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**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, DC  20549**

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**FORM10-Q**

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**(Mark One)**

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**ý**           QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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**Forthe Quarter ended September 30, 2001**

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**OR**

 

**o**           TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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**0-28252**(Commission File Number)

 

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**BROADVISION, INC.**

(Exact name of registrant as specified in its charter)

 

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| **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)  261-5100**                                             |
| (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 9,2001 there were 284,042,106 shares of the Registrant’s Common Stock issued andoutstanding.

 

 

**BROADVISION, INC. ANDSUBSIDIARIESFORM 10-QQuarter Ended September 30, 2001**

** **

**TABLE OF CONTENTS**

 
| **PART I.**    | **FINANCIAL INFORMATION**                                                                                                             |
|----------------|---------------------------------------------------------------------------------------------------------------------------------------|
| Item 1.        | Financial Statements                                                                                                                  |
|           | Condensed  Consolidated Balance Sheets—September 30, 2001and December 31, 2000                                              |
|           | Condensed  Consolidated Statements of Operations and Comprehensive Loss—Three and nine  months ended September 30, 2001 and 2000 |
|           | Condensed  Consolidated Statements of Cash Flows—Nine months ended September 30, 2001  and 2000                                  |
|           | 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                                                                           |
|           |                                                                                                                                  |
| **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** |                                                                                                                                  |

 

**PART I.  FINANCIAL INFORMATION**

 

**Item 1.    Financial Statements**

 

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

** **
|                                                                                                                                             |   | **September  30,  2001** |    | **December  31,  2000** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|---------|-------------------------|--------|
|                                                                                                                                             |   | **(unaudited)**          |    |                    |   |
| **ASSETS**                                                                                                                                       |   |                     |    |                    |   |
| Cash and cash equivalents                                                                                                                        |   | $                        | 123,703 |                    | $      | 153,137 |   |
| Short-term investments                                                                                                                           |   | 65,879                   |    | 69,397                  |   |
| Accounts receivable, less reserves of $8,593  and $4,015 for 2001 and 2000, respectively                                                         |   | 34,988                   |    | 104,811                 |   |
| Prepaids and other                                                                                                                               |   | 15,397                   |    | 17,417                  |   |
| Total current assets                                                                                                                             |   | 239,967                  |    | 344,762                 |   |
|                                                                                                                                             |   |                     |    |                    |   |
| Property and equipment, net                                                                                                                      |   | 80,464                   |    | 76,685                  |   |
| Deferred tax asset                                                                                                                               |   | 5,579                    |    | 5,579                   |   |
| Long-term investments                                                                                                                            |   | 32,581                   |    | 78,769                  |   |
| Equity investments                                                                                                                               |   | 9,329                    |    | 23,786                  |   |
| Goodwill and other intangibles                                                                                                                   |   | 74,305                   |    | 607,501                 |   |
| Other assets                                                                                                                                     |   | 7,394                    |    | 5,942                   |   |
| Total assets                                                                                                                                     |   | $                        | 449,619 |                    | $      | 1,143,024 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                    |   |                     |    |                    |   |
| Accounts payable                                                                                                                                 |   | $                        | 11,696  |                    | $      | 15,711 |   |
| Accrued expenses                                                                                                                                 |   | 69,640                   |    | 53,676                  |   |
| Unearned revenue                                                                                                                                 |   | 22,470                   |    | 16,330                  |   |
| Deferred maintenance                                                                                                                             |   | 29,015                   |    | 42,237                  |   |
| Current portion of long-term debt                                                                                                                |   | 977                      |    | 977                     |   |
| Total current liabilities                                                                                                                        |   | 133,798                  |    | 128,931                 |   |
|                                                                                                                                             |   |                     |    |                    |   |
| Long-term debt, net of current portion                                                                                                           |   | 3,166                    |    | 3,897                   |   |
| Other noncurrent liabilities                                                                                                                     |   | 55,107                   |    | 898                     |   |
| Total liabilities                                                                                                                                |   | 192,071                  |    | 133,726                 |   |
|                                                                                                                                             |   |                     |    |                    |   |
| 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; 283,888  and 270,066 shares issued and outstanding for 2001 and 2000, respectively |   | 28                       |    | 27                      |   |
| Additional paid-in capital                                                                                                                       |   | 1,205,842                |    | 1,176,042               |   |
| Accumulated other comprehensive loss, net of  tax                                                                                                |   | (8,491                   | )       | (4,348                  | )      |
| Accumulated deficit                                                                                                                              |   | (939,831                 | )       | (162,423                | )      |
| Total stockholders’ equity                                                                                                                  |   | 257,548                  |    | 1,009,298               |   |
| Total liabilities and stockholders’ equity                                                                                                  |   | $                        | 449,619 |                    | $      | 1,143,024 |   |

* *

*See AccompanyingNotes to Condensed Consolidated Financial Statements*

* *

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

** **
|                                                                |   | **Three Months Ended**

**September 30,** |     | **Nine Months Ended**

**September 30,** |   |
|---------------------------------------------------------------------|--------|-------------------------------------------|----------|------------------------------------------|--------|
|                                                                |   | **2001**                                  |     | **2000**                                 |   | **2001** |   | **2000** |   |
| **Revenues:**                                                       |   |                                      |     |                                     |   |   |   |   |   |
| Software licenses                                                   |   | $                                         | 19,673   |                                     | $      | 72,351 |   | $ | 83,842 |   | $ | 169,913 |   |
| Services                                                            |   | 31,557                                    |     | 47,843                                   |   | 115,952 |   | 107,126 |   |
| Total revenues                                                      |   | 51,230                                    |     | 120,194                                  |   | 199,794 |   | 277,039 |   |
| **Cost of revenues:**                                               |   |                                      |     |                                     |   |   |   |   |   |
| Cost of software licenses                                           |   | 1,713                                     |     | 1,395                                    |   | 6,608 |   | 5,021 |   |
| Cost of services                                                    |   | 14,636                                    |     | 34,015                                   |   | 82,009 |   | 79,971 |   |
| Total cost of revenues                                              |   | 16,349                                    |     | 35,410                                   |   | 88,617 |   | 84,992 |   |
| Gross profit                                                        |   | 34,881                                    |     | 84,784                                   |   | 111,177 |   | 192,047 |   |
| **Operating expenses:**                                             |   |                                      |     |                                     |   |   |   |   |   |
| Research and development                                            |   | 16,230                                    |     | 14,988                                   |   | 63,817 |   | 30,453 |   |
| Sales and marketing                                                 |   | 25,895                                    |     | 43,799                                   |   | 120,142 |   | 102,569 |   |
| General and administrative                                          |   | 10,849                                    |     | 8,198                                    |   | 35,707 |   | 18,595 |   |
| Goodwill and intangible amortization                                |   | 66,493                                    |     | 66,308                                   |   | 199,070 |   | 121,659 |   |
| Charge for acquired in-process technology                           |   | -                                         |     | -                                        |   | - |   | 10,100 |   |
| Restructuring charge                                                |   | 9,847                                     |     | -                                        |   | 133,320 |   | - |   |
| Impairment of goodwill and other  intangibles                       |   | 336,379                                   |     | -                                        |   | 336,379 |   | - |   |
| Total operating expenses                                            |   | 465,693                                   |     | 133,293                                  |   | 888,435 |   | 283,376 |   |
| Operating loss                                                      |   | (430,812                                  | )        | (48,509                                  | )      | (777,258 | ) | (91,329 | ) |
| Other  income, net                                                  |   | 1,797                                     |     | 4,318                                    |   | 1,418 |   | 15,505 |   |
| Loss before provision for income taxes                              |   | (429,015                                  | )        | (44,191                                  | )      | (775,840 | ) | (75,824 | ) |
| Provision  for income taxes                                         |   | 406                                       |     | 8,565                                    |   | 1,568 |   | 21,769 |   |
| Net loss                                                            |   | $                                         | (429,421 | )                                        | $      | (52,756 | ) | $ | (777,408 | ) | $ | (97,593 | ) |
| Basic and diluted net loss per share                                |   | $                                         | (1.54    | )                                        | $      | (0.20 | ) | $ | (2.83 | ) | $ | (0.38 | ) |
| **Shares used in computing:**                                       |   |                                      |     |                                     |   |   |   |   |   |
| Basic and diluted net loss per share                                |   | 278,464                                   |     | 266,368                                  |   | 274,343 |   | 257,254 |   |
| **Comprehensive loss:**                                             |   |                                      |     |                                     |   |   |   |   |   |
| Net loss                                                            |   | $                                         | (429,421 | )                                        | $      | (52,756 | ) | $ | (777,408 | ) | $ | (97,593 | ) |
| Other comprehensive loss, net of tax: Unrealized  investment losses |   | (358                                      | )        | (5,160                                   | )      | (4,143 | ) | (26,070 | ) |
| Total  comprehensive loss                                           |   | $                                         | (429,779 | )                                        | $      | (57,916 | ) | $ | (781,551 | ) | $ | (123,663 | ) |

 

*SeeAccompanying Notes to Condensed Consolidated Financial Statements*

 

