**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, DC  20549**

 

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**FORM10-Q**

 

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

 

**Forthe Quarter ended June 30, 2002**

 

**OR**

 

| **o** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|-----------------------------------------------------------------------------------------------|

 

**0–28252**

**(CommissionFile Number)**

 

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**BROADVISION, INC.**

(Exact name of registrant as specified in its charter)

 

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

 

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

 

As of  August6, 2002, there were 32,173,734 shares of the Registrant’s Common Stock issuedand outstanding.

 

 

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**BROADVISION, INC. AND SUBSIDIARIES**

**FORM 10-Q**

**Quarter Ended June 30, 2002**

** **

**TABLE OF CONTENTS**

 
|           |                                                                                                                                        |
|----------------|---------------------------------------------------------------------------------------------------------------------------------------------|
| **PART I.**    | **FINANCIAL INFORMATION**                                                                                                                   |
| Item 1.        | Financial Statements                                                                                                                        |
|           | Condensed  Consolidated Balance Sheets—June 30, 2002   and December 31, 2001                                                 |
|           | Condensed  Consolidated Statements of Operations and Comprehensive  Loss—Three and six months ended June 30,  2002  and 2001 |
|           | Condensed  Consolidated Statements of Cash Flows—Six months ended  June 30, 2002 and 2001                                         |
|           | Notes  to Condensed Consolidated Financial Statements                                                                                       |
| Item  2.       | Management’s  Discussion and Analysis of Financial Condition and  Results of Operations                                           |
| Item  3.       | Quantitative  and Qualitative Disclosures about Market Risk                                                                                 |
|           |                                                                                                                                        |
| **PART II.**   | **OTHER INFORMATION**                                                                                                                       |
| Item 1.        | Legal Proceedings                                                                                                                           |
| Item 2.        | Changes in Securities  and Use of Proceeds                                                                                                  |
| Item  3.       | Defaults upon Senior  Securities                                                                                                            |
| Item  4.       | Submission  of Matters to a Vote of Security Holders                                                                                        |
| Item 5.        | Other Information                                                                                                                           |
| Item 6.        | Exhibits and Reports  on Form 8-K                                                                                                           |
|           |                                                                                                                                        |
| **SIGNATURES** |

 

2

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**PART I.  FINANCIAL INFORMATION**

**Item 1.  Financial Statements**

 

**BROADVISION, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

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

** **
|                                                                                                                                                  |   | **June 30,  2002** |    | **December 31,  2001** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|---------|------------------------|--------|
|                                                                                                                                                  |   | **(unaudited)**    |    |                   |   |
| **ASSETS**                                                                                                                                            |   |               |    |                   |   |
|                                                                                                                                                  |   |               |    |                   |   |
| Cash and cash equivalents                                                                                                                             |   | $                  | 73,822  |                   | $      | 75,758 |   |
| Short-term investments                                                                                                                                |   | 37,559             |    | 65,705                 |   |
| Restricted cash                                                                                                                                       |   | 10,779             |    | —                 |   |
| Accounts receivable, less reserves of $7,615  and $8,194 for 2002 and 2001, respectively                                                              |   | 20,404             |    | 39,768                 |   |
| Prepaids and other                                                                                                                                    |   | 10,906             |    | 12,816                 |   |
|                                                                                                                                                  |   |               |    |                   |   |
| Total current assets                                                                                                                                  |   | 153,470            |    | 194,047                |   |
|                                                                                                                                                  |   |               |    |                   |   |
| Property and equipment, net                                                                                                                           |   | 35,796             |    | 67,219                 |   |
| Deferred tax asset                                                                                                                                    |   | —             |    | 2,857                  |   |
| Long-term investments                                                                                                                                 |   | 3,581              |    | 22,135                 |   |
| Restricted cash and investments                                                                                                                       |   | 16,595             |    | 29,949                 |   |
| Equity investments                                                                                                                                    |   | 3,332              |    | 5,583                  |   |
| Goodwill and other intangibles, net                                                                                                                   |   | 59,094             |    | 60,867                 |   |
| Other assets                                                                                                                                          |   | 5,576              |    | 9,760                  |   |
|                                                                                                                                                  |   |               |    |                   |   |
| Total assets                                                                                                                                          |   | $                  | 277,444 |                   | $      | 392,417 |   |
|                                                                                                                                                  |   |               |    |                   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                         |   |               |    |                   |   |
|                                                                                                                                                  |   |               |    |                   |   |
| Accounts payable                                                                                                                                      |   | $                  | 13,892  |                   | $      | 11,276 |   |
| Accrued expenses                                                                                                                                      |   | 49,658             |    | 61,712                 |   |
| Unearned revenue                                                                                                                                      |   | 18,348             |    | 22,580                 |   |
| Deferred maintenance                                                                                                                                  |   | 25,369             |    | 30,337                 |   |
| Bank borrowings and current portion of  long-term debt                                                                                                |   | 25,977             |    | 977                    |   |
|                                                                                                                                                  |   |               |    |                   |   |
| Total current liabilities                                                                                                                             |   | 133,244            |    | 126,882                |   |
|                                                                                                                                                  |   |               |    |                   |   |
| Long-term debt, net of current portion                                                                                                                |   | 2,434              |    | 2,922                  |   |
| Other noncurrent liabilities                                                                                                                          |   | 24,691             |    | 59,466                 |   |
|                                                                                                                                                  |   |               |    |                   |   |
| Total liabilities                                                                                                                                     |   | 160,369            |    | 189,270                |   |
|                                                                                                                                                  |   |               |    |                   |   |
| Commitments                                                                                                                                           |   |               |    |                   |   |
|                                                                                                                                                  |   |               |    |                   |   |
| Stockholders’ equity:                                                                                                                            |   |               |    |                   |   |
| Convertible preferred stock, $0.0001 par  value; 10,000 shares authorized; none issued and outstanding                                                |   | —             |    | —                 |   |
| Common stock, $0.0001 par value; 2,000,000  shares authorized; 32,162 and  31,643  shares issued and outstanding for 2002 and 2001, respectively |   | 3                  |    | 3                      |   |
| Additional paid-in capital                                                                                                                            |   | 1,209,871          |    | 1,207,071              |   |
| Accumulated other comprehensive loss, net of  tax                                                                                                     |   | (1,305             | )       | (5,245                 | )      |
| Accumulated deficit                                                                                                                                   |   | (1,091,494         | )       | (998,682               | )      |
| Total stockholders’ equity                                                                                                                       |   | 117,075            |    | 203,147                |   |
|                                                                                                                                                  |   |               |    |                   |   |
| Total liabilities and  stockholders’ equity                                                                                                      |   | $                  | 277,444 |                   | $      | 392,417 |   |

 

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

 

3

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**BROADVISION, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**AND COMPREHENSIVE LOSS**

