and provision for deferred tax asset valuationas well as a decrease in accounts payable and accrued expenses of $6.9 million,a decrease in unearned revenues and deferred maintenance of $13.7 million,partially offset by decreases in accounts receivable of $21.3 million and inprepaids and other of $3.2 million, and an increase in the restructuringreserves of $7.6 million.  Cash providedby investing activities was $70.7 million for the nine months ended September30, 2002 and $6.1 million for the nine months ended September 30, 2001. Cashprovided by investing activities for the nine months ended September 30, 2002was primarily due to net sales/maturities of investments of $58.2 million and$13.3 million released from restricted cash and investments.  Cashprovided by financing activities was $27.1 million and $14.6 million for thenine months ended September 30, 2002 and 2001, respectively.  Net cashprovided by financing activities for the nine months ended September 30, 2002consists of $2.8 million of net proceeds from the issuance of common stock and$25.0 million in proceeds from borrowings less $732,000 of repayments onborrowings.

 

Capital expenditures were$1.1 million and $50.3 million for the nine months ended September 30, 2002 and2001, respectively.  Our capital expenditures consisted of purchases ofoperating resources to manage our operations and included computer hardware andsoftware, office furniture and fixtures and leasehold improvements.

 

In connection with ourrestructuring plan initiated during 2001, we consolidated various operatingfacilities during 2001 and the first, second and third quarters of 2002. Leasetermination costs include the abandonment of certain excess lease facilities forthe remaining lease terms. These costs totaled $143.8 million, including $36.8million in leasehold improvements impairments in 2001 and $95.0 million,including $18.7 million in leasehold improvements impairments, during the ninemonths ended September 30, 2002. Total lease termination costs include theabandonment of leasehold improvements and the remaining lease liabilities andbrokerage fees, offset by estimated sublease income.  The estimated costsof abandoning these facilities, estimated costs to sublease as well asestimated sublease income, were based upon market information analyses providedby a commercial real estate brokerage firm retained by us.

 

On May 9,2002, the Company and Pacific Shores Development LLC (“PacShores”) entered into(i) the First Amendment to Lease (Lease Termination and Mutual General ReleaseAgreement), made effective as of April 29, 2002 (the “Buildings 4 and 5Termination Agreement”) and (ii) the First Amendment to Lease made effective asof April 29, 2002 (the “Building 6 Amendment”).  Under the Buildings 4 and5 Termination Agreement, the Triple Net Building Lease dated April 12, 2000between PacShores, as Lessor, and the Company, as Lessee, for Premises atPacific Shores Center, Building 4, Redwood City, California and the Triple NetBuilding Lease dated February 16, 2000 between PacShores, as Lessor, and theCompany, as Lessee, for Premises at Pacific Shores Center, Building 5, RedwoodCity, California, were terminated.  In conjunction with the termination,PacShores released all security deposits held by it relating to those premisesin exchange for our payment to PacShores a total of $45.0 million as atermination fee (the “Termination Fee”).  Under the Building 6 Amendment,the parties released each other from all claims and we agreed to provide anadditional $3.5 million as security deposit in the form of letters ofcredit.  This letter of credit is included as restricted cash andinvestments in our Condensed Consolidated Balance Sheet as of September 30,2002.  We paid the Termination Fee in full during the second quarter of2002 by payment of approximately $20.0 million from existing cash andinvestments and by drawing down approximately $25.0 million from our line ofcredit.  The $25.0 million line of credit is due in March of 2003.