**BROADVISION, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS(In thousands)**

 
|                                                                                        |   | **Nine Months Ended September 30,** |     |
|---------------------------------------------------------------------------------------------|--------|-------------------------------------|----------|
|                                                                                        |   | **2001**                            |     | **2000** |   |
|                                                                                        |   | **(unaudited)**                     |     |   |   |
| **Cash flows from operating activities:**                                                   |   |                                |     |   |   |
| Net loss                                                                                    |   | $                                   | (777,408 | ) | $ | (97,593 | ) |
| Adjustments to reconcile net loss to net  cash (used for) provided by operating activities: |   |                                |     |   |   |
| Depreciation and amortization                                                               |   | 19,238                              |     | 7,347 |   |
| Amortization of deferred compensation                                                       |   | -                                   |     | 226 |   |
| Accounts receivable reserves                                                                |   | 4,578                               |     | 1,359 |   |
| Amortization of prepaid royalties                                                           |   | 2,763                               |     | 996 |   |
| Amortization of prepaid compensation                                                        |   | 512                                 |     | 1,456 |   |
| Realized loss on cost method long-term  investments                                         |   | 3,979                               |     | - |   |
| Equity in net loss from unconsolidated  subsidiary                                          |   | 2,438                               |     | - |   |
| Charge for acquired in-process technology                                                   |   | -                                   |     | 10,100 |   |
| Amortization of goodwill and other  intangibles                                             |   | 199,070                             |     | 121,659 |   |
| Stock-based compensation charge                                                             |   | 350                                 |     | - |   |
| Restructuring charge, non cash                                                              |   | 121,547                             |     | - |   |
| Loss on sale of assets                                                                      |   | 1,147                               |     | - |   |
| Impairment of goodwill and other  intangibles                                               |   | 336,379                             |     | - |   |
| Changes in operating assets and liabilities  (net of acquisitions):                         |   |                                |     |   |   |
| Accounts receivable                                                                         |   | 65,046                              |     | (56,470 | ) |
| Prepaids and other                                                                          |   | 8,563                               |     | (7,510 | ) |
| Accounts payable and accrued expenses                                                       |   | (29,028                             | )        | 21,675 |   |
| Unearned revenue and deferred maintenance                                                   |   | (7,057                              | )        | 23,620 |   |
| Income tax benefit from stock option  exercises                                             |   | -                                   |     | 21,079 |   |
| Other noncurrent assets                                                                     |   | (2,258                              | )        | (2,838 | ) |
| Net cash (used for) provided by operating  activities                                       |   | (50,141                             | )        | 45,106 |   |
| **Cash flows from investing activities:**                                                   |   |                                |     |   |   |
| Purchase of property and equipment                                                          |   | (50,304                             | )        | (29,934 | ) |
| Purchase of long-term investments                                                           |   | (39,573                             | )        | (76,033 | ) |
| Sales/maturity of long-term investments                                                     |   | 84,299                              |     | - |   |
| Direct costs of purchase transaction, net  of cash acquired                                 |   | -                                   |     | (6,039 | ) |
| Cash acquired in purchase transaction                                                       |   | 7,171                               |     | - |   |
| Purchase of short-term investments                                                          |   | (95,853                             | )        | (175,947 | ) |
| Sales/maturity of short-term investments                                                    |   | 100,367                             |     | 92,956 |   |
| Net cash provided by (used for) investing  activities                                       |   | 6,107                               |     | (194,997 | ) |
| **Cash flows from financing activities:**                                                   |   |                                |     |   |   |
| Proceeds from issuance of common stock, net                                                 |   | 15,331                              |     | 27,757 |   |
| Repayments of borrowings                                                                    |   | (731                                | )        | (1,018 | ) |
| Payments on capital lease obligations                                                       |   | -                                   |     | (270 | ) |
| Net cash provided by financing activities                                                   |   | 14,600                              |     | 26,469 |   |
| Net decrease  in cash and cash equivalents                                                  |   | (29,434                             | )        | (123,422 | ) |
| Cash and  cash equivalents at beginning of period                                           |   | 153,137                             |     | 279,823 |   |
| Cash and  cash equivalents at end of period                                                 |   | $                                   | 123,703  |   | $ | 156,401 |   |
| **Supplemental disclosures of cash flow information:**                                      |   |                                |     |   |   |
| Cash paid for interest                                                                      |   | $                                   | 347      |   | $ | 422 |   |
| Cash paid for income taxes                                                                  |   | $                                   | 1,568    |   | $ | 1,165 |   |

 

*SeeAccompanying Notes to Condensed Consolidated Financial Statements*

 

**BROADVISION, INC. AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

** **

**Note 1.           Organization and Summary of SignificantAccounting Policies**

 

***Nature of Business***

 

BroadVision, Inc.(collectively with its subsidiaries, “BroadVision” or "Company") wasincorporated in the state of Delaware on May 13, 1993. The Companydevelops and sells an integrated suite of packaged applications for conductinge-business interactions, transactions and services. Global enterprises andgovernment entities use these applications to sell, buy and exchange goods,services and information over the Web and on wireless devices. The BroadVision e-businessapplication suite enables an entity to establish and sustain high-yieldrelationships with customers, suppliers, partners, distributors, employees andother constituents in the extended enterprise. BroadVision services, supportedby over 200 partner organizations worldwide, transform these applications intobusiness value for BroadVision's customers through consulting, education andsupport services.

 

The BroadVisione-business application suite allows businesses to tailor Web and wirelesscontent to the needs and interests of individual users by personalizing contentand transactions on a real-time basis. The Company offers enterprise-class solutions to connect companies totheir customers, suppliers, partners and employees. These solutions enablecompanies to maintain and expand existing relationships in an onlineenvironment via a single, integrated e-business platform.

 

BroadVisionGlobal Services, or BVGS, provides a broad range of consulting, training andtechnical support services to all of the Company’s customers and implementationpartners. This organization provides business application and technicalexpertise, along with extensive product knowledge, to complement the Company’sproducts and provide solutions that meet customers' unique businessrequirements. By using these services, customers are able to build customizedapplication solutions to maximize the benefits of one-to-one relationshipmanagement and self-service.

 

Asignificant element of the Company’s sales strategy is to engage in strategicbusiness alliances to assist in marketing, selling and developing customerapplications.

 

Asof September 30, 2001, the Company had developed key strategic businessalliances with over 200 systems integration, design, consulting and otherservices organizations throughout the world, including Accenture, DeloitteConsulting, Hewlett-Packard Consulting, IBM Global Services, KPMG Consulting,PricewaterhouseCoopers and Roundarch. The Company’s platform alliances are partnerships formed to integrate technologiesto drive business growth.  Additionally,the Company has developed key technology partnerships with leading Web- andwireless-focused companies in areas complementary to the Company’s solutions,such as data analysis and reporting, enterprise application integration,enterprise Web management, call center management, content management, voicerecognition, payment processing, auctioning and XML. These technologypartnerships enhance the Company’s ability to base products on industrystandards and to take advantage of current and emerging technologies. Thesealliances include companies such as BEA Systems, Broadbase, Documentum,E.Piphany, Genesys, i2, Interwoven, Nuance, Tibco, WebMethods and Yantra.

 

The Company markets its products primarily through a directsales organization with operations in North America, South America, Europe andAsia/Pacific. The Company also contracts with third-party resellers,distributors and systems integrators in North America, South America, Europeand Asia/Pacific. The Company intends to increase the use of this distributionchannel.

 

Therehas been a general downturn in the economy since the beginning of 2001.  This downturn may continue in the future andhas and could continue to have an impact on the Company’s future financialresults.  Comparisons of financialperformance made in this document are not necessarily indicative of futureperformance.  The Company announced acorporate-wide reorganization and reduction in force and incurred a charge inthe third quarter of 2001 of approximately $9.8 million and approximately$123.5 million in the second quarter of 2001, related to these actions and aconsolidation of the Company’s facilities. Please see Note 7 of Notes to Condensed Consolidated FinancialStatements.

 

***Basis of Presentationand Use of Estimates***

 

The accompanyingconsolidated financial statements include the accounts of the Company and itswholly-owned subsidiaries. They have been prepared in accordance with theestablished guidelines for interim financial information as provided by theinstructions to Form 10-Q and Article 10 of Regulation S-X. All significantintercompany transactions have been eliminated in consolidation. The financialresults and related information as of September 30, 2001 and for the three andnine months ended September 30, 2001 and 2000 are unaudited. The balance sheetat December 31, 2000 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. In the Company’s opinion,the consolidated financial statements presented herein include all necessaryadjustments, consisting of normal recurring adjustments, to fairly state theCompany’s financial position, results of operations, and cash flows for theperiods indicated. The preparation ofconsolidated financial statements in conformity with accounting principlesgenerally accepted in the United States requires management to make certainassumptions and estimates that affect reported amounts of assets andliabilities as of the date of the financial statements and the reported amountsof revenues and expenses during the reporting period. Actual results coulddiffer from estimates.

 

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 interim periods.

 

*Reclassifications**—*Certainprior period balances have been reclassified to conform to the current periodpresentation.

 

*RevenueRecognition*—TheCompany’s revenues are derived fromsoftware licensing arrangements and fees charged for services. Software isgenerally licensed for development use and for its use in deployment of thecustomer's website. Deployment licenses are generally based on the number ofpersons who register on a customer's website using the Company’s software. TheCompany’s revenue recognition policies are in accordance with Statement ofPosition ("SOP") 97-2, *Software Revenue Recognition*, as amendedand SOP 98-9, *Software Revenue Recognition, With Respect to Certain Transactions*.In general, software license revenues are recognized when a non-cancelablelicense agreement has been signed and the customer acknowledges anunconditional obligation to pay, the software product has been delivered, thereare no uncertainties surrounding product acceptance, the fees are fixed anddeterminable and collection is considered probable; professional servicesrevenues are recognized as such services are performed; and maintenancerevenues, or post-contract customer support, or PCS, including revenues bundledwith software agreements which entitle the customers to technical support andfuture unspecified enhancements to the Company’s products, are deferred andrecognized ratably over the related contract period, generally twelve months.Revenues recognized from multiple-element software arrangements are allocatedto each element of the arrangement based on the fair values of the elements,such as software products, PCS, installation or training. The determination offair value is based on objective evidence which is specific to the Company. Ifevidence of fair value does not exist for all elements of a license agreementand PCS is the only undelivered element, then all revenue for the licensearrangement is recognized ratably over the term of the agreement as licenserevenue. If evidence of fair value of all undelivered elements exists butevidence does not exist for one or more delivered elements, then revenue isrecognized using the residual method. Under the residual method, the fair valueof the undelivered elements is deferred and the remaining portion of thearrangement fee is recognized as revenue. Services that the Company providesare not essential to the functionality of the software.

 

InDecember 1999 the Securities and Exchange Commission issued Staff AccountingBulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements.” SABNo. 101 provides guidance for revenue recognition under certain circumstances.SAB No. 101 became effective in the quarter beginning October 1, 2000. Theadoption of SAB No. 101 did not have a material impact on the Company’s resultsof operations, financial position or cash flows.

 

TheCompany records unearned revenue for software arrangements when cash has beenreceived from the customer and the arrangement does not qualify for revenuerecognition under the Company’s revenue recognition policy. The Company recordsaccounts receivable for software arrangements when the arrangement qualifiesfor revenue recognition but cash or other consideration has not been receivedfrom the customer.

 

TheCompany’s professional services are delivered through BVGS, which consists ofconsulting, customer support and training. These groups provide consulting services, manage projects and clientrelationships, manage the needs of the Company’s partner community, provide training-relatedservices to employees, customers and partners, and also provide softwaremaintenance services, including technical support, to the Company’s customersand partners.

 

*Net Earnings (Loss) Per Share*—Statement of Financial AccountingStandard (“SFAS”) No. 128, *Earnings Per Share*, requires thepresentation of basic and diluted earnings per share. Earnings per share arecalculated by dividing net income available to common stockholders by aweighted average number of shares outstanding for the period. Basic earningsper share are determined solely on common shares whereas diluted earnings pershare include common equivalent shares, as determined under the treasury stockmethod.

 

The following table setsforth basic and diluted earnings per share computational data for the periodspresented (in thousands, except per share amounts, unaudited):

 
|                                                                                          |   | **Three Months Ended  September 30,** |     | **Nine Months Ended  September 30,** |   |
|-----------------------------------------------------------------------------------------------|--------|--------------------------------------------|----------|-------------------------------------------|--------|
|                                                                                          |   | **2001**                                   |     | **2000**                                  |   | **2001** |   | **2000** |   |
| Net loss                                                                                      |   | $                                          | (429,421 | )                                         | $      | (52,756 | ) | $ | (777,408 | ) | $ | (97,593 | ) |
| Weighted average common shares outstanding  utilized for basic and diluted net loss per share |   | 278,464                                    |     | 266,368                                   |   | 274,343 |   | 257,254 |   |
| Basic and  diluted net loss per share                                                         |   | $                                          | (1.54    | )                                         | $      | (0.20 | ) | $ | (2.83 | ) | $ | (0.38 | ) |

 

6,766 and 12,328potential common shares are excluded from the determination of diluted net lossper share for the three and nine months ended September 30, 2001, respectively,as the effect of such shares is anti-dilutive. 32,687 and 36,627 potential common shares are excluded from thedetermination of diluted net loss per share for the three and nine months endedSeptember 30, 2000, respectively, as the effect of such shares isanti-dilutive.