**(In thousands, except per share amounts; Unaudited)**

 
|                                                                                                                                                        |   | **Three  Months Ended********June 30,** |    | **Six  Months Ended********June 30,** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------|---------|---------------------------------------|--------|
|                                                                                                                                                        |   | **2002**                                |    | **2001**                              |   | **2002** |   | **2001** |   |
|                                                                                                                                                        |   |                                    |    |                                  |   |   |   |   |   |
| **Revenues:**                                                                                                                                               |   |                                    |    |                                  |   |   |   |   |   |
| Software licenses                                                                                                                                           |   | $                                       | 10,309  |                                  | $      | 21,029 |   | $ | 18,488 |   | $ | 64,169 |   |
| Services                                                                                                                                                    |   | 19,110                                  |    | 37,006                                |   | 41,386 |   | 86,595 |   |
| Total revenues                                                                                                                                              |   | 29,419                                  |    | 58,035                                |   | 59,874 |   | 150,764 |   |
|                                                                                                                                                        |   |                                    |    |                                  |   |   |   |   |   |
| **Cost of revenues:**                                                                                                                                       |   |                                    |    |                                  |   |   |   |   |   |
| Cost of software licenses                                                                                                                                   |   | 903                                     |    | 2,655                                 |   | 2,003 |   | 4,895 |   |
| Cost of services                                                                                                                                            |   | 10,422                                  |    | 30,595                                |   | 22,756 |   | 69,573 |   |
| Total cost of revenues                                                                                                                                      |   | 11,325                                  |    | 33,250                                |   | 24,759 |   | 74,468 |   |
|                                                                                                                                                        |   |                                    |    |                                  |   |   |   |   |   |
| Gross profit                                                                                                                                                |   | 18,094                                  |    | 24,785                                |   | 35,115 |   | 76,296 |   |
|                                                                                                                                                        |   |                                    |    |                                  |   |   |   |   |   |
| **Operating expenses:**                                                                                                                                     |   |                                    |    |                                  |   |   |   |   |   |
| Research and development                                                                                                                                    |   | 13,006                                  |    | 20,616                                |   | 26,981 |   | 47,587 |   |
| Sales and marketing                                                                                                                                         |   | 15,803                                  |    | 41,766                                |   | 31,981 |   | 94,247 |   |
| General and administrative                                                                                                                                  |   | 5,009                                   |    | 14,268                                |   | 11,202 |   | 24,858 |   |
| Goodwill and intangible amortization                                                                                                                        |   | 887                                     |    | 66,297                                |   | 1,774 |   | 132,577 |   |
| Restructuring charge                                                                                                                                        |   | 34,565                                  |    | 123,473                               |   | 39,945 |   | 123,473 |   |
| Impairment of assets                                                                                                                                        |   | —                                  |    | —                                |   | 2,276 |   | — |   |
| Total operating expenses                                                                                                                                    |   | 69,270                                  |    | 266,420                               |   | 114,159 |   | 422,742 |   |
|                                                                                                                                                        |   |                                    |    |                                  |   |   |   |   |   |
| Operating loss                                                                                                                                              |   | (51,176                                 | )       | (241,635                              | )      | (79,044 | ) | (346,446 | ) |
|                                                                                                                                                        |   |                                    |    |                                  |   |   |   |   |   |
| Other income (expense), net                                                                                                                                 |   | 1,390                                   |    | (876                                  | )      | (6,687 | ) | (379 | ) |
|                                                                                                                                                        |   |                                    |    |                                  |   |   |   |   |   |
| Loss before provision forincome taxes                                                                                                                       |   | (49,786                                 | )       | (242,511                              | )      | (85,731 | ) | (346,825 | ) |
|                                                                                                                                                        |   |                                    |    |                                  |   |   |   |   |   |
| Provision for income taxes                                                                                                                                  |   | 6,904                                   |    | 331                                   |   | 7,081 |   | 1,162 |   |
|                                                                                                                                                        |   |                                    |    |                                  |   |   |   |   |   |
| Net loss                                                                                                                                                    |   | $                                       | (56,690 | )                                     | $      | (242,842 | ) | $ | (92,812 | ) | $ | (347,987 | ) |
|                                                                                                                                                        |   |                                    |    |                                  |   |   |   |   |   |
| Basic loss per share                                                                                                                                        |   | $                                       | (1.77   | )                                     | $      | (7.99 | ) | $ | (2.91 | ) | $ | (11.51 | ) |
|                                                                                                                                                        |   |                                    |    |                                  |   |   |   |   |   |
| Diluted loss per share                                                                                                                                      |   | $                                       | (1.77   | )                                     | $      | (7.99 | ) | $ | (2.91 | ) | $ | (11.51 | ) |
|                                                                                                                                                        |   |                                    |    |                                  |   |   |   |   |   |
| **Shares used in computing:**                                                                                                                               |   |                                    |    |                                  |   |   |   |   |   |
| Basic loss per share                                                                                                                                        |   | 32,037                                  |    | 30,381                                |   | 31,857 |   | 30,245 |   |
|                                                                                                                                                        |   |                                    |    |                                  |   |   |   |   |   |
| Diluted loss per share                                                                                                                                      |   | 32,037                                  |    | 30,381                                |   | 31,857 |   | 30,245 |   |
|                                                                                                                                                        |   |                                    |    |                                  |   |   |   |   |   |
| **Comprehensive loss:**                                                                                                                                     |   |                                    |    |                                  |   |   |   |   |   |
| Net loss                                                                                                                                                    |   | $                                       | (56,690 | )                                     | $      | (242,842 | ) | $ | (92,812 | ) | $ | (347,987 | ) |
| Other comprehensive (loss) gain, net of tax:Unrealized investment gains  (losses) less reclassification adjustment for gains (losses) included in net  loss |   | (453                                    | )       | (4,439                                | )      | 3,940 |   | (3,785 | ) |
| Total comprehensive loss                                                                                                                                    |   | $                                       | (57,143 | )                                     | $      | (247,281 | ) | $ | (88,872 | ) | $ | (351,772 | ) |

 

*** See AccompanyingNotes to Condensed Consolidated Financial Statements***

 

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**BROADVISION, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(In thousands; Unaudited)**

 
|                                                                          |   | **Six Months Ended June 30,** |    |
|-------------------------------------------------------------------------------|--------|-------------------------------|---------|
|                                                                          |   | **2002**                      |    | **2001** |   |
|                                                                          |   |                          |    |   |   |
| **Cash flows from operating activities:**                                     |   |                          |    |   |   |
| Net loss                                                                      |   | $                             | (92,812 | ) | $ | (347,987 | ) |
| Adjustments to reconcile net loss to  net cash used for operating activities: |   |                          |    |   |   |
| Depreciation and amortization                                                 |   | 10,467                        |    | 12,159 |   |
| Provision for doubtful accounts                                               |   | (439                          | )       | 2,297 |   |
| Provision for sales returns                                                   |   | 477                           |    | — |   |
| Amortization of prepaid royalties                                             |   | 1,849                         |    | 2,368 |   |
| Amortization of prepaid compensation                                          |   | —                        |    | 366 |   |
| Realized loss on cost method equity  investments                              |   | 9,825                         |    | 3,142 |   |
| Equity in net loss from unconsolidated  subsidiary                            |   | —                        |    | 2,438 |   |
| Amortization of goodwill and other  intangibles                               |   | 1,774                         |    | 132,577 |   |
| Stock-based compensation charge                                               |   | 770                           |    | — |   |
| Restructuring charge, non cash                                                |   | 18,243                        |    | 27,090 |   |
| Loss on sale of assets                                                        |   | 344                           |    | — |   |
| Impairment of assets                                                          |   | 2,276                         |    | — |   |
| Provision for deferred tax asset  valuation                                   |   | 6,279                         |    | — |   |
| Changes in operating assets and  liabilities:                                 |   |                          |    |   |   |
| Accounts receivable                                                           |   | 19,326                        |    | 46,505 |   |
| Prepaids and other                                                            |   | 1,910                         |    | 1,787 |   |
| Accounts payable and accrued expenses                                         |   | (568                          | )       | (12,515 | ) |
| Restructuring reserves                                                        |   | (46,783                       | )       | 91,793 |   |
| Unearned revenue and deferred  maintenance                                    |   | (9,200                        | )       | 5,998 |   |
| Other noncurrent assets                                                       |   | (387                          | )       | (986 | ) |
| Net cash used for operating activities                                        |   | (76,649                       | )       | (32,968 | ) |
|                                                                          |   |                          |    |   |   |
| **Cash flows from investing activities:**                                     |   |                          |    |   |   |
| Purchase of property and equipment                                            |   | (1,053                        | )       | (47,510 | ) |
| Proceeds from the sale of assets                                              |   | 247                           |    | — |   |
| Purchase of long-term investments                                             |   | (2,349                        | )       | (38,063 | ) |
| Sales/maturity of long-term investments                                       |   | 21,186                        |    | 62,107 |   |
| Purchase of short-term investments                                            |   | (23,453                       | )       | (29,200 | ) |
| Sales/maturity of short-term  investments                                     |   | 50,255                        |    | 50,786 |   |
| Transfer from restricted  cash/investments                                    |   | 2,575                         |    | — |   |
| Cash acquired in purchase transaction                                         |   | —                        |    | 7,171 |   |
| Net cash provided by investing  activities                                    |   | 47,408                        |    | 5,291 |   |
|                                                                          |   |                          |    |   |   |
| **Cash flows from financing activities:**                                     |   |                          |    |   |   |
| Proceeds from issuance of common stock,  net                                  |   | 2,795                         |    | 12,694 |   |
| Proceeds from borrowings                                                      |   | 25,000                        |    | — |   |
| Repayments of borrowings                                                      |   | (490                          | )       | (513 | ) |
| Net cash provided by financing  activities                                    |   | 27,305                        |    | 12,181 |   |
|                                                                          |   |                          |    |   |   |
| Net decrease in cash and cash  equivalents                                    |   | (1,936                        | )       | (15,496 | ) |
| Cash and cash equivalents at beginning  of period                             |   | 75,758                        |    | 153,137 |   |
| Cash and cash equivalents at end of  period                                   |   | $                             | 73,822  |   | $ | 137,641 |   |
|                                                                          |   |                          |    |   |   |
| **Supplemental disclosures of cash flow information:**                        |   |                          |    |   |   |
| Cash paid for interest                                                        |   | $                             | 125     |   | $ | 186 |   |
| Cash paid for income taxes                                                    |   | $                             | 803     |   | $ | 1,162 |   |

 

*** See AccompanyingNotes to Condensed Consolidated Financial Statements***

 

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**BROADVISION, INC. AND SUBSIDIARIES**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

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

 

***Nature of Business***

 

BroadVision,Inc. (collectively with its subsidiaries, the "Company") wasincorporated in the state of Delaware on May 13, 1993.  The Company develops and sells acomprehensive suite of enterprise business portal applications and technologythat enable enterprise self-service for conducting interactions, transactionsand services in a personalized model. The Company’s enterprise business portal applications enable companiesto organize dynamic profiles of web and wireless users from volunteered dataand observed behavior, deliver highly specialized content in response to theseprofiles and securely execute transactions.

 

BroadVisionGlobal Services, ("BVGS"), provides a full spectrum of globalservices to help ensure success for businesses, including the Company’sup-front Solution Value Proposition, consulting services, and ongoing trainingand support.  The BVGS organizationconsists of business, content and technical consultants with extensiveexperience in the design of online businesses and in the implementation ofenterprise self-service applications.

 

A significantelement of the Company’s sales strategy is to engage in strategic businessalliances to assist in marketing, selling and developing customer applications.

 

The Company sells its productsand provides services worldwide through a direct sales force in North America,Europe and Asia and through independent distributors, value-added resellers("VARs") and application service providers ("ASPs").  In addition, the sales of the Company’sproducts are promoted through independent professional consulting organizationsknown as systems integrators.  TheCompany provides services worldwide through its BVGS organization andindirectly through distributors, VARs, ASPs, and systems integrators.