 

We expect to incursignificant operating expenses for the foreseeable future in order to executeour business plan. As discussed in Note 4 of Notes to Condensed ConsolidatedFinancial Statements, our operating lease commitments, which exclude facilitiesthat are included in our restructuring plan, consist of the following future

 

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minimum lease payments as of September 30,2002 (in thousands):

 

| **Year Ended  December 31,** |   | **Operating********leases** |   |
|-----------------------------------|--------|-----------------------------|--------|
| 2002                              |   | $                           | 1,152  |   |
| 2003                              |   | 3,422                       |   |
| 2004                              |   | 3,378                       |   |
| 2005                              |   | 2,939                       |   |
| 2006                              |   | 2,304                       |   |
| 2007 and thereafter               |   | 59,014                      |   |
| Total minimum lease  payments     |   | $                           | 72,209 |   |

 

As of September 30, 2002,$94.6 million of lease termination costs, net of anticipated sublease income, isaccrued in our restructuring reserves and is expected to be paid by the end ofthe second quarter of fiscal 2013.  We expect to pay approximately $24.5million over the next twelve months and the remaining $70.1 million fromOctober 1, 2003 through June of fiscal 2013.  The $24.5 million and $70.1million include approximately $48.8 million of estimated sublease income ofwhich approximately $31.7 million represents sublease agreements yet to benegotiated.  See Note 7 of Notes toCondensed Consolidated Financial Statements for additional information.

 

We anticipate that suchoperating expenses, as well as capital expenditures, will constitute a materialuse of our cash resources. As a result, our net cash flows will depend heavilyon the level of future sales, our ability to restructure operationssuccessfully and our ability to manage infrastructure costs.

 

We currently expect to fundour short-term working capital and operating resource expenditure requirements,for at least the next twelve months, from our existing cash and cashequivalents and short-term investment resources and our anticipated cash flowsfrom operations. However, we could experience unforeseen circumstances such asa worsening economic downturn, legal or lease settlements and less thananticipated cash inflows that may increase our use of available cash or need toobtain additional financing.  Also, we may find it necessary to obtainadditional equity or debt financing in order to support more rapid expansion,develop new or enhanced services, respond to competitive pressures, acquirecomplementary businesses or technologies or respond to unanticipatedrequirements. We may seek to raise additional funds through private or publicsales of securities, strategic relationships, bank debt, financing underleasing arrangements or otherwise. If additional funds are raised through theissuance of equity securities, the percentage ownership of our stockholderswill be reduced, stockholdersmay experience additional dilution or such equity securities may haverights, preferences or privileges senior to those of the holders of our commonstock. 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, takeadvantage of future opportunities or respond to competitive pressures orunanticipated requirements, which could have a material adverse effect on ourbusiness, financial condition and future operating results.

 

***Factors That May Affect FutureOperating 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, 2001 and elsewhere therein and as disclosed in otherdocuments filed with the Securities and Exchange Commission.

 

Significant fluctuations infuture quarterly operating results may be caused by many factors including,among others, the timing of introductions or enhancements of products andservices by us or our competitors, market acceptance of new products, the mixof our products sold, changes in pricing policies by us or our competitors, ourability to retain customers, changes in our sales incentive plans, budgetingcycles of our customers, customer order deferrals in anticipation of newproducts or enhancements by us or our competitors, nonrenewal of

 

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maintenance agreements (which generallyautomatically renew for one year terms unless earlier terminated by eitherparty upon 90-days notice), product life cycles, changes in strategy, seasonaltrends, the mix of distribution channels through which our products are sold,the mix of international and domestic sales, the rate at which new sales peoplebecome productive, changes in the level of operating expenses to supportprojected growth and general economic conditions. We anticipate that asignificant portion of our revenues will be derived from a limited number oforders, and the timing of receipt and fulfillment of any such orders isexpected to cause material fluctuations in our operating results, particularlyon a quarterly basis. Due to the foregoing factors, quarterly revenues andoperating results are difficult to forecast, and we believe thatperiod-to-period comparisons of our operating results will not necessarily bemeaningful and should not be relied upon as any indication of futureperformance. It is likely that our future quarterly operating results from timeto time will not meet the expectations of market analysts or investors, whichmay have an adverse effect on the price of our common stock.