 

*ForeignCurrency Transactions*—Thefunctional currency of the Company’s foreign subsidiaries is the U.S.dollar.  Resulting foreign exchange gainsand losses are included in the Condensed Consolidated Statements of Operationsand, to date, have not been significant.

 

*Impairmentof Long-Lived Assets*—TheCompany periodically assesses the impairment of long-lived assets, includingidentifiable intangibles, in accordance with the provisions of SFAS No. 121,“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assetsto be Disposed Of.”  The Company alsoperiodically assesses the impairment of enterprise level goodwill in accordancewith the provisions of Accounting Principles Board (“APB”) Opinion No. 17,“Intangible Assets.”  An impairmentreview is performed whenever events or changes in circumstances indicate thatthe carrying value may not be recoverable. Factors the Company considers important which could trigger animpairment include, but are not limited to, significant underperformancerelative to historical or projected future operating results, significantchanges in the manner of use of the acquired assets or the strategy for theCompany’s overall business, significant negative industry or economic trends, asignificant decline in the Company’s stock price for a sustained period and theCompany’s market capitalization relative to net book value.  When the Company determines that thecarrying value of goodwill or other intangible assets may not be recoverablebased upon the existence of one or more of the above indicators of impairment,the Company measures any impairment based on a projected discounted cash flowmethod using a discount rate commensurate with the risk inherent in its currentbusiness model.

 

*Fair Value of Financial Instruments*—The Company’s financial instruments consistof cash and cash equivalents, short-term investments, accounts receivable,long-term investments, equity investments, accounts payable and debt.  The Company does not have any derivativefinancial instruments.  The Companybelieves the reported carrying amounts of its financial instrumentsapproximates fair value, based upon the short maturity of cash equivalents,short-term investments, accounts receivable and payable, and based on thecurrent rates available to the Company on similar debt issues.  Additionally, the Company periodicallyevaluates the carrying value of all of its investments for permanent impairmentwhen events and circumstances indicate that the book value of an asset may notbe 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.  The Company’s equity investments arecomprised of investments in public and non-public technology-relatedcompanies.  The Company may recordfuture impairment charges due to continued economic decline and the potentialresulting negative impact on these companies. During the three and nine months ended September 30, 2001, respectively,the Company recorded $837,000 and $4.0 million in impairment charges on itscost method long-term investments. There were no such charges during the three and nine months endedSeptember 30, 2000.

 

*New Accounting Pronouncements*—On June 29, 2001, the Financial Accounting Standard Board (“FASB”) approved forissuance SFAS No. 141, *Business Combinations*,and SFAS No. 142, *Goodwill and IntangibleAssets*. Major provisions of these Statements are as follows: allbusiness combinations initiated after June 30, 2001 must use the purchasemethod 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 or exchanged,either individually or as part of a related contract, asset or liability;goodwill and intangible assets with indefinite lives are not amortized but aretested for impairment at least annually using a fair value approach, except incertain circumstances, and whenever there is an impairment indicator; otherintangible assets will continue to be valued and amortized over their estimatedlives except assembled workforce which, pursuant to SFAS No. 141, will not berecognized as an intangible asset apart from goodwill; in-process research anddevelopment will continue to be written off immediately; all acquired goodwillmust be assigned to reporting units for purposes of impairment testing andsegment  reporting;  effective January 1, 2002, existing goodwill will no longer be subject toamortization.  Goodwill arising betweenJuly 1, 2001 and December 31, 2001 will not be subject to amortization.

 

Upon adoption of SFAS No.142, on January 1, 2002, the Company will no longer amortize goodwill and,thereby eliminating annual goodwill amortization of approximately $43.2million, based on anticipated amortization for 2002.  Amortization for the nine months ended September 30, 2001 was$191.8 million.  Additionally, uponadoption of SFAS No. 141 and 142, the Company will no longer amortize itsnon-technology based intangible asset, or assembled workforce, therebyeliminating annual amortization of approximately $2.2 million based onanticipated amortization for 2002.  Amortizationfor the non technology based intangible asset was $2.1 million for the ninemonths ended September 30, 2001.  Duringthe third quarter of 2001, the Company recorded an impairment charge of $330.2million related to goodwill and $6.2 million related to other intangible assetsprimarily as part of the Interleaf acquisition which closed on April 14,2000.  Please see Note 8 for additionalinformation.

 

**Note 2.           Selective Balance Sheet Detail**

 

Property and equipment consisted of the following (inthousands): 

 
|                                            |   | **September 30,** |   | **December 31,** |   |
|-------------------------------------------------|--------|-------------------|--------|-----------------------|--------|
|                                            |   | **2001**          |   | **2000**              |   |
|                                            |   | **(unaudited)**   |   |                  |   |
| Furniture and  fixtures                         |   | $                 | 10,982 |                  | $      | 6,136 |   |
| Computers and  software                         |   | 67,020            |   | 56,654                |   |
| Leasehold  improvements                         |   | 41,280            |   | 34,465                |   |
|                                            |   | 119,282           |   | 97,255                |   |
| Less accumulated  depreciation and amortization |   | (38,818           | )      | (20,570               | )      |
|                                            |   | $                 | 80,464 |                  | $      | 76,685 |   |

 

Accrued expensesconsisted of the following (in thousands):

 
|                        |   | **September 30,** |   | **December 31,** |   |
|-----------------------------|--------|-------------------|--------|------------------|--------|
|                        |   | **2001**          |   | **2000**         |   |
|                        |   | **(unaudited)**   |   |             |   |
| Employee  benefits          |   | $                 | 4,431  |             | $      | 3,900 |   |
| Commissions and  bonuses    |   | 6,593             |   | 22,790           |   |
| Sales and other  taxes      |   | 7,015             |   | 11,439           |   |
| Restructuring  (See Note 7) |   | 40,503            |   | -                |   |
| Other                       |   | 11,098            |   | 15,547           |   |
|                        |   | $                 | 69,640 |             | $      | 53,676 |   |

 

Other noncurrentliabilities consisted of the following (in thousands): 

 
|                        |   | **September 30,** |   | **December 31,** |   |
|-----------------------------|--------|-------------------|--------|------------------|--------|
|                        |   | **2001**          |   | **2000**         |   |
|                        |   | **(unaudited)**   |   |             |   |
| Restructuring  (See Note 7) |   | $                 | 54,107 |             | $      | - |   |
| Other                       |   | 1,000             |   | 898              |   |
|                        |   | $                 | 55,107 |             | $      | 898 |   |

 

**Note 3.           Commercial Credit 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. As of September 30, 2001 andDecember 31, 2000, outstanding term debt borrowings were approximately $4.1million and $4.9 million, respectively. Borrowings bear interest at the bank’s prime rate (6.0% and 9.5% as ofSeptember 30, 2001 and December 31, 2000, respectively). Principal and interestare due in consecutive monthly payments through maturity based on the term ofthe facility. Principal payments of $977,000 are due annually from 2000 through2004, $611,000 due in 2005, and a final payment of $357,000 due in 2006. As ofSeptember 30, 2001 and December 31, 2000, the Company had no outstandingborrowings under its revolving line of credit. However, commitments totaling$2.4 million in the form of standby letters of credit were issued under itsrevolving line of credit facility as of September 30, 2001 and December 31,2000. Commitments totaling $22.7 million in the form of standby letters ofcredit were also issued from separate financial institutions as of September30, 2001. The commercial credit facilities include covenants which imposecertain restrictions on the payment of dividends and other distributions andrequired the Company to meet a financial covenant. Borrowings arecollateralized by a security interest in substantially all of the Company’sowned assets.  In August 2001 theCompany signed an amendment to the loan agreement which removes the financialcovenant and requires the Company to maintain a $10.0 million deposit in the bank.  No other advances will be available underthe revolving line of credit.

 

**Note 4.           Commitments**

 

The Company currently has$4.1 million of outstanding term debt under its existing credit facility with acommercial bank.  Capital expenditureswere $50.3 million and $29.9 million for the nine months ended September 30,2001 and 2000, respectively.  TheCompany’s capital expenditures consisted of purchases of operating resources tomanage its operations and included computer hardware and software, communicationsequipments, office furniture and fixtures and leasehold improvements.  In February and April 2000, the Companyentered into new facility lease agreements for approximately 519,000 squarefeet.  Lease payments will be made on anescalating basis with the total future minimum lease payments amounting to$316.4 million, payable through the third quarter of 2013.  Portions of these lease payments, along withexpected sublease income, have been recorded as part of the Company’srestructuring change recorded during the second quarter of 2001.  The Company has no other significant capitalcommitments.  The Company hasconsolidated various facilities as part of its restructuring plan for the threeand nine months ended September 30, 2001. Please refer to Note 7 for additional information.

 

**Note 5.           Geographic, Segment and SignificantCustomer Information**

 

The Company adopted theprovisions of SFAS No. 131, *Disclosure about Segments of an Enterprise andRelated Information*, during 1998. SFAS No. 131 establishes standardsfor the reporting by public business enterprises of information about operatingsegments, products and services, geographic areas and major customers.  The methodology for determining whatinformation to report is based on the way that management organizes theoperating segments within the Company for making operational decisions andassessments of financial performance. The Company’s chief operating decision maker is considered to be theCompany’s Chief Executive Officer, or CEO. The CEO reviews financial information presented on a consolidated basisaccompanied by disaggregated information about revenues by geographic regionand by product for purposes of making operating decisions and assessingfinancial performance.  The Companyoperates in one segment, electronic business commerce solutions.