 

There has beena general downturn in the economy since the beginning of 2001.  This downturn is likely to continue in thefuture and has and could continue to have an impact on the Company’s futurefinancial results.  Comparisons offinancial performance made in this document are not necessarily indicative offuture performance.  The Companyannounced a corporate-wide reorganization and reduction in force and incurred acharge in fiscal 2001 of $153.3 million and during the six months ended June30, 2002 of $39.9 million, related to these actions and to consolidation of theCompany’s facilities.  Please see Note 7of Notes to Condensed Consolidated Financial Statements.

 

***Basis ofPresentation and Use of Estimates***

 

Theaccompanying consolidated financial statements include the accounts of the Companyand its wholly-owned subsidiaries. All significant intercompany transactionshave been eliminated in consolidation. In the Company’s opinion, the consolidated financial statementspresented herein include all necessary adjustments, consisting of normalrecurring adjustments, to fairly state the Company’s financial position,results of operations, and cash flows for the periods indicated.  The preparation of consolidated financialstatements in conformity with accounting principles generally accepted in theUnited States of America requires management to make certain assumptions andestimates that affect reported amounts of assets and liabilities as of the dateof the financial statements and the reported amounts of revenues and expensesduring the reporting period.  Actualresults could differ from estimates. The financial results and related information as of June 30, 2002 andfor the three and six months ended June 30, 2002 and 2001 are unaudited. Thebalance sheet at December 31, 2001 has been derived from the auditedconsolidated financial statements as of that date but does not necessarilyreflect all of the informational disclosures previously reported in accordancewith accounting principles generally accepted in the United States of America.

 

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Theaccompanying consolidated financial statements should be read in conjunctionwith the consolidated financial statements and notes thereto included with theCompany’s Form 10-K and other documents that have been filed with theSecurities and Exchange Commission. The results of the Company’s operations forthe interim periods presented are not necessarily indicative of operatingresults for the full fiscal year or any future periods.

 

*Reclassifications—*Certain prior periodbalances have been reclassified to conform to the current period presentation.

 

***Revenue Recognition***

 

*Overview*

 

The Company’srevenue consists of fees for licenses of the Company’s software products,maintenance, consulting services, and customer training. Software is generallylicensed for development use and for its use in deployment of the customer’swebsite. Fees for deployment licenses are generally based on the number ofpersons who register on a customer’s website using the Company’s software.  Software that is licensed on a per-CPU basisis inclusive of development and deployment. The Company’s revenue recognition policies are in accordance with Statementof Position (‘‘SOP’’) No. 97-2, *SoftwareRevenue Recognition*, as amended; SOP No. 98-9, *Software Revenue Recognition, With Respect to CertainTransactions*and the Securities and Exchange Commission’s StaffAccounting Bulletin No. 101, *RevenueRecognition in Financial Statements*.

 

*Software License Revenue*

 

The Companylicenses its products through its direct sales force and indirectly throughresellers. In general, software license revenues are recognized when anon-cancelable license agreement has been signed and the customer acknowledgesan unconditional obligation to pay, the software product has been delivered,there are no uncertainties surrounding product acceptance, the fees are fixedand determinable and collection is considered probable. Delivery is consideredto have occurred when title and risk of loss have been transferred to thecustomer, which generally occurs when media containing the licensed programs isprovided to a common carrier.  In caseof electronic delivery, delivery occurs when the customer is given access tothe licensed programs.  Ifcollectibility is not considered probable, revenue is recognized when the feeis collected. Subscription-based license revenues are recognized ratably overthe subscription period.

 

The Company recognizes revenue using the residual method pursuant tothe requirements of SOP No. 97-2, as amended by SOP No. 98-9.  Revenues recognized from multiple-elementsoftware arrangements are allocated to each element of the arrangement based onthe fair values of the elements, such as licenses for software products,maintenance, consulting services or customer training. The determination offair value is based on objective evidence, which is specific to the Company.The Company limits its assessment of objective evidence for each element toeither the price charged when the same element is sold separately or the priceestablished by management having the relevant authority to do so, for anelement not yet sold separately. If evidence of fair value of all undeliveredelements exists but evidence does not exist for one or more delivered elements,then revenue is recognized using the residual method. Under the residualmethod, the fair value of the undelivered elements is deferred and theremaining portion of the arrangement fee is recognized as revenue.

 

The Company records unearned revenue for software license agreementswhen cash has been received from the customer and the agreement does notqualify for revenue recognition under the Company’s revenue recognition policy.The Company records accounts receivable for software license agreements when theagreement qualifies for revenue recognition but cash or other consideration hasnot been received from the customer.

 

*Services Revenue*

 

Consulting services revenues and customer training revenues arerecognized as such services are performed. Maintenance revenues, which includerevenues bundled with software license agreements that entitle the customers totechnical support and future unspecified enhancements to the Company’sproducts, are deferred and recognized ratably over the related agreement period,generally twelve months.

 

The Company’s consulting services, which consist of consulting,maintenance, and training, are delivered through BVGS. Services that theCompany provides are not essential to the functionality of the software. Thisgroup provides a full spectrum of global services to help ensure success forbusinesses, including the Company’s up-front Solution Value Proposition,consulting services, and

 

7

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ongoing training andmaintenance.  The BVGS organizationconsists of business, content and technical consultants with extensiveexperience in the design of online businesses and in the implementation ofenterprise self-service applications. In accordance with Financial Accounting Standards Board("FASB") Topic D-103, which the Company adopted as of January 1,2002, the Company records reimbursement by its customers for out-of-pocketexpenses as an increase to services revenues. Prior to January 1, 2002, the Company recorded reimbursement by itscustomers for out-of-pocket expenses as a decrease to cost of services.  The Company’s results of operations for thethree and six months ended June 30, 2001 have been reclassified for comparablepurposes in accordance with Topic D-103. The effect of this reclassification was to increase services revenuesand increase cost of services for the three and six months ended June 30, 2001by $590,000 and $2.2 million, respectively.

 

***Stock Split***

 

On July 24,2002, the Company announced that its Board of Directors had approved aone-for-nine reverse split of the Company’s common stock.  The reverse split was effective as of 8:00p.m. Eastern Daylight Time on July 29, 2002. Each nine shares of outstanding common stock of the Companyautomatically converted into one share of common stock.  The Company’s common stock began trading ona post-split basis at the opening of trading on the Nasdaq National Market onJuly 30, 2002.  The accompanyingconsolidated financial statements and related financial information containedherein have been retroactively restated to give effect for the July, 2002 stocksplit.

 

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

 

Statement ofFinancial Accounting Standard ("SFAS") No. 128, *Earnings Per Share*, requiresthe presentation of basic and diluted earnings per share. Earnings per shareare calculated 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 followingtable sets forth basic and diluted earnings per share computational data forthe periods presented (in thousands, except per share amounts, unaudited):

 
|                                                                                          |   | **Three Months  Ended  June 30,** |       | **Six Months  Ended  June 30,** |       |
|-----------------------------------------------------------------------------------------------|--------|----------------------------------------|------------|--------------------------------------|------------|
|                                                                                          |   | **2002**                               |       | **2001**                             |       | **2002** |   | **2001** |   |
|                                                                                          |   |                                   | ** ** |                                 | ** ** |   | ** ** |   | ** ** |
| Net loss                                                                                      |   | $                                      | (56,690    | )                                    | $          | (242,842 | ) | $ | (92,812 | ) | $ | (347,987 | ) |
|                                                                                          |   |                                   |       |                                 |       |   |   |   |   |
| Weighted average common shares outstanding utilized  for basic and diluted net loss per share |   | 32,037                                 |       | 30,381                               |       | 31,857 |   | 30,245 |   |
|                                                                                          |   |                                   |       |                                 |       |   |   |   |   |
| Basic and diluted net loss per share                                                          |   | $                                      | (1.77      | )                                    | $          | (7.99 | ) | $ | (2.91 | ) | $ | (11.51 | ) |

 

97,277 and337,551 potential common shares are excluded from the determination of dilutednet loss per share for the three months and six months ended June 30, 2002,respectively, as the effect of such shares is anti-dilutive.  1,326,667 and 1,679,556 potential commonshares are excluded from the determination of diluted net loss per share forthe three and six months ended June 30, 2001, respectively, as the effect ofsuch shares is anti-dilutive.

 

***Allowances and Reserves***

 

Occasionally, the Company’s customers experience financial difficultyafter the Company records the sale but before payment has been received.  The Company maintains allowances fordoubtful accounts for estimated losses resulting from the inability of itscustomers to make required payments. The Company’s normal payment terms are 30 to 90 days from invoicedate.  If the financial condition of theCompany’s customers were to deteriorate, resulting in an impairment of theirability to make payments, additional allowances may be required.  The Company records estimated reductions torevenue for potential returns of products by its customers.  If market conditions were to decline, theCompany may experience larger volumes of returns resulting in an incrementalreduction of revenue at the time the return occurs.

 

8

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***Restructuring***

 

Based on the downturn in the economy, the Company’s industry and itsbusiness, the Company has recorded restructuring charges to align its coststructure with these changing market conditions and to create a more efficientorganization.  To the extent actualevents and circumstances, such as the amount and timing of future subleaseincome, differ from estimates made when the restructuring charges are recorded,the Company may increase or decrease income in the period when such changes arenoted.

 

***Legal Matters***

 

The Company’s current estimated range of liability related to pendinglitigation is based on claims for which it is probable that a liability has been incurred and the Company canestimate the amount and range of loss. The Company has recorded the minimum estimated liability related tothose claims, where there is a range of loss. Because of the uncertainties related to both the amount and range ofloss on the remaining pending litigation, the Company is unable to make a reasonableestimate of the liability that could result from an unfavorable outcome.  As additional information becomes available,the Company will assess the potential liability related to its pendinglitigation and revise its estimates, if necessary.  Such revisions in the Company’s estimates of the potentialliability could materially impact the Company’s results of operations andfinancial position.