 

We have experienced adecline in revenues sequentially for the first three quarters of fiscal 2001and the first three quarters of fiscal 2002 and the outlook on future quartersis unclear given the general economic conditions. Furthermore, we incurred netlosses for the past ten quarters and have not achieved positive cash flow fromoperations in the last eight quarters. We do not expect to be profitable fromoperations for the near term and may continue to incur negative cash flow. Ifthe negative cash flow continues, our liquidity and ability to operate ourbusiness would be severely and adversely impacted. Additionally, our ability toraise financial capital may be hindered due to our operational losses andnegative cash flows, reducing our operating flexibility.

 

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 recently renewed andamended the SVB Facility during the second quarter of fiscal 2002. The SVBFacility is secured by substantially all of our owned assets.  The primaryfinancial covenant under the SVB Facility obligates us to maintain certainlevels of available cash, cash equivalents, short-term investments andlong-term investments (excluding equity investments). Falling below such levelswould be an event of default for which Silicon Valley Bank may, among otherthings, 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 success depends largelyon the skills, experience and performance of key personnel. If we lose one ormore key personnel, our business could be harmed. Our future success depends onour ability to continue attracting and retaining highly skilled personnel. Wemay not be successful in attracting, assimilating and retaining qualifiedpersonnel in the future. Furthermore, the significant downturn in our businessenvironment had a negative impact on our operations. We are currentlyrestructuring our operations and have taken actions to reduce our workforce andimplement other cost containment activities. These actions could lead todisruptions in our business, reduced employee morale and productivity,increased attrition and problems with retaining existing employees andrecruiting 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 has a $1.00 per share minimum bid requirement, pursuant to which ourcommon stock could be de-listed from the Nasdaq National Market 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” maintainedby the National Quotation Bureau, Inc. Such alternatives are generally consideredto be less efficient markets, and our stock price, as well as the liquidity ofour common stock, would be adversely impacted by a Nasdaq delisting.

 

Some of these risks anduncertainties relate to the rapidly evolving nature of the markets in which weoperate. These related market risks include, among other things, the evolutionof the online commerce market, the dependence of online commerce on thedevelopment of the Internet and its related infrastructure, the uncertainty

 

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pertaining to widespread adoption of onlinecommerce and the risk of government regulation of the Internet. Other risks anduncertainties relate to our ability to, among other things, successfullyimplement our marketing strategies, respond to competitive developments,continue to develop and upgrade our products and technologies more rapidly thanour competitors, and commercialize our products and services by incorporatingthese enhanced technologies. There can be no assurance that we will succeed inaddressing any or all of these risks.

 

There has been a generaldownturn in the Unites States of America and global economy. Therefore,financial comparisons discussed herein may not be indicative of futureperformance. If the economic environment continues to decline or if the currentglobal slowdown worsens or becomes prolonged, our future results may besignificantly impacted. We believe that the current economic decline hasincreased the average length of our sales cycle and our operating results couldsuffer and our stock price could decline if we do not achieve the level ofrevenues we expect.

 

Like other U.S. companies,our business and operating results are subject to uncertainties arising out ofthe terrorist attacks on the United States, including the economic consequencesof military actions or additional terrorist activities and associated politicalinstability, and the impact of heightened security concerns on domestic andinternational travel and commerce. Such uncertainties could also lead to delaysor cancellations of customer orders, a general decrease in corporate spendingor our inability to effectively market and sell our products. Any of theseresults could substantially harm our business and results of operations, causinga decrease in our revenues.

 

***Related Party Transactions***

 

Mr. Pehong Chen, theCompany’s CEO and Chairman of the Board, also served as a director of Brience,Inc. a provider of software products. From February 2001 to February 2002, we had a reseller relationship withBrience whereby we agreed to resell the Brience product licenses with ourproduct.  One end-customer installationthat resulted from the reseller relationship was not concluded until the threemonths ended September 30, 2002.  Duringthe three and nine months ended September 30, 2002, we paid to Brienceapproximately $175,000 in license fees for the resell of the Brience product tothat end-customer.  During the three andnine months ended September 30, 2001, we paid no royalties to Brience.  Mr. Chen resigned from the Brience board ofdirectors on September 12, 2002.