 

The Company sells itsproducts and provides services worldwide through a direct sales force andthrough a channel of independent distributors, value-added resellers (“VARs”)and application service providers (“ASPs”). In addition, the sales of the Company’s products are promoted throughindependent professional consulting organizations known as systems integrators.The Company provides services worldwide directly through its BroadVision GlobalServices organization and indirectly through distributors, VARs, ASPs andsystem integrators. The Company currently operates in three primarygeographical territories: NASA, which includes North and South America; EMEA,which includes Europe, the Middle East and Africa; and Asia/Pacific/Japan(APJ), which includes the Pacific Rim, the Far East and India. Disaggregatedfinancial information regarding the Company’s products and services andgeographic revenues is as follows (in thousands):

 

 
|                           |   | **Three Months  Ended  September 30,  (unaudited)** |   | **Nine Months  Ended  September 30,  (unaudited)** |   |
|--------------------------------|--------|----------------------------------------------------------|--------|---------------------------------------------------------|--------|
|                           |   | **2001**                                                 |   | **2000**                                                |   | **2001** |   | **2000** |   |
| Software  licenses:            |   |                                                     |   |                                                    |   |   |   |   |   |
| One-To-One  Enterprise         |   | $                                                        | 1,766  |                                                    | $      | 7,941 |   | $ | 5,879 |   | $ | 21,676 |   |
| One-To-One  Packaged Solutions |   | 17,907                                                   |   | 64,410                                                  |   | 77,963 |   | 148,237 |   |
| Services                       |   | 16,339                                                   |   | 35,054                                                  |   | 69,184 |   | 77,223 |   |
| Maintenance                    |   | 15,218                                                   |   | 12,789                                                  |   | 46,768 |   | 29,903 |   |
| Total Revenues                 |   | $                                                        | 51,230 |                                                    | $      | 120,194 |   | $ | 199,794 |   | $ | 277,039 |   |
| Revenues:                      |   |                                                     |   |                                                    |   |   |   |   |   |
| NASA                           |   | $                                                        | 27,358 |                                                    | $      | 79,607 |   | $ | 120,978 |   | $ | 190,920 |   |
| EMEA                           |   | 18,253                                                   |   | 30,921                                                  |   | 59,089 |   | 64,190 |   |
| APJ                            |   | 5,619                                                    |   | 9,666                                                   |   | 19,727 |   | 21,929 |   |
| Total Company                  |   | $                                                        | 51,230 |                                                    | $      | 120,194 |   | $ | 199,794 |   | $ | 277,039 |   |

 
|                  |   | **September 30,  2001  (unaudited)** |    | **December 31,  2000** |   |
|-----------------------|--------|--------------------------------------|---------|-----------------------------|--------|
| Identifiable  assets: |   |                                 |    |                        |   |
| NASA                  |   | $                                    | 401,961 |                        | $      | 1,102,343 |   |
| EMEA                  |   | 36,305                               |    | 33,254                      |   |
| APJ                   |   | 11,353                               |    | 7,427                       |   |
| Total Company         |   | $                                    | 449,619 |                        | $      | 1,143,024 |   |

 

During the three and ninemonths ended September 30, 2001 and 2000, no single customer accounted for morethan 10% of the Company’s total revenues.

 

**Note 6.           Acquisitions**

 

*Interleaf*

 

On April 14, 2000, theCompany completed its acquisition of Interleaf, Inc. and its subsidiaries(“Interleaf”) pursuant to a statutory merger involving a stock-for-stockexchange. Interleaf’s software products and related services enable automatedelectronic business, or e-business, and also enable the extension of e-businessto wireless users. Interleaf provides customers with an integrated, easilyimplemented e-business solution based on extensible Markup Language, or XML,that enables the design, creation and management of XML-based content fortransformation and delivery over the Web and related services. As a result ofthe acquisition, the Company will have the ability to combine technologicalresources to develop a robust Web-based business solution and reduce time tomarket for the combined Company’s products. Through the acquisition of all ofthe equity securities of Interleaf, BroadVision acquired all of the assets andassumed liabilities of Interleaf and its existing operations which includedin-process technology. Pursuant to the terms of the Agreement and Plan ofMerger and Reorganization, dated as of January 26, 2000, each outstanding shareof Interleaf common stock was exchanged for 1.0395 shares of Company commonstock and all options to purchase shares of Interleaf common stock outstandingimmediately prior to the consummation of the merger were converted into optionsto purchase shares of Company common stock.

 

The Company issued14,391,991 shares of Company common stock with a fair market value of $686.9million and exchanged options to purchase 2,338,342 shares of Company commonstock with a fair market value of $102.7 million. The fair market value of theexchanged options to purchase 2,338,342 shares of Company common stock wascalculated using the Black-Scholes option-pricing model. In connection with theacquisition, the Company incurred transaction costs consisting primarily offinancial advisor, legal and accounting professional fees of $14.8 million,severance costs of $1.0 million and office closure costs of $1.3 million,resulting in a total purchase price of $806.7 million. The results ofoperations of Interleaf have been included with the Company’s results ofoperations since the April 14, 2000 acquisition date.

 

The acquisition wasaccounted for as a purchase business combination.  Under this accounting treatment, the purchase price is allocatedto the assets acquired and liabilities assumed based on the estimated fairvalues on the date of acquisition.

 

The total purchase pricepaid for the Interleaf acquisition was allocated as follows (in thousands):

 
| Property and equipment                                     |   | $       | 2,896   |   |
|------------------------------------------------------------|--------|---------|---------|--------|
| Net liabilities  assumed, excluding property and equipment |   | (1,041  | )       |
| Identifiable  intangible assets                            |   | 28,910  |    |
| In-process  technology                                     |   | 10,100  |    |
| Goodwill                                                   |   | 765,805 |    |
| Total                                                      |   | $       | 806,670 |   |

 

Based upon the Company’sestimates prepared in conjunction with a third-party valuation consultant,$10.1 million was allocated to acquired in-process technology and $28.9 millionwas allocated to intangible assets. The amounts allocated to intangible assetsinclude completed technologies of $20.4 million and assembled workforces of$8.5 million.

 

At September 30, 2001,accumulated amortization related to the goodwill and other intangible assetsacquired in the Interleaf acquisition totaled $386.3 million.  Goodwill amortization was $372.3 million andother intangible asset amortization was $14.0 million. The goodwill and otherintangible assets are being amortized over a three-year period.

 

During the third quarterof 2001, the Company recorded an impairment charge of $330.2 million related togoodwill and $6.2 million related to other intangible assets recorded as partof the Company’s various acquisitions, primarily the Interleafacquisition.  See Note 8 for additionalinformation.

 

The following summary,prepared on an unaudited pro forma basis, reflects the condensed consolidatedresults of operations for the nine month period ended September 30, 2000assuming Interleaf had been acquired at the beginning of the period presented(in thousands, except per share data):

 
|                                  |   | **For the nine  months  ended  September 30,** |       |
|---------------------------------------|--------|------------------------------------------------|------------|
|                                  |   | **2000**                                       | ** ** |
| Revenue                               |   | $                                              | 290,702    |   |
| Net loss                              |   | (172,584                                       | )          |
| Basic and  diluted net loss per share |   | $                                              | (0.65      | ) |

 

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 not intended tobe a projection of future results and do not reflect any synergies that mightbe affected from combined operations. The charges for in-process technologyhave not been included in the unaudited pro forma results because they arenonrecurring. See Management’s Discussion and Analysis of Financial Conditionand Results of Operations for more information concerning the acquisition ofInterleaf.

 

On April 30, 2001 and May15, 2001, the Company entered into agreements with third parties to sellcertain assets and liabilities of E-Publishing Corporation, formerly awholly-owned subsidiary of the Company, which the Company acquired as part ofthe acquisition of Interleaf in April 2000. The Company recorded a loss on sale of assets of approximately $1.3million which is included in other expense in the Condensed ConsolidatedStatements of Operations.

 

*Keyeon*

 

On June 29, 2001, theCompany completed its acquisition of Keyeon, LLC, formerly a joint venture inwhich the Company previously held an interest of approximately 36%.  As consideration for the acquisition, theCompany issued 2,713,280 shares of its common stock valued at $13.6 million tothe other former participants in the joint venture which resulted in theCompany owning 100% of the outstanding shares of Keyeon, LLC.  The acquisition was accounted for as apurchase.  The acquired assets andassumed liabilities, and the related results of operations, are included in theconsolidated financial statements of the Company from the date ofacquisition.  The preliminary purchaseprice allocation is as follows (in thousands):

 

 
| Purchase price, net of cash  acquired                                          |   | $      | 6,395  |   |
|--------------------------------------------------------------------------------|--------|--------|--------|--------|
| Add: fair value of liabilities assumed                                         |   | 3,199  |   |
| Total purchase consideration                                                   |   | 9,594  |   |
| Less: fair value allocated to acquired  assets                                 |   | 7,388  |   |
| Excess of purchase consideration over  acquired assets and assumed liabilities |   | 2,206  |   |
| Excess allocated to:                                                           |   |   |   |
| Goodwill                                                                       |   | $      | 2,206  |   |

 

The following summary, preparedon an unaudited pro forma basis, reflects the condensed consolidated results ofoperations for the nine month period ended September 30, 2001 assuming Keyeonhad been acquired at the beginning of the period presented (in thousands,except per share data):

 
|                                  |   | **For the nine  months  ended  September 30,   2001** |    |
|---------------------------------------|--------|-------------------------------------------------------|---------|
| Revenue                               |   | $                                                     | 199,794 |   |
| Net loss                              |   | (781,959                                              | )       |
| Basic and  diluted net loss per share |   | $                                                     | (2.85   | ) |

 

The nine months endedSeptember 30, 2000 is not presented as Keyeon did not commence operations untilthe fourth quarter of 2000.  The proforma results are not necessarily indicative of what would have occurred if theacquisition had been in effect for the period presented.  In addition, they are not intended to be aprojection of future results and do not reflect any synergies that might beaffected from combined operations.

 

**Note 7.           Restructuring Charges and AssetImpairments**

 

During the third quarterand second quarter of 2001, the Company approved restructuring plans to, amongother things, reduce its workforce and consolidate facilities.  These restructuring and asset impairmentcharges were taken to align the Company’s cost structure with changing marketconditions and to create a more efficient organization.  A pre-tax charge of $9.8 million was recordedin the third quarter of 2001 and a pre-tax charge of $123.5 million wasrecorded in the second quarter of 2001 to provide for these actions and otherrelated items.  The Company recorded thelow-end of a range of assumptions modeled for the restructuring charges, inaccordance with SFAS No. 5, “Accounting for Contingencies.”  The high-end of the range was estimated atapproximately $11.1 million for the third quarter charge and $137.2 million forthe second quarter charge.  Adjustmentsto the restructuring reserves will be made in future periods, if necessary,based upon the then current actual events and circumstances.

 

The following tablesummarizes charges recorded during the second quarter and third quarter of 2001for exit activities and asset write-downs (in thousands):

 
|                                                     |   | **Severance  and Benefits** |   | **Facilities/Excess  Assets** |   | **Other** |   | **Total** |   |
|----------------------------------------------------------|--------|-----------------------------|--------|-------------------------------|--------|-----------|--------|-----------|--------|
| Restructuring charges,  quarter ended June 30, 2001      |   | $                           | 5,070  |                          | $      | 118,351   |   | $         | 52     |   | $ | 123,473 |   |
| Cash payments                                            |   | (3,757                      | )      | (814                          | )      | (19       | )      | (4,590    | )      |
| Non-cash portion                                         |   | (527                        | )      | (26,563                       | )      | -         |   | (27,090   | )      |
| Reserve balances, June  30, 2001                         |   | $                           | 786    |                          | $      | 90,974    |   | $         | 33     |   | $ | 91,793 |   |
| Restructuring charges,  quarter ended September 30, 2001 |   | 1,906                       |   | 7,818                         |   | 123       |   | 9,847     |   |
| Cash payments                                            |   | (2,044                      | )      | (5,048                        | )      | (91       | )      | (7,183    | )      |
| Non-cash portion                                         |   | (30                         | )      | 183                           |   | -         |   | 153       |   |
| Reserve balances,  September 30, 2001                    |   | $                           | 618    |                          | $      | 93,927    |   | $         | 65     |   | $ | 94,610 |   |

 

The nature of the charges summarized above is as follows:

 

Severance and benefits –During the third quarter and second quarter of 2001, the Company recorded chargesof approximately $1.9 million and $5.1 million, respectively, related toseverance benefits to terminated employees in the United States and variousinternational locations.  Approximately$5.8 million was paid out as of September 30, 2001 and $557,000 relates tonon-cash compensation.  The Companyterminated approximately 539 employees in North and South America andapproximately 147 employees throughout Europe and the Asia Pacific during thesecond and third quarters of 2001.