 

***Foreign Currency Transactions***

 

The functionalcurrency of the Company’s foreign subsidiaries is the U.S. dollar.  Foreign exchange gains and losses resultingfrom the remeasurement of foreign currency assets and liabilities are includedin other (expense) income, net in the Condensed Consolidated Statements ofOperations.

 

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

 

The Companyperiodically assesses the impairment of long-lived assets in accordance withthe provisions of SFAS No. 121, *Accountingfor the Impairment of Long-Lived Assets and for Long-Lived Assets to beDisposed of*.  The Companyassesses the impairment of goodwill and identifiable intangible assets in accordancewith SFAS No. 121, SFAS No. 141, *BusinessCombinations*and SFAS No. 142, *Goodwilland Other Intangible Assets*.   The Company adopted the provisions of SFAS No. 142 as of January 1,2002.  Please see Note 8 of Notes toCondensed Consolidated Financial Statements for additional information

 

***Fair Value of Financial Instruments***

 

The Company’s financial instruments consist of cash and cashequivalents, short-term investments, long-term investments, equity investments,accounts receivable, accounts payable and debt.  The Company does not have any derivative financialinstruments.  The Company believes thereported carrying amounts of its financial instruments approximates fair value,based upon the maturities and nature of its cash equivalents, short-terminvestments, long-term investments, accounts receivable and payable, and basedon the current rates available to it on similar debt issues.  Additionally, the Company periodicallyevaluates the carrying value of all of its investments for other-than-temporaryimpairment when events and circumstances indicate that the book value of anasset may not be recoverable.  If suchassets are considered to be impaired, the impairment to be recognized ismeasured by the amounts by which the carrying amount exceeds its fair marketvalue.  The Company’s equity investmentsare comprised 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 months ended June 30, 2002, the Company recorded $1.3million in impairment charges on its cost method equity investments.  During the three months ended June 30, 2001,the Company recorded $1.9 million in impairment charges on its cost methodequity investments and $1.3 million in equity in net losses of its equitymethod investee.  During the six monthsended June 30, 2002, the Company recorded $9.8 million in impairment charges onits cost method equity investments. During the six months ended June 30, 2001, the Company recorded $3.1million on its cost method equity investments and $2.4 million in equity in netlosses of its equity method investee. The Company recorded no equity in net losses charges during the threeand six months ended June 30, 2002 as the Company did not have an equity methodinvestment as of and during the three and six months ended June 30, 2002.

 

9

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***New AccountingPronouncements***

 

On June 29,2001, the FASB approved for issuance SFAS No. 141, *Business Combination*s, and SFAS No. 142, *Goodwill and Intangible Assets.*Majorprovisions of these Statements are as follows: all business combinationsinitiated after June 30, 2001 must use the purchase method of accounting; thepooling of interest method of accounting is prohibited except for transactionsinitiated before July 1, 2001; intangible assets acquired in a businesscombination must be recorded separately from goodwill if they arise fromcontractual or other legal rights or are separable from the acquired entity andcan be sold, transferred, licensed, rented or exchanged, either individually oras part of a related contract, asset or liability; goodwill and intangibleassets with indefinite lives are not amortized but are tested for impairment atleast annually using a fair value approach, except in certain circumstances,and whenever there is an impairment indicator; other intangible assets willcontinue to be valued and amortized over their estimated lives except assembledworkforce which, pursuant to SFAS No. 141, will not be recognized as anintangible asset apart from goodwill; in-process research and development willcontinue to be written off immediately; all acquired goodwill must be assignedto reporting units for purposes of impairment testing and segment reporting andeffective January 1, 2002, existing goodwill will no longer be subject toamortization. Upon adoption of SFAS No. 142, on January 1, 2002, the Company nolonger amortizes goodwill. Amortization of goodwill for the three and sixmonths ended June 30, 2001 was $63.9 million and $127.8 million,respectively.  Additionally, uponadoption of SFAS No. 141 and 142 on January 1, 2002, the Company no longeramortizes its non-technology based intangible asset, or assembled workforce.Amortization for the non-technology based intangible asset was $709,000 and$1.4 million for the three and six months ended June 30, 2001, respectively.During fiscal 2001, the Company recorded an impairment charge of $330.2 millionrelated to goodwill and $6.2 million related to other intangible assetsprimarily as part of the Interleaf acquisition that closed on April 14, 2000.Pursuant to SFAS No. 142, the Company is required to test its goodwill forimpairment upon adoption and, if impairment is indicated, record suchimpairment as a cumulative effect of an accounting change. There was noaccounting charge to record upon adoption.

 

In August2001, the FASB issued SFAS No. 144, *Accountingfor the Impairment or Disposal of Long-Lived Asset*s, whichsupersedes both SFAS No. 121, *Accounting forthe Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of*and the accounting and reporting provisions of APB Opinion No. 30, *Reporting the Results of Operations—Reporting theEffects of Disposal of a Segment of a Business, and Extraordinary, Unusual andInfrequently Occurring Events and Transaction*s, for the disposal ofa segment of a business (as previously defined in that Opinion). SFAS No. 144retains the fundamental provisions in SFAS No. 121 for recognizing andmeasuring impairment losses on long-lived assets held for use and long-livedassets to be disposed of by sale, while also resolving significantimplementation issues associated with SFAS No. 121. For example, SFAS No. 144provides guidance on how a long-lived asset that is used as part of a groupshould be evaluated for impairment, establishes criteria for when a long-livedasset is held for sale, and prescribes the accounting for a long-lived assetthat will be disposed of other than by sale. SFAS No. 144 retains the basicprovisions of APB No. 30 on how to present discontinued operations in thestatement of operations but broadens that presentation to include a componentof an entity (rather than a segment of a business). Unlike SFAS No. 121, animpairment assessment under SFAS No. 144 will never result in a write-down ofgoodwill. Rather, goodwill is evaluated for impairment under SFAS No. 142, *Goodwill and Other Intangible Asset*s. TheCompany adopted  SFAS No. 144 as ofJanuary 1, 2002.  There was no materialimpact on the Company’s consolidated results of operations and financialposition as a result of the adoption of SFAS No. 144.

 

In November2001, the staff of the FASB reached consensus on Topic No. D-103, on the topicof *Income Statement Characterization ofReimbursements Received for Out of Pocket Expenses Incurre*d. Thistopic addresses whether reimbursements received for out of pocket expensesincurred should be characterized in the income statement as revenue or as areduction of expenses incurred. The FASB staff concluded that reimbursementsreceived for out of pocket expenses incurred should be characterized as revenuein the income statement. This announcement will be applied in financialreporting periods beginning after December 15, 2001, and comparative financialstatements for prior periods will be reclassified to comply with the guidancein this announcement. The Company is currently recording reimbursement by its customersfor out-of-pocket expenses as a component of services revenue.  Prior to adoption of Topic No. D-103 onJanuary 1, 2002, the Company recorded reimbursement by its customers forout-of-pocket expenses as a reduction to cost of sales. Prior periods have beenreclassified to comply with the guidance of Topic No. D-103.  The effect of this reclassification was toincrease services revenues and increase cost of services for the three and sixmonths ended June 30, 2001 by $590,000 and $2.2 million, respectively.

 

In June 2002,the FASB issued SFAS No. 146, *Accounting forCosts Associated with Exit Activities*, which addresses financialaccounting and reporting for costs associated with exit activities andsupersedes Emerging Issues Task Force ("EITF") 94-3, *Liability Recognition for Certain EmployeeTermination Benefits and Other Costs to Exit an Activity (including*

 

10

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*Certain Costs Incurred in a Restructuring). *SFAS No. 146 requires that a liabilityfor a cost associated with an exit or disposal activity be recognized andmeasured initially at fair value only when the liability is incurred.  This differs from EITF 94-3, which requiredthat a liability for an exit cost be recognized at the date of an entity’scommitment to an exit plan. However, under SFAS No. 146, a liability forone-time termination benefits is recognized when an entity has committed to aplan of termination, provided certain other requirements have been met.  In addition, under SFAS No. 146, a liabilityfor costs to terminate a contract is not recognized until the contract has beenterminated, and a liability for costs that will continue to be incurred under acontract’s remaining term without economic benefit to the entity is recognized whenthe entity ceases to use the right conveyed by the contract.  Statement 146 is effective for exit ordisposal activities initiated after December 31, 2002.  The Company will adopt the provisions ofSFAS No. 146 for restructuring activities initiated after December 31,2002.  The Company does not expect theadoption of Statement 146 will have a material impact on its consolidatedresults of operations or financial position.