 

We also have an investmentof 19.9% in Roundarch, a CRM services company. We have a reseller relationshipwith Roundarch whereby Roundarch resells and integrates our software productswith other third party software products into CRM customer installations.  During the three and nine months, endedSeptember 30, 2002, transactions involving Roundarch comprised no more than **$**39,000 and $383,000 respectively, of our revenue.  During the three and nine months ended September 30, 2001,transactions involving Roundarch comprised no more than $191,000 and $1.3million, respectively, of our revenue.

 

**Item 3.****          ****Quantitativeand Qualitative Disclosures about Market Risk**

 

Our exposure to market riskfor changes in interest rates relates primarily to our investment portfolio. Wehad no derivative financial instruments as of September 30, 2002 and December31, 2001. 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 three and nine months ended September 30, 2002.

 

During the second quarter offiscal 2002, we drew down $25.0 million on our revolving line of credit. Interest is payable monthly at the bank’s prime rate (4.75% annually as ofSeptember 30, 2002) and principal is due in full in March 2003. Additionally, we have two outstanding term loans as of September 30, 2002. Interest on those term loans are at the bank’s prime rate (4.75% as ofSeptember 30, 2002) and prime rate plus 1.25% (6.0% as of September 30, 2002). We estimate that annual interest charges would increase by approximately$140,000 for every one-half of one percent increase in interest rates.

 

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

 

We consider all debtsecurities with remaining maturities of three months or less at the date ofpurchase to be cash equivalents.

 

Our short-term investmentsconsist of debt 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, net of tax. Included in our long-terminvestments are investments in debt securities that are classified asavailable-for-sale. These securities have remaining maturities greater than oneyear from September 30, 2002. These

 

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investments are carried at fair value withrelated unrealized gains or losses reported as other comprehensive income, netof tax.

 

All short-term investmentshave a remaining maturity of twelve months or less. Total short-term andlong-term investment unrealized gains (losses) were approximately ($1.5million) and $3.5 million for the nine months ended September 30, 2002 and2001, respectively. Total realized gains during the nine months ended September30, 2002 and 2001 were $664,000 and $1.3 million and are included in otherincome in the accompanying Condensed Consolidated Statements of Operations.

 

Our cash and cashequivalents, short-term investments and long-term investments consisted of thefollowing as of September 30, 2002 (in thousands):

 
|                      |   | **Amortized********Cost** |    | **Unrealized********Gains** |   | **Unrealized********Losses** |   | **Fair********Value** |   |
|---------------------------|--------|---------------------------|---------|-----------------------------|--------|------------------------------|--------|-----------------------|--------|
| Cash                      |   | $                         | 47,236  |                        | $      | —                       |   | $                     | — |   | $ | 47,236 |   |
| Money market              |   | 35,659                    |    | $                           | — |                         | — |                  | 35,659 |   |
| Corporate notes/bonds     |   | 31,036                    |    | 220                         |   | —                       |   | 31,256                |   |
| Government notes/bonds    |   | 14,009                    |    | 7                           |   | —                       |   | 14,016                |   |
|                      |   | $                         | 127,940 |                        | $      | 227                          |   | $                     | — |   | $ | 128,167 |   |
| Cash and cash equivalents |   | $                         | 99,758  |                        | $      | 1                            |   | $                     | — |   | $ | 99,759 |   |
| Short-term investments    |   | 25,939                    |    | 196                         |   | —                       |   | 26,135                |   |
| Long-term investments     |   | 2,243                     |    | 30                          |   | —                       |   | $                     | 2,273  |   |
|                      |   | $                         | 127,940 |                        | $      | 227                          |   | $                     | — |   | $ | 128,167 |   |

 

Included in the table abovein cash and cash equivalents are $16.6 million of non-current restricted cashand investments.