 

Facilities/Excess Assets– The Company recorded a charge of approximately $7.8 million and $118.4million during the third quarter and second quarter of  2001, respectively, related to theconsolidation of facilities and impairment of certain assets.  Included in these charges are approximately$26.4 million of asset impairments related to certain long-lived assets thatwere either abandoned during the quarter or for which the resulting estimatedfuture reduced cash flows were insufficient to cover the carrying amounts.  $25.5 million of the $26.4 million relatesto assets associated with facilities consolidation and approximately $852,000relates to other operating and capital assets. The remainder of the charges related to the consolidation of facilitiesand represents remaining lease commitments, net of expected sublease income.

 

Other – The Companyrecorded a charge of approximately $123,000 and $52,000 during the thirdquarter and second quarter of 2001, respectively, for various incremental costsincurred as a direct result of the restructuring.

 

**Note 8.           Impairment of Goodwill and OtherIntangible Assets**

 

TheCompany periodically assesses the impairment of long-lived assets, includingidentifiable intangibles, in accordance with the provisions of SFAS No.121.  The Company also periodicallyassesses the impairment of enterprise level goodwill in accordance with theprovisions of APB Opinion No. 17.    Based on quantitative and qualitativemeasures, the Company assesses the need to record impairment losses onlong-lived assets used in operations when impairment indicators are present.

 

As part of its review ofits third quarter financial results, the Company performed an impairmentassessment of identifiable intangible assets and goodwill recorded inconnection with its various acquisitions. The impairment assessment was performed primarily due to the significantdecline in the Company’s stock price, the net book value of assetssignificantly exceeding the Company’s market capitalization and the overalldecline in industry growth rates which have negatively impacted the Company’srevenues and forecasted revenue growth rate. Also, current economic indicatorsindicate that this trend may continue for an indefinite period.  As a result, the Company recorded a $336.4million impairment charge in the third quarter of 2001 to reduce goodwill by$330.2 million and other intangible assets by $6.2 million associated with theCompany’s acquisitions, primarily the Interleaf acquisition, to their estimatedfair value.  To determine other thantemporary impairment for identifiable intangibles, the sum of the undiscountedcash flows was compared to the current carrying value.  If the undiscounted cash flows were greaterthan or equal to the current carrying value the asset is deemed not to be impaired.If the undiscounted cash flows are less than the current carrying value thenthe asset is deemed impaired. A discounted cash flow analysis is then preparedand the difference between the carrying value and the discounted cash flowsrepresents the charge taken in accordance with SFAS No. 121. Todetermine the impairment loss for goodwill, the Company determined the fairvalue using a business enterprise methodology which includes a terminal valueassigned to the entity. This value is then compared to the carrying value, andif less, the difference represents the impairment to be recorded. Theassumptions supporting the estimated future cash flows, including the estimatedterminal values, reflect management's best estimates.  It is reasonably possible that the estimates and assumptions usedunder our assessment may change in the short term, resulting in the need tofurther write-down the goodwill and other long-lived assets.  In addition, it is reasonably possible thatwe may have additional reductions in goodwill if our market capitalization isless than our net assets in future periods.

 

**Note 9.           Subsequent Events**

** **

On October 24, 2001 theCompany announced initial plans of an additional reduction of the Company’sworkforce to occur during the fourth quarter of 2001.

**Note 10.         Legal Proceedings**

** **

On April 20, 2001, theCompany filed a Form 8-K with the Securities and Exchange Commission reportingthat several purported class action lawsuits had been filed  against the Company and certain of itsofficers and directors.  In each of thelawsuits, the plaintiffs seek to assert claims on behalf of a class of allpersons who purchased securities of the Company between January 26, 2001 andApril 2, 2001.  The complaints allegethat the Company and the individual defendants violated federal securities lawsin connection with the Company’s reporting of financial results during suchperiod.  The  lawsuits have been consolidated into a single action, as iscustomary in such cases.  On November 5,2001, the Company and the individual defendants filed motions to dismiss theconsolidated complaint.  The Companybelieves that the lawsuits are without merit and continues to  defend itself vigorously.

 

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 the complaint denying all allegations and isdefending itself vigorously. 

 

In the Company’s opinion,these legal matters are not likely to have a material adverse effect on theCompany’s result of operations or financial position.

 

**Item 2.            Management’s Discussion and Analysis of FinancialCondition and Results of Operations**

 

*Exceptfor the historical information contained herein, the following discussioncontains forward-looking statements that involve risks and uncertainties. TheCompany’s actual results could differ significantly from those discussedherein. Factors that could cause or contribute to such differences include, butare not limited to, those discussed herein and in the Company’s annual reporton Form 10-K and other documents filed with the Securities and ExchangeCommission. Any such forward-looking statements speak only as of the date suchstatements are made.*

 

**Overview**

 

BroadVision, Inc.(collectively with its subsidiaries, “BroadVision”, the "Company",“us” or “we”) was incorporated in the state of Delaware on May 13, 1993.We develop and sell an integrated suite of packaged applications for conductinge-business interactions, transactions and services. Global enterprises andgovernment entities use these applications to sell, buy and exchange goods,services and information over the Web and on wireless devices. The BroadVisione-business application suite enables an entity to establish and sustainhigh-yield relationships with customers, suppliers, partners, distributors,employees and other constituents in the extended enterprise. BroadVisionservices, supported by over 200 partner organizations worldwide, transformthese applications into business value for BroadVision's customers throughconsulting, education, and support services.

 

The BroadVisione-business application suite allows businesses to tailor Web and wirelesscontent to the needs and interests of individual users by personalizing contentand transactions on a real-time basis.  We offer enterprise-class solutions to connect companies to theircustomers, suppliers, partners and employees. These solutions enable companiesto maintain and expand existing relationships in an online environment via asingle, integrated e-business platform.

 

BroadVisionGlobal Services, or BVGS, provides a broad range of consulting, training andtechnical support services to all of our customers and implementation partners.This organization provides business application and technical expertise, alongwith extensive product knowledge, to complement our products and providesolutions that meet customers' unique business requirements. By using theseservices, customers are able to build customized application solutions tomaximize the benefits of one-to-one relationship management and self-service.

 

Asignificant element of our sales strategy is to engage in strategic businessalliances to assist in marketing, selling and developing customer applications.

 

Asof September 30, 2001, we had developed key strategic business alliances withover 200 systems integration, design, consulting and other servicesorganizations throughout the world, including Accenture, Deloitte Consulting,Hewlett-Packard Consulting, IBM Global Services, KPMG Consulting,PricewaterhouseCoopers and Roundarch. Our platform alliances are partnerships formed to integrate technologiesto drive business growth.  Additionally,we have developed key technology partnerships with leading Web- andwireless-focused companies in areas complementary to our solutions, such asdata analysis and reporting, enterprise application integration, enterprise Webmanagement, call center management, content management, voice recognition,payment processing, auctioning and XML. These technology partnerships enhanceour ability to base products on industry standards and to take advantage ofcurrent and emerging technologies. These alliances now include companies suchas BEA Systems, Broadbase, Documentum, E.Piphany, Genesys, i2, Interwoven,Nuance, Tibco, WebMethods and Yantra.

 

We market our products primarily through a directsales organization with operations in North America, South America, Europe andAsia/Pacific. We also contract with third-party resellers, distributors andsystems integrators in North America, South America, Europe and Asia /Pacific.We intend to increase the use of this distribution channel.

 

**Recent Events**

** **

During the third quarterof 2001, based on a variety of factors and methodology as discussed in Note 8,the Company recorded an impairment charge related to goodwill and otherintangible assets recorded primarily as a result of the Interleaf acquisitionon April 14, 2000.  The Company recordedan impairment charge of $336.4 million during the three months ended September30, 2001.

 

During the third quarterof 2001, the Company approved a restructuring plan to, among other things,reduce its workforce and consolidate facilities.  These restructuring and asset impairment charges were taken toalign the Company’s cost structure with changing market conditions and tocreate a more efficient organization.  Apre-tax charge of $9.8 million was recorded in the third quarter to provide forthese actions and other related items. Please see Note 7 of Notes to Condensed Consolidated FinancialStatements for additional information.

 

Therehas been a general downturn in the economy, our industry and our business,since the beginning of 2001.  Thisdownturn may continue in the future and has had and could continue to have animpact on our future financial results. Comparisons of financial performance made in this document are notnecessarily indicative of future performance.

 

**Results of Operations**

 

*Revenues*

 

Ourrevenues are derived from software licensing arrangements and fees charged forservices. Software is generally licensed for development use and for its use indeployment of the customer's website. Deployment licenses are generally basedon the number of persons who register on a customer's website using oursoftware. Our revenue recognition policies are in accordance with Statement ofPosition ("SOP") 97-2, *Software Revenue Recognition*, as amendedand SOP 98-9, *Software Revenue Recognition, With Respect to Certain Transactions*.In general, software license revenues are recognized when a non-cancelablelicense agreement has been signed and the customer acknowledges anunconditional obligation to pay, the software product has been delivered, thereare no uncertainties surrounding product acceptance, the fees are fixed anddeterminable and collection is considered probable; professional servicesrevenues are recognized as such services are performed; and maintenancerevenues, or post-contract customer support, or PCS, including revenues bundledwith software agreements which entitle the customers to technical support andfuture unspecified enhancements to our products, are deferred and recognizedratably over the related contract period, generally twelve months. Revenuesrecognized from multiple-element software arrangements are allocated to eachelement of the arrangement based on the fair values of the elements, such assoftware products, PCS, installation or training. The determination of fairvalue is based on objective evidence which is specific to us. If evidence offair value does not exist for all elements of a license agreement and PCS isthe only undelivered element, then all revenue for the license arrangement isrecognized ratably over the term of the agreement as license revenue. If evidenceof fair value of all undelivered elements exists but evidence does not existfor one or more delivered elements, then revenue is recognized using theresidual method. Under the residual method, the fair value of the undeliveredelements is deferred and the remaining portion of the arrangement fee isrecognized as revenue. Services that we provide are not essential to thefunctionality of the software.