 

**Note 2.           SelectiveBalance Sheet Detail**

 

Property andequipmentconsisted of the following (in thousands):

 
|                                           |   | **June 30,  2002** |   | **December 31,  2001** |   |
|------------------------------------------------|--------|--------------------|--------|------------------------|--------|
|                                           |   | **(unaudited)**    |   |                   |   |
| Furniture and fixtures                         |   | $                  | 9,680  |                   | $      | 9,646 |   |
| Computers and software                         |   | 51,437             |   | 59,182                 |   |
| Leasehold improvements                         |   | 20,523             |   | 38,440                 |   |
|                                           |   | 81,640             |   | 107,268                |   |
| Less accumulated depreciation and amortization |   | (45,844            | )      | (40,049                | )      |
|                                           |   | $                  | 35,796 |                   | $      | 67,219 |   |

 

Accrued expensesconsisted of the following (in thousands):

 
|                       |   | **June 30,  2002** |   | **December 31,  2001** |   |
|----------------------------|--------|--------------------|--------|------------------------|--------|
|                       |   | **(unaudited)**    |   |                   |   |
| Employee benefits          |   | $                  | 3,503  |                   | $      | 3,121 |   |
| Commissions and bonuses    |   | 2,791              |   | 5,543                  |   |
| Sales and other taxes      |   | 10,508             |   | 7,620                  |   |
| Restructuring (See Note 7) |   | 19,537             |   | 32,454                 |   |
| Other                      |   | 13,319             |   | 12,974                 |   |
|                       |   | $                  | 49,658 |                   | $      | 61,712 |   |

 

Other noncurrentliabilities consisted of the following (in thousands):

 
|                       |   | **June 30,  2002** |   | **December 31,  2001** |   |
|----------------------------|--------|--------------------|--------|------------------------|--------|
|                       |   | **(unaudited)**    |   |                   |   |
| Restructuring (See Note 7) |   | $                  | 23,552 |                   | $      | 58,335 |   |
| Other                      |   | 1,139              |   | 1,131                  |   |
|                       |   | $                  | 24,691 |                   | $      | 59,466 |   |

 

**Note 3.           CommercialCredit Facilities**

 

The Companyhas various credit facilities with a commercial lender which include term debtin the form of notes payable and a revolving line of credit. In March2002, the Company renewed and amended its revolving credit facility. The amountavailable under the revolving line of credit was increased from $10.0 millionto $25.0 million. Borrowings under the revolving line of credit arecollateralized by all of the Company’s assets and bear interest at the bank’sprime rate (4.75% as of June 30, 2002). At June 30, 2002, $25.0 million wasoutstanding and the revolving credit facility is due to expire in March 2003.There were no outstanding borrowings under the revolving line of credit as ofDecember 31, 2001.  Interest is duemonthly and principal is due at expiration. The amended and restated loan andsecurity agreement requires the Company to maintain specified financialcovenants, all of which the Company was in compliance with as of June 30, 2002.As of June 30, 2002 and December 31, 2001, outstanding term debtborrowings were approximately $3.4 million and $3.9 million, respectively andconsist of two borrowings.  Borrowingsbear interest at the bank’s prime rate (4.75% as of June 30, 2002 and December31, 2001) and prime

 

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rate plus 1.25% (6.0% as ofJune 30, 2002 and December 31, 2001). Principal and interest are due inconsecutive monthly payments through maturity based on the terms of thefacilities. Principal payments of $977,000 are due annually from 2000 through2004, $611,000 due in 2005, and a final payment of $357,000 due in 2006. 

 

Commitmentstotaling $27.4 million and $25.0 million in the form of standby letters ofcredit were issued on the Company's behalf from financial institutions as ofJune 30, 2002 and December 31, 2001 in favor of the Company’s various landlordsto secure obligations under the Company’s facility leases. The commercialcredit facilities include covenants which impose certain restrictions on thepayment of dividends and other distributions and require the Company to meet afinancial covenant to maintain certain levels of available cash, cashequivalents, short-term investments and long-term investments (excluding equityinvestments). Borrowings are collateralized by a security interest insubstantially all of the Company’s owned assets.

** **

**Note 4.           Commitmentsand Contingencies**

 

On February 15,2002, BroadVision and Hewlett-Packard signed an agreement, which terminatedHewlett-Packard’s rights to resell BroadVision software effective February 15,2002.  In the event BroadVision becomesinsolvent, files a petition for relief under the United States Bankruptcy Code,or materially breaches the agreement, Hewlett-Packard will have rights to alimited term license for BroadVision’s business-to-business customer portalssoftware products and a limited use license for BroadVision’s One-to-OneEnterprise software product. Hewlett-Packard’s license will be limited in term until such time asHewlett-Packard has received monies for sale of the products up to a maximum of$12,000,000.  In addition, the Companywill pay back prepay payments received in prior periods totaling approximately$2.4 million.  This amount was includedin Unearned Revenue as of December 31, 2001, and this amount was reclassifiedto Accrued Liabilities in fiscal 2002. The amount due is payable in quarterly installments by December 31,2003.

 

***Leases***

* *

The Company leasesits headquarters facility and its other facilities under noncancelableoperating lease agreements expiring through the year 2013.  Under the terms of the agreements, theCompany is required to pay property taxes, insurance and normal maintenancecosts.

 

A summary offuture minimum lease payments is as follows (in thousands); properties that arepart of the restructuring have been excluded:

 
| **Year Ended December 31,** |   | **Operating  leases** | ** ** |
|----------------------------------|--------|-----------------------|------------|
|                             |   |                  |       |
| 2002                             |   | $                     | 3,560      |   |
| 2003                             |   | 5,081                 |       |
| 2004                             |   | 6,748                 |       |
| 2005                             |   | 12,054                |       |
| 2006                             |   | 12,647                |       |
| 2007 and  thereafter             |   | 99,159                |       |
| Total  minimum lease payments    |   | $                     | 139,249    |   |

 

The Company’sfuture minimum lease commitments have not been reduced by approximately $26.4million of minimum sublease rentals due in the future under noncancelablesubleases related to excess lease facilities. In addition, the Company's future minimum lease commitments includelease commitments for excess facilities that have been accrued as arestructuring liability.  Refer to Note7 of Notes to Condensed Consolidated Financial Statements for additionalinformation.

 

Capitalexpenditures were $1.1 million and $47.5 million for the six months ended June30, 2002 and 2001, respectively.  TheCompany’s capital expenditures consisted of purchases of operating resources tomanage its operations and included computer hardware and software,communications equipments, office furniture and fixtures and leaseholdimprovements.  The Company has no othersignificant capital commitments.  TheCompany has consolidated various facilities as part of its restructuringplan.  Please refer to Note 7 foradditional information.

 

***Standby Letter of Credit Commitments***

 

As of June 30,2002, the Company had $27.4 million of outstanding commitments in the form ofstandby letters of credit in favor of the Company’s various landlords to secureobligations under the Company’s facility leases.

 

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***Legal Proceedings***

 

In April 2001, theCompany filed a Form 8-K with the Securities and Exchange Commission reportingthat several purported class action lawsuits had been filed against the Companyand certain of its officers and directors. In each of the lawsuits, theplaintiffs seek to assert claims on behalf of a class of all persons whopurchased securities of BroadVision between January 26, 2001 and April 2, 2001.The complaints allege that BroadVision and the individual defendants violatedfederal securities laws in connection with its reporting of financial resultsduring such period. The lawsuits have been consolidated into a single action,as is customary in such cases. On November 5, 2001, BroadVision and theindividual defendants filed motions to dismiss the consolidated complaint. OnFebruary 22, 2002, the Court granted these motions, dismissed the consolidatedcomplaint without prejudice and ordered the lead plaintiff to file an amendedcomplaint within 30 days. On March 25, 2002, the plaintiff filed its SecondAmended Consolidated Complaint, which added claims for breach of fiduciary dutyand named members of the Company’s board of directors as additional defendants.All defendants filed motions to dismiss the Second Amended ConsolidatedComplaint on May 10, 2002.  The hearingon this motion to dismiss has been scheduled for  August 30, 2002.  TheCompany believes that the lawsuits are without merit and continues to defenditself vigorously.

 

On June 7,2001, Verity, Inc. filed suit against the Company alleging copyrightinfringement, breach of contract, unfair competition and other claims. TheCompany has answered the complaint denying all allegations and isdefending itself vigorously.

 

On July 18, 2002,Avalon Partners, Inc., doing business as Cresa Partners, filed a suit againstthe Company claiming broker commissions related to the Company’s terminationand restructuring of certain facilities leases associated with the Company’srestructuring plans taken during the second quarter of 2002.  The Company is currently evaluating theclaims and expects to defend itself vigorously and will be answering thecomplaint by August 17, 2002.

 

The Company isalso subject to various other claims and legal actions arising in the ordinarycourse of business. In the opinion of management, after consultation with legalcounsel, the ultimate disposition of these matters is not expected to have amaterial effect on the Company’s business, financial condition or results ofoperations. Although management currently believes that the outcome of otheroutstanding legal proceedings, claims and litigation involving the Company willnot have a material adverse effect on its business, results of operations orfinancial condition, litigation is inherently uncertain, and there can be noassurance that existing or future litigation will not have a material adverseeffect on the Company’s business, results of operations or financial condition.

 

**Note 5.           Geographic,Segment and Significant Customer Information**

 

The Companyoperates in one segment, electronic business commerce solutions.  The Company’s reportable segment includesthe Company’s facilities in North and South America (Americas), Europe and AsiaPacific and The Middle East (Asia/Pacific). The Company’s chief operating decision maker is considered to theCompany’s Chief Executive Officer ("CEO").  The CEO reviews financial information presented on a consolidatedbasis accompanied by disaggregated information about revenues by geographicregion and by product for purposes of making operating decisions and assessingfinancial performance.