 

Our cash and cashequivalents, short-term investments and long-term investments consisted of thefollowing as of December 31, 2001 (in thousands):

 
|                      |   | **Amortized********Cost** |    | **Unrealized********Gains** |   | **Unrealized********Losses** |   | **Fair********Value** |   |
|---------------------------|--------|---------------------------|---------|-----------------------------|--------|------------------------------|--------|-----------------------|--------|
| Cash                      |   | $                         | 25,874  |                        | $      | —                       |   | $                     | — |   | $ | 25,874 |   |
| Money market              |   | 36,299                    |    | 364                         |   | (1                           | )      | 36,662                |   |
| Corporate notes/bonds     |   | 75,842                    |    | 1,056                       |   | (8                           | )      | 76,890                |   |
| Government notes/bonds    |   | 53,792                    |    | 346                         |   | (17                          | )      | 54,121                |   |
|                      |   | $                         | 191,807 |                        | $      | 1,766                        |   | $                     | (26    | ) | $ | 193,547 |   |
| Cash and cash equivalents |   | $                         | 75,393  |                        | $      | 366                          |   | $                     | (1     | ) | $ | 75,758 |   |
| Short-term investments    |   | 94,773                    |    | 895                         |   | (14                          | )      | 95,654                |   |
| Long-term investments     |   | 21,641                    |    | 505                         |   | (11                          | )      | $                     | 22,135 |   |
|                      |   | $                         | 191,807 |                        | $      | 1,766                        |   | $                     | (26    | ) | $ | 193,547 |   |

 

Included in the table abovein short-term investments are non-current restricted cash and investments of$29.9 million.

 

Remaining maturities of ourlong-term investments as of September 30, 2002 are as follows:

 

|                  |   | **2003** |   | **2004** |   | **Total** |   |
|-----------------------|--------|----------|--------|----------|--------|-----------|--------|
| Corporate notes/bonds |   | $        | 1,180  |     | $      | 1,093     |   | $ | 2,273 |   |
|                       |        |          |        |          |        |           |        |  |  |  |

 

***Concentrations of Credit Risk***

 

Financial assets thatpotentially subject us to significant concentrations of credit risk consistprincipally of cash, cash equivalents, short-term investments, long-terminvestments, restricted cash and investments and trade accounts receivable. Weanalyzed our cash, short-term and long-term investment holdings for interestrate risk and estimate that the impact of a change in interest rates ofone-half of one percent would be approximately $455,000 on annual interestincome. We market and sell our products throughout the world and performongoing credit evaluations of our customers. We maintain reserves for potentialcredit losses. For the three months and nine months ended September 30, 2002,no single customer accounted for more than 10% of total revenues.  For thethree months ended September 30, 2001, no single customer accounted for more than10% of total revenues.  During the nine months ended September 30, 2001,one

 

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customer accounted for more than 10% of totalrevenues.  As of September 30, 2002 andDecember 31, 2001, no customer individually accounted for more than 10% of ouraccounts receivable.

 

***Fair Value of Financial Instruments***

 

Our financial instrumentsconsist of cash equivalents, short-term investments, long-term investments,restricted cash and investments, accounts receivable, accounts payable anddebt. We do not have any derivative financial instruments. We believe thereported carrying amounts of our financial instruments approximates fair value,based upon the short maturity of cash equivalents, short-term investments, accountsreceivable and payable, and based on the current rates available to us onsimilar debt issues.