 

In December 1999, theSecurities and Exchange Commission issued Staff Accounting Bulletin (“SAB”) No.101, "Revenue Recognition in Financial Statements." SAB No. 101provides guidance for revenue recognition under certain circumstances. SAB No.101 became effective in the quarter beginning October 1, 2000. The adoption ofSAB No. 101 did not have a material impact on our results of operations,financial position or cash flows.

 

Werecord unearned revenue for software arrangements when cash has been receivedfrom the customer and the arrangement does not qualify for revenue recognitionunder our revenue recognition policy. We record accounts receivable forsoftware arrangements when the arrangement qualifies for revenue recognitionbut cash or other consideration has not been received from the customer.

 

Our professional servicesare delivered through BVGS, which consists of consulting, customer support andtraining.  These groups provideconsulting services, manage projects and client relationships, manage the needsof our partner community, provide training-related services to employee,customers and partners, and also provide software maintenance services,including technical support, to the Company’s customers and partners.

* *

*Three and nine months ended September 30, 2001 and September30, 2000*

 

*Total  revenues* decreased 57% during the quarter endedSeptember 30, 2001 to $51.2 million as compared to $120.2 million for thequarter ended September 30, 2000. Total revenues decreased 28% during the ninemonths ended September 30, 2001 to $199.8 million as compared to $277.0 millionfor the nine months ended September 30, 2000. A summary of our revenues by geographic region is as follows:

 
|                    |   | **Software**                |       | **%**  |   | **Services** |   | **%**   |   | **Total** |   | **%**  |    |
|-------------------------|--------|-----------------------------|------------|--------|--------|--------------|--------|---------|--------|-----------|--------|--------|---------|
|                    |   | **(dollars in  thousands)** | ** ** |
| **Three Months Ended:** |   |                        |       |   |   |         |   |    |   |      |   |   |    |
| September 30, 2001      |   |                        |       |   |   |         |   |    |   |      |   |   |    |
| NASA                    |   | $                           | 7,498      |   | 38     | %            | $      | 19,860  |   | 63        | %      | $      | 27,358  |   | 53 | % |
| EMEA                    |   | 8,857                       |       | 45     |   | 9,396        |   | 30      |   | 18,253    |   | 36     |    |
| APJ                     |   | 3,318                       |       | 17     |   | 2,301        |   | 7       |   | 5,619     |   | 11     |    |
| Total                   |   | $                           | 19,673     |   | 100    | %            | $      | 31,557  |   | 100       | %      | $      | 51,230  |   | 100 | % |
| September 30, 2000      |   |                        |       |   |   |         |   |    |   |      |   |   |    |
| NASA                    |   | $                           | 42,005     |   | 58     | %            | $      | 37,602  |   | 78        | %      | $      | 79,607  |   | 66 | % |
| EMEA                    |   | 22,840                      |       | 32     |   | 8,081        |   | 17      |   | 30,921    |   | 26     |    |
| APJ                     |   | 7,506                       |       | 10     |   | 2,160        |   | 5       |   | 9,666     |   | 8      |    |
| Total                   |   | $                           | 72,351     |   | 100    | %            | $      | 47,843  |   | 100       | %      | $      | 120,194 |   | 100 | % |
| **Nine Months Ended:**  |   |                        |       |   |   |         |   |    |   |      |   |   |    |
| September 30, 2001      |   |                        |       |   |   |         |   |    |   |      |   |   |    |
| NASA                    |   | $                           | 43,489     |   | 52     | %            | $      | 77,489  |   | 67        | %      | $      | 120,978 |   | 61 | % |
| EMEA                    |   | 29,987                      |       | 36     |   | 29,102       |   | 25      |   | 59,089    |   | 30     |    |
| APJ                     |   | 10,366                      |       | 12     |   | 9,361        |   | 8       |   | 19,727    |   | 9      |    |
| Total                   |   | $                           | 83,842     |   | 100    | %            | $      | 115,952 |   | 100       | %      | $      | 199,794 |   | 100 | % |
| September 30, 2000      |   |                        |       |   |   |         |   |    |   |      |   |   |    |
| NASA                    |   | $                           | 108,134    |   | 64     | %            | $      | 82,786  |   | 77        | %      | $      | 190,920 |   | 69 | % |
| EMEA                    |   | 44,918                      |       | 26     |   | 19,272       |   | 18      |   | 64,190    |   | 23     |    |
| APJ                     |   | 16,861                      |       | 10     |   | 5,068        |   | 5       |   | 21,929    |   | 8      |    |
| Total                   |   | $                           | 169,913    |   | 100    | %            | $      | 107,126 |   | 100       | %      | $      | 277,039 |   | 100 | % |
|                         |        |                             |            |        |        |              |        |         |        |           |        |        |         |  |  |  |  |  |  |  |  |  |  |

 

There has been a generaleconomic decline since the beginning of 2001 that may continue.  Therefore, financial comparisons discussedherein may not be indicative of future performance.

 

*Software  license revenues* decreased 73% during thecurrent quarter ended September 30, 2001 to $19.7 million as compared to $72.4million for the quarter ended September 30, 2000.   Software license revenues decreased 51% during the nine monthsended September 30, 2001 to $83.8 million as compared to $169.9 million for thenine months ended September 30, 2000. The decreases are attributable to an overall decline in the economythroughout the first three quarters of 2001 in comparison to the same period of2000.  Continued economic uncertaintysurrounding the economic and information technology spending environmentsignificantly affected our license revenue during the first three quarters of2001.  Software license revenues for ourEnterprise applications decreased to $1.8 million for the quarter endedSeptember 30, 2001 and $5.9 for the nine months ended September 30, 2001 ascompared to $7.9 million for the quarter ended September 30, 2000 and $21.7million for the nine months ended September 30, 2000.  Software license revenues for our packaged solutions decreased to$17.9 million and $78.0 million for the quarter ended and nine months endedSeptember 30, 2001, respectively, as compared to $64.4 million and $148.2million for the quarter ended and nine months ended September 30, 2000,respectively.   During the quarter endedSeptember 30, 2001, we signed license agreements with 33 new customers ascompared to 142 new customers for the quarter ended September 30, 2000.   During the nine months ended September 30,2001, we signed license agreements with 115 new customers as compared to 413new customers for the nine months ended September 30, 2000.  As of September 30, 2001, we had a totalinstalled base of more than 1,280 accounts as compared to 1,169 accounts as ofDecember 31, 2000 and 1,062 accounts as of September 30, 2000.

 

*Total*s*ervices revenues* decreased 34%during the current quarter ended September 30, 2001 to $31.6 million ascompared to $47.8 million for the quarter ended September 30, 2000.  Total services revenues increased 8% duringthe nine months ended September 30, 2001 to $116.0 million as compared to$107.1 million for the nine months ended September 30, 2000.

 

The decrease inprofessional services revenue during the third quarter of 2001 is a result ofdecreased business volume associated with decreased software license revenuesover the past three quarters and an overall decline in the economy.  The increase in professional servicesrevenue during the nine months ended September 30, 2001 is a result of higherlevels of consulting related services and higher customer support revenuesderived from  increased license revenuesin fiscal 2000. Maintenance related fees for technical support and productupgrades were $15.2 million for the quarter ended September 30, 2001 ascompared to $12.8 million for the quarter ended September 30, 2000.  Maintenance related fees for technicalsupport and product upgrades were $46.8 million for the nine months endedSeptember 30, 2001 as compared to $29.9 million for the nine months endedSeptember 30, 2000.  The increase inmaintenance revenues is due to an increased installed base consisting ofmaintenance revenues associated with current transactions as well as renewalmaintenance for license transactions recorded in prior periods.

 

**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, third-party consultant fees incurred onconsulting 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,** |   |
|----------------------------------|--------|--------------------------------------------|------------|-------------------------------------------|--------|
|                             |   | **2001**                                   |       | **%**                                     |   | **2000** |   | **%** |   | **2001** |   | **%** |   | **2000** |   | **%** |   |
|                             |   | **(dollars in  thousands)**                | ** ** |
| Cost of software  licenses (1)   |   | $                                          | 1,713      |                                      | 9      | % | $ | 1,395 |   | 2 | % | $ | 6,608 |   | 8 | % | $ | 5,021 |   | 3 | % |
| Cost of services  (2)            |   | 14,636                                     |       | 46                                        |   | 34,015 |   | 71 |   | 82,009 |   | 71 |   | 79,971 |   | 75 |   |
| Total cost of  revenues (3) |   | $                                          | 16,349     |                                      | 32     | % | $ | 35,410 |   | 29 | % | $ | 88,617 |   | 44 | % | $ | 84,992 |   | 31 | % |

 

----

(1)   Percentage is calculated based on totalsoftware license revenues for the period indicated

(2)   Percentage is calculated based on totalservices revenues for the period indicated

(3)   Percentage is calculated based on totalrevenues for the period indicated

 

*Cost of software licenses* increased 23% inabsolute dollar terms during the current quarter ended September 30, 2001 to$1.7 million as compared to $1.4 million for the quarter ended September 30,2000.  Cost of software licensesincreased 32% during the nine months ended September 30, 2001 to $6.6 millionas compared to $5.0 million for the nine months ended September 30, 2000.

In absolute dollar terms,the increase in cost of software licenses was principally a result of a higherlevel of sales with associated royalties due with third party products.

 

*Cost of services* decreased 57% during thecurrent quarter ended September 30, 2001 to $14.6 million as compared to $34.0million for the quarter ended September 30, 2000. Cost of services increased 3%during the nine months ended September 30, 2001 to $82.0 million as compared to$80.0 million during the nine months ended September 30, 2000.  In absolute dollar terms, the decrease incost of services for the three months ended September 30, 2001 was the resultof reductions in force that occurred in the second and third quarter of 2001resulting in decreased salary and salary related expenses and a decrease in theuse of third party consultants.  Theincrease in cost of services in absolute dollar terms for the nine months endedSeptember 30, 2001 was a result of higher business volumes in early 2001 asevidenced by increased services revenues. As a percentage of services revenue, the decrease in cost of services isa result of reductions in force during the second and third quarters of 2001resulting in lower salary related costs.

 

**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 marketingexpenses consist primarily of salaries, employee-related benefit costs,commissions and other incentive compensation, travel and entertainment andmarketing program-related expenditures such as collateral materials, tradeshows, public relations, advertising and creative services.