 

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

 
|                          |   | **Three Months  Ended  June 30,** |   | **Six Months  Ended  June 30,** |   |
|-------------------------------|--------|----------------------------------------|--------|--------------------------------------|--------|
|                          |   | **2002**                               |   | **2001**                             |   | **2002** |   | **2001** |   |
| Software licenses:            |   |                                   |   |                                 |   |   |   |   |   |
| One-To-One Enterprise         |   | $                                      | 1,360  |                                 | $      | 1,641 |   | $ | 1,893 |   | $ | 4,113 |   |
| One-To-One Packaged Solutions |   | 8,949                                  |   | 19,388                               |   | 16,595 |   | 60,056 |   |
| Services                      |   | 9,752                                  |   | 21,936                               |   | 21,440 |   | 55,045 |   |
| Maintenance                   |   | 9,358                                  |   | 15,070                               |   | 19,946 |   | 31,550 |   |
| Total Revenues                |   | $                                      | 29,419 |                                 | $      | 58,035 |   | $ | 59,874 |   | $ | 150,764 |   |
|                          |   |                                   |   |                                 |   |   |   |   |   |
| Revenues:                     |   |                                   |   |                                 |   |   |   |   |   |
| Americas                      |   | $                                      | 18,852 |                                 | $      | 36,672 |   | $ | 37,054 |   | $ | 97,583 |   |
| Europe                        |   | 8,998                                  |   | 16,553                               |   | 19,841 |   | 40,749 |   |
| Asia/Pacific                  |   | 1,569                                  |   | 4,810                                |   | 2,979 |   | 12,432 |   |
| Total Company                 |   | $                                      | 29,419 |                                 | $      | 58,035 |   | $ | 59,874 |   | $ | 150,764 |   |

 
|                              |   | **June 30,  2002** |    | **December 31,  2001** |   |
|-----------------------------------|--------|--------------------|---------|------------------------|--------|
|                              |   | **(unaudited)**    |    |                   |   |
| Long-lived assets (in thousands): |   |               |    |                   |   |
| Americas                          |   | $                  | 96,936  |                   | $      | 131,874 |   |
| Europe                            |   | 2,134              |    | 3,547                  |   |
| Asia/Pacific                      |   | 1,395              |    | 2,425                  |   |
| Total Company                     |   | $                  | 100,465 |                   | $      | 137,846 |   |

 

One-to-OneEnterprise revenues represent revenues from sales of the Company’s One-to-OneEnterprise product sold on a stand-alone basis.  One-to-One Packaged Solutions revenues represent revenues derivedfrom sales of the Company’s products excluding One-to-One Enterprise sales on astand-alone basis.  During the three andsix months ended June 30, 2002 no single customer accounted for more than 10%of the Company’s total revenues.  Duringthe three months ended June 30, 2001, no single customer accounted for morethan 10% of the Company’s total revenues. During the six months ended June 30, 2001, one customer accounted formore than 10% of the Company’s total revenues.

 

**Note 6.           Acquisitionsand Dispositions**

 

***E-Publishing Corporation***

 

On April 30, 2001and May 15, 2001, the Company entered into agreements with third parties tosell certain assets and liabilities of E-Publishing Corporation, a wholly-ownedsubsidiary of the Company, which the Company acquired as part of theacquisition of Interleaf in April 2000. The Company recorded a loss on sale of assets of approximately $1.3million.  The loss was included in otherexpense in the Company’s second quarter of 2001 Condensed ConsolidatedStatements of Operations.

*** ***

***Keyeon***

 

On June 29, 2001,the Company completed its acquisition of Keyeon, LLC ("Keyeon"),formerly a corporate joint venture in which the Company held an interest ofapproximately 36%.  The acquisition wascompleted primarily to obtain technology to extend functionality of theCompany’s existing products.  Asconsideration for the remaining interest in Keyeon, the Company issued 301,475shares of its common stock valued at $13.6 million to the other former participantsin the joint venture which resulted in the Company owning 100% of theoutstanding shares of Keyeon.  Theacquisition was accounted for as a purchase. The acquired assets and assumed liabilities, and the related results ofoperations, are included in the consolidated financial statements of theCompany from the date of acquisition. The purchase price allocation is as follows (in thousands):

 

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

 

At June 30, 2002,accumulated amortization related to goodwill acquired in the Keyeon acquisitiontotaled $246,000.  Amortization ofgoodwill ceased as of December 31, 2001. As discussed in Note 1, the Company will no longer amortize goodwill inaccordance with SFAS No. 142 but will periodically test for impairment underthe provisions of SFAS No. 142.  TheCompany estimated that $6.4 million of the purchase price for Keyeonrepresented acquired in-process technology that had not yet reachedtechnological feasibility and had no alternative future use.  Accordingly, this amount was immediatelycharged to expense in the Consolidated Statements of Operations during thefourth quarter of 2001.  The incomeapproach methodology was used to value the acquired in-process technology.  Under the income approach, fair valuereflects the present value of the projected free cash flows that will begenerated by the products, incorporating the acquired technologies underdevelopment, assuming they will be successfully completed.  These cash flows are discounted at a rateappropriate for the risk of the asset. The rate of return depends upon the stage of completion which wasestimated at fifty percent.  An overallafter-tax discount rate of thirty percent was applied to the cash flowsexpected to be generated by the products incorporating technology currentlyunder development.

 

The followingsummary, prepared on an unaudited pro forma basis, reflects the condensedconsolidated results of operations for the six month period ended June 30, 2001assuming Keyeon had been acquired at the beginning of the period presented (inthousands, except per share data):

 

 

|                                 |   | **For the six  months ended  June 30,  2001** | ** ** |
|--------------------------------------|--------|-----------------------------------------------|------------|
| Revenue                              |   | $                                             | 150,764    |   |
| Net loss                             |   | (352,317                                      | )          |
| Basic and diluted net loss per share |   | $                                             | (11.61     | ) |

 

The pro formaresults 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.

 

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**Note 7.           RestructuringCharges and Asset Impairments**

 

During the first quarter and second quarter of 2002, the Companyapproved restructuring plans to, among other things, reduce its workforce andconsolidate facilities.  Theserestructuring and asset impairment charges were taken to align the Company’scost structure with changing market conditions and to create a more efficientorganization.  A pre-tax charge of $34.6million was recorded in the second quarter of 2002 and a pre-tax charge of $5.4million was recorded in the first quarter of 2002 to provide for these actionsand other related items.  The Companyrecorded the low-end of a range of assumptions modeled for the restructuringcharges, in accordance with SFAS No. 5, *Accountingfor Contingencies*.  Thehigh-end of the range was estimated at approximately $35.3 million for thesecond quarter charge and $6.3 million for the first quarter charge.  Adjustments to the restructuring reserveswill be made in future periods, if necessary, based upon the then currentactual events and circumstances. The following table summarizes chargesrecorded during the first and second quarters of 2002 for exit activities andasset write-downs (in thousands):

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

 

The nature of the charges summarized above is as follows:

 

Severance and benefits — The Company recorded charges of approximately$3.8 million and $1.1 million during the second quarter and first quarter of2002, respectively, related to severance benefits to terminated employees inthe United States and various international locations.  Costs incurred include severance, payrolltaxes and COBRA benefits.  Included inthe $3.8 million is approximately $107,000 of non-cash charges.  These non-charges represent a one-timecompensation charge taken as a result of granting certain terminated employeesextended vesting of stock options beyond the standard vesting schedule forterminated employees.  The compensationcharge was calculated using the Black-Scholes option pricing model.  Approximately $817,000 of severance andbenefits related costs remained accrued as of December 31, 2001 as a result ofthe Company’s 2001 restructuring plan. Approximately $2.6 million of severance and benefits costs had been paidout during the six months ended June 30, 2002 and the remaining $3.0 million ofseverance, payroll taxes and COBRA benefits is expected to be paid in full byJune 30, 2003.  The Company'srestructuring plan included plans to terminate approximately 265 employees inNorth and South America and approximately 90 employees throughout Europe andAsia/Pacific during the first three quarters of fiscal 2002 impacting alldepartments within the Company. Approximately 335 employees were terminated during the six months endedJune 30, 2002.  As a result of thesereductions, the Company expects annual salaries savings of approximately $22.5million.

 

Facilities/Excess Assets — During the second and first quarters of2002, the Company revised its estimates and expectations with respect to itsfacilities disposition efforts due to further consolidation and abandonment ofadditional facilities and to account for changes in estimates used in theCompany’s 2001 restructuring plan based upon actual events andcircumstances.  Total lease terminationcosts include the impairment of related assets, remaining lease liabilities andbrokerage fees offset by estimated sublease income.  The estimated costs of abandoning these leased facilities,including estimated sublease income, were based on market information analysesprovided by a commercial real estate brokerage firm retained by theCompany.  Based on the factors above, afacilities/excess assets charge of $30.5 million and $4.1 million was recordedin the second quarter and first quarter, respectively, of 2002 and includesnon-cash asset impairment charges of approximately $17.2 million during thesecond quarter and $1.0 million during the first quarter.

 

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Approximately $89.9 million of facilities related costs remainedaccrued as of December 31, 2001 as a result of the Company’s 2001 restructuringplan.  Net cash payments through June30, 2002 related to abandoned facilities amounted to $66.4 million.  Actual future cash requirements may differmaterially from the accrual at June 30, 2002, particularly if actual subleaseincome is significantly different from historical estimates.  As of June 30, 2002, $39.8 million of leasetermination costs, net of anticipated sublease income, is expected to be paidout by the end of the first quarter of fiscal 2010.  The Company expects to pay out approximately $16.6 million overthe next twelve months and the remaining $23.2 million from July 1, 2003through the first quarter of fiscal 2010. The $16.6 million and $23.2 million include approximately $47.8 millionof estimated sublease income of which approximately $21.4 million representssublease agreements yet to be negotiated.