 

***Equity Investments***

 

Our equity investmentsconsist of equity investments in public and non-public companies that areaccounted for under either the cost method of accounting or the equity methodof accounting. Equity investments are accounted for under the cost method ofaccounting when we have a minority interest and do not have the ability toexercise significant influence. These investments are classified as availablefor sale and are carried at fair value when readily determinable market valuesexist or at cost when such market values do not exist. We review financialinformation on all of our investees at each reporting period. Such financialinformation may consist of financial statements, current stock prices,subsequent rounds of financing and other relevant information such as investorupdates and press releases. Adjustments to fair value are recorded as acomponent of other comprehensive income (loss) unless the investments areconsidered permanently impaired in which case the adjustment is recorded as acomponent of other income (expense), net in the Consolidated Statement ofOperations. Equity investments are accounted for under the equity method ofaccounting when we have a minority interest and have the ability to exercisesignificant influence. These investments are classified as available for saleand are carried at cost with periodic adjustments to carrying value for ourequity in net income (loss) of the equity investee. Such adjustments arerecorded as a component of other income (expense), net. Any decline in value ofour investments, which is other than a temporary decline, is charged toearnings during the period in which the permanent impairment is evident.

 

The total fair value of ourcost method long-term equity investments in public and non-public companies was$3.0 million as of September 30, 2002. This includes $503,000 million for thethree months ended September 30, 2002 and $10.3 million for the nine monthsended September 30, 2002 of write-downs of investments due to an other thantemporary decline in fair value. There was no unrealized loss in our costmethod long-term equity investments during the three and nine months ended September30, 2002.

 

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**ITEM 4.****          ****CONTROLSAND PROCEDURES**

 

(a)  Based on their evaluationof our disclosure controls and procedures conducted within 90 days of the dateof filing this report on Form 10-Q, our Chief Executive Officer and ChiefFinancial Officer have concluded that our disclosure controls and procedures(as defined in Rules 13a-14(c) and 15d-14(c) promulgated under the SecuritiesExchange Act of 1934) are effective.

 

(b) There have been no significant changes (including correctiveactions with regard to significant deficiencies or material weaknesses) in ourinternal controls or in other factors that could significantly affect thesecontrols subsequent to the date of the evaluation referenced inparagraph (a) above.

 

# ***Limitations on the Effectiveness of Controls***

 

The company’s management,including the Chief Executive Officer ("CEO") and Chief FinancialOfficer ("CFO"), does not expect that our Disclosure Controls or ourInternal Controls will prevent all errors and all fraud. A control system, nomatter how well conceived and operated, can provide only reasonable, notabsolute, assurance that the objectives of the control system are met. Further,the design of a control system must reflect the fact that there are resourceconstraints, and the benefits of controls must be considered relative to theircosts. Because of the inherent limitations in all control systems, noevaluation of controls can provide absolute assurance that all control issues andinstances of fraud, if any, within the company have been detected. Theseinherent limitations include the realities that judgments in decision-makingcan be faulty, and that breakdowns can occur because of simple error ormistake. Additionally, controls can be circumvented by the individual acts ofsome persons, by collusion of two or more people, or by management override ofthe control. The design of any system of controls also is based in part uponcertain assumptions about the likelihood of future events, and there can be noassurance that any design will succeed in achieving its stated goals under allpotential future conditions; over time, control may become inadequate becauseof changes in conditions, or the degree of compliance with the policies orprocedures may deteriorate. Because of the inherent limitations in acost-effective control system, misstatements due to error or fraud may occurand not be detected.

 

**PART II.****  OTHER INFORMATION**

 
| **Item 1.** | **Legal Proceedings** |   |   |
|-------------|-----------------------|--------|--------|

 