 

General andadministrative expenses consist primarily of salaries, employee-related benefitcosts, accounts receivable reserves expense and professional service fees.

 
|                                          |   | **Three Months  Ended September 30,** |       | **Nine Months  Ended September 30,** |   |
|-----------------------------------------------|--------|--------------------------------------------|------------|-------------------------------------------|--------|
|                                          |   | **2001**                                   |       | **% (1)**                                 |   | **2000** |   | **% (1)** |   | **2001** |   | **% (1)** |   | **2000** |   | **% (1)** |   |
|                                          |   | **(dollars in  thousands)**                | ** ** |
| Research and development                      |   | $                                          | 16,230     |                                      | 32     | % | $ | 14,988 |   | 13 | % | $ | 63,817 |   | 32 | % | $ | 30,453 |   | 11 | % |
| Sales and  marketing                          |   | 25,895                                     |       | 50                                        |   | 43,799 |   | 36 |   | 120,142 |   | 60 |   | 102,569 |   | 37 |   |
| General and  administrative                   |   | 10,849                                     |       | 21                                        |   | 8,198 |   | 7 |   | 35,707 |   | 18 |   | 18,595 |   | 7 |   |
| Goodwill and  intangible amortization         |   | 66,493                                     |       | 130                                       |   | 66,308 |   | 55 |   | 199,070 |   | 100 |   | 121,659 |   | 44 |   |
| Charge for  acquired in-process technology    |   | —                                     |       | —                                    |   | — |   | — |   | — |   | — |   | 10,100 |   | 3 |   |
| Restructuring  charge                         |   | 9,847                                      |       | 19                                        |   | — |   | — |   | 133,320 |   | 67 |   | — |   | — |   |
| Impairment of  goodwill and other intangibles |   | 336,379                                    |       | 657                                       |   | — |   | — |   | 336,379 |   | 168 |   | — |   | — |   |
| Total Operating  Expenses                     |   | $                                          | 465,693    |                                      | 909    | % | $ | 133,293 |   | 111 | % | $ | 888,435 |   | 445 | % | $ | 283,376 |   | 102 | % |

 

----

(1)   Expressed as a percent of total revenues forthe period indicated

* *

*Research and development expenses*increased 8% during the current quarter ended September 30, 2001 to $16.2million as compared to $15.0 million for the quarter ended September 30,2000.  Research and development expensesincreased 110% during the nine months ended September 30, 2001 to $63.8 millionas compared to $30.5 million for the nine months ended September 30, 2000.  The increase in research and developmentexpenses is primarily attributable to increased efforts involved in theenhancement of existing applications and the development of our next generationof products partially offset by compensation reductions and cost-cuttingefforts put in place during the second and third quarter of 2001.

 

*Sales and marketing expenses* decreased 41%during the current quarter ended September 30, 2001 to $25.9 million ascompared to $43.8 million for the quarter ended September 30, 2000.  Sales and marketing expenses increased 17%during the nine months ended September 30, 2001 to $120.1 million as comparedto $102.6 million during the nine months ended September 30, 2000.  Sales and marketing expenses decreasedduring the three months ended September 30, 2001 as a result of decreasedsalary expense as a result of the second and third quarter reductions in forcein addition to decreased commission expense as a result of decreases in licenserevenue.  The increase in sales andmarketing expense during the nine months ended September 30, 2001 reflect thecost of increased sales and marketing personnel from additional hiresthroughout the fourth quarter of 2000, expenditures made to develop and expand sales distribution channels, andcosts incurred for increased training activities all partially offset bydecreases in salary related expenses as a result of the second and thirdquarter reductions in force and decreased commission expense as a result ofdecreased license revenues.

 

*General and administrative expenses*increased 32% during the current quarter ended September 30, 2001 to $10.8million as compared to $8.2 million for the quarter ended September 30,2000.  General and administrativeexpenses increased 92% during the nine months ended September 30, 2001 to $35.7million as compared to $18.6 million during the nine months ended September 30,2000.  The increase in general and administrativeexpenses is attributable to higher professional fees primarily due to increasedlegal expenses and  increases in thegeneral reserves of our accounts receivable balance.

 

We are attempting toreduce expenses in an effort to return to profitability during a period whenrevenues have been less than originally expected.  Therefore, operating costs may decline in the near future butthere can be no assurance that such decline will be enough to return the Companyto profitability.  Should revenues increasesignificantly, we would expect our expenses to increase commensurate withincreases in revenues.

 

*Amortizationof goodwill and other intangibles.*As described in Note 6 in the Notes to the CondensedConsolidated Financial Statements above, we acquired Interleaf in the quarterended June 30, 2000. We have accounted for the acquisition as a purchasebusiness combination. As a result of this transaction, we had recorded goodwilland other intangible assets on the balance sheet of $794.7 million. Amortizationof goodwill and other intangibles assets related to the Interleaf acquisitionwas $66.2 million and $198.7 million for the quarter ended and the nine monthsended September 30, 2001, respectively. As reported in Note 6, we acquired Keyeon LLC on June 29, 2001.  We have accounted for this acquisition as apurchase business combination.  As aresult of this transaction, we recorded goodwill and other intangible assets onthe balance sheet of $2.2 million. Amortization of goodwill and other intangible assets related to theKeyeon acquisition was $184,000 during the three and nine months endedSeptember 30, 2001.  As reported in Note8, we recorded an impairment charge on goodwill and other intangible assets duringthe third quarter ended September 30, 2001 of $336.4 million.

 

*Restructuring. *During the third andsecond quarters of 2001, we approved a restructuring plan to, among otherthings, reduce our workforce and consolidate facilities.  These restructuring and asset impairmentcharges were taken to align our cost structure with changing market conditionsand to create a more efficient organization. Pre-tax charges of $9.8 million and $123.5 million were recorded in thethird quarter and second quarter of 2001, respectively, to provide for these actionsand other related items.

 

In connection with therestructuring plan recorded in the third quarter, we expect to saveapproximately $15 million in salary expense over the next twelve months.  We expect facility related cash outlaysassociated with the third quarter restructuring charge to be approximately $4.6million over the next twelve months. Additionally, we expect sublease income associated with these facilitiesor approximately $1.2 million over the next twelve months.   Please see Note 7 of Notes to CondensedConsolidated Financial Statements for additional information.

 

*Impairmentof Goodwill and Other Intangible Assets.*During the thirdquarter of 2001, we determined that the goodwill and other intangible assetsrelated to our various acquisitions may have become impaired.  In accordance with SFAS No. 121 and APB No.17, we performed an impairment analysis. These standards require that goodwill and other intangible assets bereviewed for impairment whenever events or changes in circumstances indicatethat the carrying amount may not be recoverable.  Because we had integrated the acquired companies' operations, wewere required to test for impairment at an overall enterprise level.  Our policy is to use a discounted cash flowapproach.  This approach includesanalyzing estimated future cash flows over the remaining life of the goodwilland other intangible assets as well as a disposition value at the end of thelife of the goodwill and other intangible assets.  The resulting value was then compared to the carrying value ofstockholders’ equity and the difference represents goodwill and otherintangible assets impairment measured on a discounted basis.  Accordingly, we recorded an impairmentcharge of $336.4 million during the three months ended September 30, 2001.  Please see Note 8 for additionalinformation.

 

*Other Income, net*

** **

Other income, netconsists of interest income, interest expense net of other non-operatingexpenses.  Other income, net decreasedto $1.8 million for the three months ended September 30, 2001 as compared to$4.3 million during the three months ended September 30, 2000.  The main reason for the decrease is adecrease in interest income of approximately $2.1 million to $2.7 million forthe quarter ended September 30, 2001 as compared to $4.8 million for thequarter ended September 30, 2000 as a result of a decrease in available cashand investments.  Other income, netdecreased to $1.4 million for the nine months ended September 30, 2001 ascompared to $15.5 million for the nine months ended September 30, 2000.  Interest income decreased approximately $3.5million to $9.3 million for the nine months ended September 30, 2001 ascompared to $12.8 million for the nine months ended September 30, 2000 as aresult of a decrease in overall cash and investments.  Losses on asset disposals increased approximately $1.1 millionfor the nine months ended September 30, 2001 as compared to the same period in2000.  This increase is due to a loss ofapproximately $1.1 million on the sale of various computers and relatedequipment and furniture of E-Publishing Corporation, formerly our wholly-ownedsubsidiary recorded during the second quarter of 2000.  Gains on sales of investments decreased $3.4million for the nine months ended September 30, 2001 as compared to the sameperiod during 2000.  We experienced anincrease in net losses from an unconsolidated subsidiary of $2.4 million forthe nine months ended September 30, 2001 and an increase in realized losses oncost method investments of $3.9 million for the nine months ended September 30,2001.

**Income Taxes**

 

During the quarter endedSeptember 30, 2001, we recognized tax expense of $406,000.   We recognized income tax expense of $1.6million during the nine months ended September 30, 2001.  The tax expense during both periods mainlyrelates to foreign withholding taxes and state income taxes.

 

**Litigation Settlement**

 

On February 22, 2000, wereached a settlement agreement and entered into a license agreement with ArtTechnology Group (“ATG”) in connection with the lawsuit filed by us on December11, 1998 against ATG alleging infringement of our U.S. Patent No. 5,710,887. Inaccordance with the terms of the agreement, we granted ATG a nonexclusive,nontransferable, worldwide, perpetual license and we were paid $8.0 million byATG at the effective date of the settlement and began to receive in quarterlyinstallment payments commencing on February 24, 2000 (four consecutivequarterly payments of $750,000 during 2000 and eight consecutive quarterly paymentsof $500,000 during 2001 and 2002) which will total $7.0 million.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 
|                                                      |   | **September 30,  2001** |       | **December 31,  2000** |   |
|-----------------------------------------------------------|--------|-------------------------|------------|-----------------------------|--------|
|                                                      |   | **(in thousands)**      | ** ** |
| Cash, cash  equivalents and liquid short-term investments |   | $                       | 189,582    |                        | $      | 222,534 |   |
| Long-term liquid  investments                             |   | $                       | 32,581     |                        | $      | 78,769 |   |
| Working capital                                           |   | $                       | 106,169    |                        | $      | 215,831 |   |
| Working capital  ratio                                    |   | 1.8 : 1                 |       | 2.7 : 1                     |   |

 

At September 30, 2001, wehad $222.2 million of cash, cash equivalents and liquid short-term andlong-term investments, which represents a decrease of $79.1 million as comparedto December 31, 2000. We currently have $4.1 million of outstanding term debtunder our existing credit facility with a commercial bank.

 

Cash used for operatingactivities was $50.1 million for the nine months ended September 30, 2001 andcash provided by operating activities was $45.1 million for the nine monthsended September 30, 2000. Net cash used for operating activities for the ninemonths ended September 30, 2001 was primarily attributed to a decrease inaccounts payable and accrued expenses, the net loss for the nine months (lessnon-cash expenses), all partially offset by a decrease in accounts receivableand prepaid expenses.  Cash provided byinvesting activities was $6.1 million for the nine months ended September 30,2001 and cash used for investing activities was $195.0 million for the ninemonths ended September 30, 2000.  Cashprovided by investing activities for the nine months ended September 30, 2001was primarily due to cash acquired in a purchase transaction of approximately$7.2 million, net sales/maturities of investments of approximately $49.2million, partially offset by approximately $50.3 million in purchases ofproperty and equipment.  Cash providedby financing activities was $14.6 million and $26.5 million for the nine monthsended September 30, 2001 and 2000, respectively, and consists primarily ofproceeds from the issuance of common stock.