 

Other — The Company recorded charges of approximately $320,000 and$155,000 during the second quarter and first quarter of 2002, respectively, forvarious incremental costs incurred as a direct result of the restructuringplan.  The remaining reserve balance of$223,000 is expected to be paid in full by the end of the fourth quarter of2002.

 

**Note 8.           Goodwilland Other Intangible Assets**

 

Goodwill and other intangibles consist of the following (in thousands):

 
|                                 |   | **June 30,  2002** | ** ** | **December 31,  2001** | ** ** |
|--------------------------------------|--------|--------------------|------------|------------------------|------------|
|                                 |   | **(unaudited)**    |       |                   |       |
| Goodwill                             |   | $                  | 437,206    |                   | $          | 437,206 |   |
| Completed  technology                |   | 15,236             |       | 15,236                 |       |
| Assembled  workforce                 |   | 7,496              |       | 7,496                  |       |
|                                 |   | 459,938            |       | 459,938                |       |
| Less:                                |   |               |       |                   |       |
| Accumulated  amortization            |   | (400,844           | )          | (399,071               | )          |
| Goodwill and  other intangibles, net |   | $                  | 59,094     |                   | $          | 60,867 |   |

 

The Company periodically assesses theimpairment of long-lived assets in accordance with the provisions of SFAS No.121, *Accounting for the Impairment ofLong-Lived Assets and for Long-Lived Assets to be Disposed of*.  The Company assesses the impairment ofgoodwill and identifiable intangible assets in accordance with SFAS No. 121,SFAS No. 141, *Business Combinations*andSFAS No. 142, *Goodwill and Other IntangibleAssets*.    The Companyadopted the provisions of SFAS No. 142 as of January 1, 2002.  The Company determines that an impairmentoccurred when the asset’s undiscounted future cash flows are less than thecarrying amount of the asset. The Company calculates the impairment loss as theamount that the carrying value of the asset exceeds the discounted future cashflows. SFAS No. 142 requires that goodwill and intangible assets with indefiniteuseful lives no longer be amortized, but instead be tested for impairment atleast annually in accordance with the provisions of SFAS No. 142.  SFAS No. 142 also requires that intangibleassets with definite useful lives be amortized over their respective estimateduseful lives to their estimated residual values, and reviewed for impairment inaccordance with SFAS No. 121.  Goodwillis tested for impairment at the reporting unit level.  Each reporting unit is required to be tested for an indicator ofgoodwill impairment within six months of adoption of SFAS No. 142 and testedfor impairment by no later than the end of the year of adoption.  The fair value of each reporting unit iscompared to the carrying amount of the reporting unit.  To the extent the carrying amount of areporting unit exceeds the fair value of each reporting unit, an indicationexists that the reporting unit goodwill may be impaired and the Company mustthen compare the implied fair value of the reporting unit goodwill with the carryingamount of the reporting unit goodwill, both of which would be measured as ofthe date of adoption.  Useful lives ofamortizable intangible assets are required to be reevaluated annually absent atriggering event, with any changes in estimated useful lives being accountedfor prospectively over the revised remaining useful life.    Nonamortizable intangible assets arereviewed annually for impairment and more frequently if events or circumstancesindicate that the asset may be impaired. Goodwill is tested for impairment annually or sooner if an event orcircumstance indicates that it is more likely than not that an impairment losshas been incurred.  Examples of suchevents or circumstances include, but are not limited to adverse changes inlegal factors, business climate, or regulatory environment, unanticipatedcompetition, loss of key personnel or a more-likely-than-not expectation that areporting unit or a significant portion of a reporting unit will be sold orotherwise disposed of.

 

When the Company determines that the carryingvalue of goodwill may not be recoverable based upon the existence of one ormore of the above indicators of impairment, the Company measures any impairmentbased on a

 

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projected discounted cash flowsusing a discount rate commensurate with the risk inherent in its currentbusiness model.  During the third quarter of fiscal 2001, inaccordance with SFAS No. 121 and APB Opinion No. 17 and prior to the adoptionof SFAS No. 142, the Company performed an impairment analysis of identifiable intangible assets andgoodwill recorded in connection with its various acquisitions.  The impairment assessment was performedprimarily as a result of the significant decline in the Company’s stock price,the net book value of assets significantly exceeding the Company’s marketcapitalization, the underperformance of the Interleaf acquisition relative toprojections, and the overall decline in industry growth rates which havenegatively impacted the Company’s revenues and forecasted revenue growth ratewhich indicate that this trend might continue for an indefinite period.  Also, current economic indicators forecastthat this trend may continue for an indefinite period.  SFAS No. 121 and APB Opinion No. 17 requirethat goodwill and other intangible assets be reviewed for impairment wheneverevents or changes in circumstances indicate that the carrying amount may not berecoverable.  The Company recorded acharge of $6.2 million related to specific intangible assets.  Because the Company had integrated theacquired companies’ operations, the Company performed the test for impairmentof goodwill at an overall enterprise level. The Company’s policy is to use a discounted cash flow approach.  This approach includes analyzing estimatedfuture cash flows over the remaining life of the goodwill as well as adisposition value at the end of the life of the goodwill.  The resulting value was then compared to thecarrying value of stockholders’ equity and the difference represents goodwilland other intangible assets impairment measured on a discounted basis.  Accordingly, the Company recorded animpairment charge of $330.2 million during the 2001 fiscal year for goodwill.  Todetermine other than temporary impairment for identifiable intangibles, the sumof the current undiscounted cash flows was compared to the current carryingvalue.  If the undiscounted cash flowswere greater than or equal to the current carrying value the asset is deemednot to be impaired.  If the undiscountedcash flows are less than the current carrying value then the asset is deemedimpaired.  A discounted cash flowanalysis is then prepared and the difference between the carrying value and thediscounted cash flows represents the charge taken in accordance with SFAS No.121.  To determine the impairment lossfor goodwill, the Company determined the fair value using a business enterprisemethodology which includes a terminal value assigned to the entity.  This value is then compared to the carryingvalue of stockholder’s equity, and if less, the difference represents theimpairment to be recorded.  Theassumptions supporting the estimated future cash flows, including the estimatedterminal values, reflect management’s best estimates.  The discount rate was based upon the weighted average cost ofcapital for comparable companies.

 

It isreasonably possible that the estimates and assumptions used under ourassessment may change in the short term, resulting in the need to furtherwrite-down the goodwilland other long-lived assets.  TheCompany assessed the carrying value of goodwill and other intangible assetsduring the fourth quarter of 2001 and first and second quarters of 2002 and nofurther impairment was deemed necessary.

 

Uponadoption of SFAS No. 142, on January 1, 2002, the Company no longer amortizesgoodwill.  The Company has identifiedthe assembled workforce as an intangible asset which does not meet the criteriaof recognizable intangible asset as defined by SFAS No. 142.  The remaining other intangible assets arebeing amortized on a straight-line basis over their remaining useful life of 9months as of June 30, 2002, subject to certain effects of the new accountingpronouncements described in Note 1. Amortization expense is estimated to be $3.5 million in 2002 and$887,000 in 2003.  The Company analyzedits goodwill and other intangible assets as of December 31, 2001, March 31,2002, and June 30, 2002 and determined that there was no additional impairment.

 

**Note 9.           DeferredTax Assets**

 

The Company analyzes its deferred tax assetswith regards to potential realization. The Company has established a valuation allowance on its deferred taxassets to the extent that management has determined that it is more likely thannot that some portion or all of the deferred tax asset will not be realizedbased upon the uncertainty of their realization.  The Company has considered estimated future taxable income andongoing prudent and feasible tax planning strategies in assessing the amount ofthe valuation allowance.  Based uponthis analysis, the Company recorded a valuation allowance for its deferred taxassets during the three months ended June 30, 2002, which increased to 100% itsvaluation allowance and resulted in a charge of $6.3 million included inprovision for income taxes in the Company’s Condensed Consolidated Statementsof Operations and Comprehensive Loss.

 

**Note 10.         Subsequent Events**

 

On July 24, 2002 the Company announced thatits Board of Directors approved a one-for-nine reverse split of the Company’sCommon Stock.  The reverse split waseffective as of 8:00 p.m. Eastern Daylight Time on July 29, 2002, and each nineshares of outstanding common stock of the Company automatically converted intoone share of common stock.  TheCompany’s common stock began trading on a post-split basis at the opening oftrading on the Nasdaq National Market on July 30, 2002.  From July 30, 2002 to August 27, 2002,BroadVision’s common stock will trade under

 

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the symbol"BVSND".  Thereafter, theCompany’s common stock will resume trading under its current symbol"BVSN".  All per share amountsand outstanding shares, including common stock equivalents (stock options),have been retroactively restated in the accompanying condensed consolidatedfinancial statements and notes to condensed consolidated financial statementsfor all periods presented to reflect the reverse stock split.

 

On July 18, 2002, Avalon Partners, Inc., doingbusiness as Cresa Partners, filed a suit against the Company claiming brokercommissions related to the Company’s termination and restructuring of certainfacilities leases associated with the Company’s restructuring plans takenduring the second quarter of 2002.  TheCompany is currently evaluating the claims and expects to defend itselfvigorously and will be answering the complaint by August 17, 2002.

 

On July 24, 2002 the Company announced plansof an additional reduction of the Company’s workforce to occur during the thirdquarter of 2002.  As a result of thisplanned reduction, additional facility consolidations are expected in the thirdquarter of 2002.  The Company estimatesthat it will record a restructuring charge in the third quarter of 2002 in therange of $30.0 million to $40.0 million as a result of these actions.