In April 2001, the Companyfiled a Form 8-K with the Securities and Exchange Commission reporting thatseveral purported class action lawsuits had been filed against the Company andcertain of its officers and directors. In each of the lawsuits, the plaintiffssought to assert claims on behalf of a class of all persons who purchasedsecurities of BroadVision between January 26, 2001 and April 2, 2001. Thecomplaints alleged that BroadVision and the individual defendants violatedfederal securities laws in connection with its reporting of financial resultsfor the quarter ended December 31, 2000. The lawsuits were consolidated into asingle action.  On November 5, 2001,BroadVision and the individual defendants filed motions to dismiss the consolidatedcomplaint.  On February 22, 2002, theCourt granted these motions, dismissed the consolidated complaint withoutprejudice and ordered the lead plaintiff to file an amended complaint within 30days. On March 25, 2002, the plaintiff filed its Second Amended ConsolidatedComplaint, which added claims for breach of fiduciary duty and named members ofthe Company’s board of directors as additional defendants. All defendants filedmotions to dismiss the Second Amended Consolidated Complaint on May 10,2002.  The hearing on the defendant’s motion to dismiss was heard onAugust 30, 2002.  On September 11, 2002,the Court (1) dismissed with prejudice the claims that the defendants violatedfederal securities laws, on the basis that the complaint failed to state aclaim upon which relief could be granted, and (2) dismissed without prejudicethe claims for breach of fiduciary duty, on the basis that the claims were madeunder state law and, in the absence of any remaining federal law claims, theCourt would decline to exercise supplemental jurisdiction.  The Company is not aware of plaintiffsfiling an appeal of the Court’s September 11, 2002 decision or filing anothercomplaint in any other court.  TheCompany believes that the action was without merit and will continue to defenditself vigorously should plaintiffs continue to pursue any of these claims.

 

On June 7, 2001, Verity,Inc. filed suit against the Company alleging copyright infringement, breach ofcontract, unfair competition and other claims. The Company has answered thecomplaint denying all allegations and is defending itself vigorously.

 

On July 18, 2002, AvalonPartners, Inc., doing business as Cresa Partners, filed a suit against theCompany claiming broker commissions related to the Company’s termination andrestructuring of certain facilities leases associated with the Company’srestructuring plans taken during the second quarter of 2002.  The Companyhas answered the complaint and is defending itself vigorously.

 

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.

 

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| **Item 2.** | **Changes in Securities and Use of Proceeds**           |                |                                                                                               |
|-------------|---------------------------------------------------------|---------------------|----------------------------------------------------------------------------------------------------|
|        | Not applicable.                                         |                |                                                                                               |
| **Item 3.** | **Defaults Upon Senior Securities**                     |                |                                                                                               |
|        | Not applicable.                                         |                |                                                                                               |
| **Item 4.** | **Submission of Matters to a Vote of Security Holders** |                |                                                                                               |
|        | Not applicable.                                         |                |                                                                                               |
| **Item 5.** | **Other Information**                                   |                |                                                                                               |
|        | Not applicable.                                         |                |                                                                                               |
| **Item 6.** | **Exhibits and Reports on Form 8-K**                    |
|        | (a)                                                     | Exhibits            |                                                                                               |
|        |                                                    | Exhibits            |                                                                                               | Description |   |
|        |                                                    | 10.32               | Offer letter, dated September 3, 2002, by and between the Company and  Philip L. Oreste.           |
|        |                                                    | 10.33               | Form of Indemnity Agreement between the Company and each of its  directors and executive officers. |
|        |                                                    | 99.1                | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of  2002.                          |
|        |                                                    |                |
|        | (b)                                                     | Reports on Form 8-K |
|        |                                                    | None                |
|             |                                                         |                     |                                                                                                    |  |  |  |  |

 

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**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 

 
|   |              |   | **BROADVISION, INC.**                                                                                              |
|--------|-------------------|--------|--------------------------------------------------------------------------------------------------------------------|
| Date:  | November 14, 2002 | By:    | /s/  Pehong Chen                                                                                              |   |
|   |              |   | Pehong ChenChairman of the Board,  President and Chief Executive Officer (Principal Executive Officer)             |
| Date:  | November 14, 2002 | By:    | /s/  Philip L. Oreste                                                                                         |   |
|   |              |   | Philip L. OresteExecutive Vice President and  Chief Financial Officer(Principal Financial and Accounting  Officer) |