 

Capital expenditures were$50.3 million and $29.9 million for the nine months ended September 30, 2001and 2000, respectively.  Our capitalexpenditures consisted of purchases of operating resources to manage ouroperations and included computer hardware and software, office furniture andfixtures and leasehold improvements.  InFebruary and April 2000, we entered into new facility lease agreements forapproximately 519,000 square feet. Lease payments will be made on an escalating basis with the total futureminimum lease payments amounting to $316.4 million, payable through the third quarterof 2013. Portions of these lease payments, along with expected sublease income,have been recorded as part of our restructuring charge recorded during thesecond quarter of 2001.

 

In connection with thethird quarter restructuring plan described in Note 7 of the accompanying Notesto Condensed Consolidated Financial Statements, we expect to pay outapproximately $618,000 of severance related costs and approximately $65,000 ofother restructuring costs over the next twelve months.  We expect facility related cash outlaysassociated with the third quarter restructuring charge to be approximately $4.6million over the next twelve months and an additional $7.6 million from October1, 2002 through September 30, 2006. Additionally, we expect sublease income associated with these facilitiesof approximately $1.2 million over the next twelve months and $5.0 million fromOctober 1, 2002 through September 30, 2006. We expect cash outlays, net ofexpected sublease income, totaling approximately $77.0 million relating to ourrestructuring charge recorded in the second quarter of 2001, payable throughthe fourth quarter of 2008. The total cash outlay is expected to be funded fromexisting cash balances and internally generated cash flows from operations.

 

We believe that ouravailable cash and short-term investment resources and cash generated fromoperations will be sufficient to meet our expected working capital and capitalexpenditure requirements for at least the next 12 months. This estimate is aforward-looking statement that involves risks and uncertainties, and actualresults may vary as a result of a number of factors, including those discussedunder “Factors Affecting Quarterly Operating Results” below and elsewhereherein. We may need to raise additional funds in order to support more rapidexpansion, develop new or enhanced services, respond to competitive pressures,acquire complementary 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. No other advances will be available underour revolving line of credit. If additional funds are raised through theissuance of equity securities, the percentage ownership of the stockholders ofthe Company will be reduced, stockholders may experience additional dilution orsuch equity securities may have rights, preferences or privileges senior tothose of the holders of our common stock. There can be no assurance thatadditional financing will be available on acceptable terms, if at all. Ifadequate funds are not available or are not available on acceptable terms, wemay be unable to develop our products, take advantage of future opportunitiesor respond to competitive pressures or unanticipated requirements, which couldhave a material adverse effect on our business, financial condition andoperating results.

 

**FactorsThat May Affect Future Operating Results**

 

We may experiencesignificant fluctuations in quarterly operating results that may be caused bymany factors including, but not limited to, those discussed below and herein,as set out in Items 7 and 7A in our annual report on Form 10-K for the yearended December 31, 2000  and elsewheretherein and as disclosed in other documents filed with the Securities andExchange Commission.

 

Significant fluctuationsin future 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 serviceagreements (which generally automatically renew for one year terms unlessearlier terminated by either party upon 90-days notice), product life cycles,changes in strategy, seasonal trends, the mix of distribution channels throughwhich our products are sold, the mix of international and domestic sales, therate at which new sales people become productive, changes in the level ofoperating expenses to support projected growth and general economic conditions.We anticipate that a significant portion of our revenues will be derived from alimited number of orders, and the timing of receipt and fulfillment of any suchorders is expected to cause material fluctuations in our operating results,particularly on a quarterly basis. Due to the foregoing factors, quarterlyrevenues and operating 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 operatingresults from time to time will not meet the expectations of market analysts orinvestors, which may have an adverse effect on the price of our common stock.

 

Our success dependslargely on the skills, experience and performance of key personnel.  If we lose one or more key personnel, ourbusiness could be harmed.  Our futuresuccess depends on our ability to continue attracting and retaining highlyskilled personnel.  We may not besuccessful in attracting, assimilating and retaining qualified personnel in thefuture.

 

Some of these risks anduncertainties relate to the new and rapidly evolving nature of the markets inwhich we operate. These related market risks include, among other things, theearly stage of the developing online commerce market, the dependence of onlinecommerce on the development of the Internet and its related infrastructure, theuncertainty pertaining to widespread adoption of online commerce and the riskof government regulation of the Internet. Other risks and uncertainties relateto our ability to, among other things, successfully implement our marketingstrategies, respond to competitive developments, continue to develop andupgrade our products and technologies more rapidly than our competitors, andcommercialize our products and services by incorporating these enhancedtechnologies. There can be no assurance that we will succeed in addressing anyor all of these risks.

 

There has been a generaldownturn in the economy.  We had revisedour projected estimate of revenue range for fiscal 2001.  If the economic environment continues todecline, our future results may be significantly impacted.  We believe that the current economic declinehas increased the average length of our sales cycle and our operating resultscould suffer and our stock price could decline if we do not achieve the levelof revenues we expect.

 

Like other U.S.companies, our business and operating results are subject to uncertaintiesarising out of the recent terrorist attacks on the United States, includingpotential worsening or extension of the current global slowdown, the economicconsequences of military actions or additional terrorist activities andassociated political instability, and the impact of heightened securityconcerns on domestic and international 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 these results could substantiallyharm our business and results of operations, causing a decrease in our revenues.

 

**Item 3.            Quantitative and QualitativeDisclosures about Market Risk**

 

We develop products inthe United States and market our products throughout the world.  As a result, our financial results could beaffected by factors such as changes in currency exchange rates or weak economicconditions in foreign markets.  Themajority of our sales are made in United States dollars.  Our exposure to market risk for changes ininterest rates relates primarily to our investment portfolio. We had noderivative financial instruments as of September 30, 2001 or December 31, 2000.We invest in instruments that meet high credit quality standards and the amountof credit exposure to any one issue, issuer and type of instrument is limited.We do not expect any material loss with respect to the investment portfolio.Investments are carried at market value. The following represents our investment portfolio as of September 30,2001 by maturity:

 
| (in thousands)              |   | **Year  Ending  December  31, 2001** |   | **Year  Ending  December  31, 2002** |   | **Year  Ending  December  31, 2003** |   | **Year  Ending  December  31, 2004** |   | **Total** |   |
|-----------------------------|--------|--------------------------------------|--------|--------------------------------------|--------|--------------------------------------|--------|--------------------------------------|--------|-----------|--------|
| Cash equivalents            |   | $                                    | 38,586 |                                 | $      | -                                    |   | $                                    | -      |      | $      | - |   | $ | 38,586 |   |
| Short-term investments      |   | $                                    | 14,445 |                                 | $      | 51,397                               |   | $                                    | -      |      | $      | - |   | $ | 65,842 |   |
| Long-term investments       |   | $                                    | -      |                                 | $      | 13,196                               |   | $                                    | 11,448 |      | $      | 7,937 |   | $ | 32,581 |   |
| Total investment securities |   | $                                    | 53,031 |                                 | $      | 64,593                               |   | $                                    | 11,448 |      | $      | 7,937 |   | $ | 137,009 |   |

 

Not included in the aboveare $85.1 million in checking and money market accounts, $37,000 of short-termmarketable securities in common stock and $9.3 million in equity investments.

 

*Equity Investments*

 

Equity investmentsconsist of investments in non-public and publicly traded companies that areaccounted for under either the cost method of accounting or the equity methodof accounting.

 

Equity investments are accountedfor under the cost method of accounting when we have a minority interest and donot have the ability to exercise significant influence.  These investments are classified asavailable-for-sale and are carried at fair value when readily determinablemarket values exist or cost when such market values do not exist.  Adjustments to fair value are recorded as acomponent of other comprehensive (loss) income unless the investments areconsidered permanently impaired in which case the adjustment is recorded as acomponent of other income, net in the condensed consolidated statements ofoperations.  During the three and ninemonths ended September 30, 2001, we recorded realized losses related to costmethod equity investments of $837,000 and $4.0 million, respectively.  There were no such charges during the threeand nine months ended September 30, 2000.

 

Equity investments areaccounted for under the equity method of accounting when we have a minorityinterest and have the ability to exercise significant influence.  These investments are classified asavailable-for-sale and are carried at cost with periodic adjustments tocarrying value for our equity in net income (loss) of the equity investee.  Such adjustments are recorded as a componentof other income, net.  Any decline invalue of our investments, which is other than a temporary decline, is chargedto earnings during the period in which the impairment occurs.  During the nine months ended September 30,2001 we recorded our share of our equity investee’s net loss of $2.4 million.There were no such charges during the three and nine months ended September 30,2000.  We had no such charge in thethird quarter of 2001 as  we purchased100% of the remaining outstanding shares of this equity investee during thesecond quarter of 2001.

 

**PARTII.  OTHER INFORMATION**

 

**Item1.   Legal Proceedings**

 

On April 20, 2001, theCompany filed a Form 8-K with the Securities and Exchange Commission reportingthat several purported class action lawsuits had been filed  against the Company and certain of itsofficers and directors.  In each of thelawsuits, the plaintiffs seek to assert claims on behalf of a class of allpersons who purchased securities of the Company between January 26, 2001 andApril 2, 2001.  The complaints allegethat the Company and the individual defendants violated federal securities lawsin connection with the Company’s reporting of financial results during suchperiod.  The  lawsuits have been consolidated into a single action, as iscustomary in such cases.  On November 5,2001, the Company and the individual defendants filed motions to dismiss theconsolidated complaint.  The Companybelieves that the lawsuits are without merit and continues to  defend itself vigorously.

 

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 the complaint denying all allegations and isdefending itself vigorously.

 

**Item 2.    Changes in Securities and Use of Proceeds**

 

Not applicable.

 

**Item 3.    Defaults Upon Senior Securities**

 

Not applicable.

 

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

 

Not applicable.

 

**Item5.    Other Information**

 

Not applicable.

 

**Item 6.   Exhibits and Reports on Form 8-K**

 

(a)    Exhibits

ExhibitsDescription

10.25       Fourth Loan Modification Agreement withSilicon Valley Bank dated August 3, 2001.

10.26       Loan Modification Agreement with SiliconValley Bank dated November 1, 2001.

 

(b)    Reports on Form 8-K

 

Not applicable.

 

**SIGNATURES**

 

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

 
|   |              |   | **BROADVISION, INC.**                                                                                    |
|--------|-------------------|--------|----------------------------------------------------------------------------------------------------------|
|   |              |   |                                                                                                     |
| Date:  | November 14, 2001 | By:    | /s/  Pehong  Chen                                                                                   |
|   |              |   | Pehong Chen  Chairman of the Board, President and Chief  Executive Officer (Principal Executive Officer) |

 
|   |              |   |                                                                                                                      |
|--------|-------------------|--------|---------------------------------------------------------------------------------------------------------------------------|
| Date:  | November 14, 2001 | By:    | /s/  Francis  Barton                                                                                                 |
|   |              |   | Francis Barton  Executive Vice President  and Chief Financial Officer  (Principal Financial and Chief Accounting Officer) |