 

**CERTIFICATIONS**

 

I, Pehong Chen, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q ofBroadVision, Inc.;

 

2. Based on my knowledge, this quarterly report does notcontain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements made, in light of the circumstances underwhich such statements were made, not misleading with respect to the periodcovered by this quarterly report;

 

3. Based on my knowledge, the financial statements, and otherfinancial information included in this quarterly report, fairly present in allmaterial respects the financial condition, results of operations and cash flowsof the registrant as of, and for, the periods presented in this quarterlyreport;

 

4. The registrant’s other certifying officers and I areresponsible for establishing and maintaining disclosure controls and procedures(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and wehave:

 

a) Designed such disclosure controlsand procedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this quarterly reportis being prepared;

 

b) Evaluated the effectiveness ofthe registrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c) Presented in this quarterlyreport our conclusions about the effectiveness of the disclosure controls andprocedures based on our evaluation as of the Evaluation Date;

 

5. The registrant’s other certifying officers and I havedisclosed, based on our most recent evaluation, to the registrant’s auditorsand the audit committee of registrant’s board of directors (or personsperforming the equivalent function):

 

a) All significant deficiencies inthe design or operation of internal controls which could adversely affect theregistrant’s ability to record, process, summarize and report financial dataand have identified for the registrant’s auditors any material weaknesses ininternal controls; and

 

b) Any fraud, whether or notmaterial, that involves management or other employees who have a significantrole in the registrant’s internal controls; and

 

6. The registrant’s other certifying officers and I haveindicated in this quarterly report whether or not there were significantchanges in internal controls or in other factors that could significantlyaffect internal controls subsequent to the date of our most recent evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

 
| Date:  November 14, 2002 |
|--------------------------|
|                     |
|                     |   | /s/ Pehong Chen |   |   |
|                     |   | Pehong Chen |   |   |
|                     | Chairman of  the Board, President and Chief Executive Officer |   |

 

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I, Philip L. Oreste, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q ofBroadVision, Inc.;

 

2. Based on my knowledge, this quarterly report does notcontain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements made, in light of the circumstances underwhich such statements were made, not misleading with respect to the periodcovered by this quarterly report;

 

3. Based on my knowledge, the financial statements, andother financial information included in this quarterly report, fairly presentin all material respects the financial condition, results of operations andcash flows of the registrant as of, and for, the periods presented in thisquarterly report;

 

4. The registrant’s other certifying officers and I areresponsible for establishing and maintaining disclosure controls and procedures(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and wehave:

 

a) Designed such disclosure controlsand procedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this quarterly reportis being prepared;

 

b) Evaluated the effectiveness ofthe registrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c) Presented in this quarterlyreport our conclusions about the effectiveness of the disclosure controls andprocedures based on our evaluation as of the Evaluation Date;

 

5. The registrant’s other certifying officers and I havedisclosed, based on our most recent evaluation, to the registrant’s auditorsand the audit committee of registrant’s board of directors (or personsperforming the equivalent function):

 

a) All significant deficiencies inthe design or operation of internal controls which could adversely affect theregistrant’s ability to record, process, summarize and report financial dataand have identified for the registrant’s auditors any material weaknesses ininternal controls; and

 

b) Any fraud, whether or notmaterial, that involves management or other employees who have a significantrole in the registrant’s internal controls; and

 

6. The registrant’s other certifying officers and I haveindicated in this quarterly report whether or not there were significantchanges in internal controls or in other factors that could significantlyaffect internal controls subsequent to the date of our most recent evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

 
| Date:  November 14, 2002 |
|--------------------------|
|                     |
|                     |   | /s/  Philip L. Oreste |   |   |
|                     |   | Philip L. Oreste |   |   |
|                     | Executive  Vice President and Chief Financial Officer |   |

 

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