 

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

*** ***

*Except for thehistorical information*contained*herein, the following discussion containsforward-looking statements that involve risks and uncertainties. The Company’sactual results could differ significantly from those discussed herein. Factorsthat could cause or contribute to such differences include, but are not limitedto, those discussed herein and in the Company’s annual report on Form 10-K andother documents filed with the Securities and Exchange Commission. Any suchforward–looking statements speak only as of the date such statements aremade.*

 

***Overview***

 

We develop and sell a comprehensive suite of enterprise business portalapplications and technology that enable enterprise self-service for conductinginteractions, transactions and services in a personalized model.  Our enterprise business portal applications enablecompanies to organize dynamic profiles of web and wireless users fromvolunteered data and observed behavior, deliver highly specialized content inresponse to these profiles and securely execute transactions.  As of June 30, 2002 more than 1,200 companiesand government entities around the globe use our applications to enable theirenterprise self-service initiatives. They are leveraging the web and wirelesstechnology in conjunction with our software to unify and extend their legacyapplications, information and business processes to better serve theiremployees, partners and customers in a personalized and collaborative way.

 

Business managers are able to modify business rules and content in realtime, offering a personalized experience to each visitor. Because of the openarchitecture of our applications, they are easily integrated with ourcustomers’ existing systems and easily expanded as our customers’ needs andbusinesses grow.

 

We believe our products enhance our customers' revenue opportunities byenabling them to establish more effective and efficient "one-to-one"relationships with their customers and business partners. Web and wirelessusers are engaged by highly personalized real-time interactions, are able totransact business securely and are encouraged to remain online and make returnvisits. Our applications also improve the cost-effectiveness of one-to-onerelationship management by enabling non-technical managers to modify businessrules and content in real time and by helping to reduce costs of customeracquisition and retention, business development and technical support as wellas employee workplace initiatives. In addition, the packaged solution nature ofour products decreases our customers’ time to deployment and allows them toeasily manage and expand their web and wireless application usage in acost-effective manner.

 

As of June 30, 2002, we had developed key strategic business allianceswith over 75 system integration, design, consulting, and other servicesorganizations throughout the world.  Ourplatform alliances are partnerships formed to integrate technologies to drivebusiness growth.  Additionally, we havedeveloped key technology partnerships with leading web- and wireless-focusedcompanies in areas complementary to our solutions, such as data analysis andreporting, enterprise application integration, enterprise web management,payment processing, and Extensible Markup Language.  These technology partnerships enhance our ability to baseproducts on industry standards and to take advantage of current and emergingtechnologies.

 

We sell our products and services worldwide through a direct salesforce and independent distributors, value-added resellers ("VARs"),and application service providers ("ASPs"). In addition, our salesare promoted through independent professional consulting organizations, knownas systems integrators.  We haveoperations in North America, South America, Europe, and Asia/Pacific.  We provide services through our

 

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BroadVision Global Services("BVGS") organization and indirectly through distributors, VARs,ASPs, and system integrators.

*** ***

***Recent Events***

 

We experienced a general downturn in the economy, our industry and ourbusiness, since the beginning of 2001. This downturn is likely to continue inthe future and has had and could continue to have an impact on our futurefinancial results. As discussed in Note 7 of Notes to Condensed ConsolidatedFinancial Statements, we have recorded significant restructuring charges inconnection with our reduction in workforce and abandonment of certain operatingfacilities as part of our program to restructure our operations and relatedfacilities initiated in the second quarter of fiscal 2001.  A pre-tax charge of $153.3 million wasrecorded during 2001 and $34.6 million and $5.4 million was recorded during thethree months ended June 30, 2002 and March 31, 2002, respectively, to providefor these actions and other related items. Costs for the abandoned facilitieswere estimated to include the impairment of assets, remaining lease liabilitiesand brokerage fees partially offset by estimated sublease income. Estimatesrelated to sublease costs and income are based on assumptions regarding theperiod required to locate and contract with suitable sublesees and subleaserates which were based upon market trend information analyses. Adjustments tothe restructuring reserve will be made in future periods, if necessary, basedupon the then current actual events and circumstances.  In July, 2002, the Company announced plansfor a further reduction in force to occur in the third quarter of 2002.  As a result of this planned reduction,additional facility consolidations are expected in the third quarter of 2002.  The Company estimates that it will record arestructuring charge in the range of $30.0 million to $40.0 million during thethird quarter of 2002

 

On May 9, 2002, the Company and Pacific Shores Development LLC("PacShores") entered into (i) the First Amendment to Lease (LeaseTermination and Mutual General Release Agreement), made effective as of April29, 2002 (the "Buildings 4 and 5 Termination Agreement") and (ii) theFirst Amendment to Lease made effective as of April 29, 2002 (the"Building 6 Amendment"). Under the Buildings 4 and 5 Termination Agreement, the Triple NetBuilding Lease dated April 12, 2000 between PacShores, as Lessor, and theCompany, as Lessee, for Premises at Pacific Shores Center, Building 4, RedwoodCity, California and the Triple Net Building Lease dated February 16, 2000between PacShores, as Lessor, and the Company, as Lessee, for Premises atPacific Shores Center, Building 5, Redwood City, California, wereterminated.  In conjunction with thetermination, PacShores will release all security deposits held by it relatingto those premises and we paid to PacShores a total of $45.0 million as atermination fee (the "Termination Fee").  Under the Building 6 Amendment, the parties release each otherfrom all claims and we agreed to provide an additional $3.5 million as securitydeposit in the form of letters of credit. This letter of credit is included as restricted cash and investments inour Condensed Consolidated Balance Sheet as of June 30, 2002.  We paid the Termination Fee in full duringthe second quarter of 2002 by payment of approximately $20.0 million fromexisting cash and investments and by drawing down approximately $25.0 millionfrom our line of credit.  The $25.0million line of credit is due in March of 2003.  On July 18, 2002, Avalon Partners, Inc., doing business asCresa Partners, filed a suit against us claiming broker commissions related toour termination and restructuring of certain facilities leases associated withour restructuring plans taken during the second quarter of 2002.  We are currently evaluating the claims andexpect to defend ourselves vigorously and will be answering the complaint byAugust 17, 2002.

 

During the first quarter of 2002 we engaged a third party firm toconduct a physical inventory of our computer hardware assets located in NorthAmerica.  We conducted an internalphysical inventory on computer hardware assets located outside of NorthAmerica.  The objective of the physicalinventory was to verify the amount and location of our computer hardware.  As a result of the findings of the physicalinventory and related reconciliation with our asset records, we recorded anasset impairment charge of approximately $2.3 million net book value related tocomputer hardware.

 

On April 8, 2002, we filed a Form 8-K with the Securities and ExchangeCommission to report that we had received notice from our independent publicaccountant, Arthur Andersen LLP, of its resignation as our auditor as a resultof our plans to change independent public accountants for the fiscal yearending December 31, 2002 due to an anticipated future non-audit businessrelationship between the two companies.

 

On May 13, 2002, we filed a Form 8-K with the Securities and ExchangeCommission to report our selection of our independent public accountants, BDOSeidman, LLP, as auditors for the fiscal year ending December 31, 2002.

 

Comparisons of financial performance made in this document are notnecessarily indicative of future performance.

 

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***Critical Accounting Policies***

 

BroadVisionmanagement’s discussion and analysis of our financial condition and results ofoperations are based upon our consolidated financial statements, which havebeen prepared in accordance with accounting principles generally accepted inthe United States. In preparing these financial statements, we are required tomake estimates and judgments that affect the reported amounts of assets,liabilities, revenues, and expenses, and related disclosures of contingentassets and liabilities. On an on-going basis, we evaluate our estimates,including those related to doubtful accounts, product returns, investments,goodwill and intangible assets, income taxes, restructuring, as well ascontingencies and litigation. We base our estimates on historical experienceand on various other assumptions that we believe are reasonable, the results ofwhich form the basis for making judgments about the carrying values of assetsand liabilities that are not readily apparent from other sources. Actualresults may differ from these estimates using different assumptions orconditions. We believe the following critical accounting policies reflect themore significant judgments and estimates used in the preparation of ourconsolidated financial statements.

 

**RevenueRecognition**

 

*Overvie*w—Our revenues are derived from fees for licenses of our softwareproducts, maintenance, consulting services and customer training. Software isgenerally licensed for development use and for its use in deployment of thecustomer’s website. Fees for deployment licenses are generally based on the number of persons who register on a customer’swebsite using our software. Our revenue recognition policies are in accordancewith Statement of Position (‘‘SOP’’) No. 97-2, *SoftwareRevenue Recogniti*on, as amended; SOP No. 98-9, *Software Revenue Recognition, With Respect to CertainTransactions*and the Securities and Exchange Commission’s StaffAccounting Bulletin No. 101, *RevenueRecognition in Financial Statemen*ts.

 

*Software License Revenu*e—We license our products through our directsales force and indirectly through resellers. In general, software licenserevenues are recognized when a non-cancelable license agreement has been signedand the customer acknowledges an unconditional obligation to pay, the softwareproduct has been delivered, there are no uncertainties surrounding productacceptance, the fees are fixed and determinable and collection is consideredprobable. Delivery is considered to have occurred when title and risk of losshave been transferred to the customer, which generally occurs when mediacontaining the licensed programs is provided to a common carrier.  In case of electronic delivery, deliveryoccurs when the customer is given access to the licensed programs.  If collectibility is not consideredprobable, revenue is recognizedwhen the fee is collected. Subscription-based license revenues are recognizedratably over the subscription period.

 

Werecognize revenue using the residual method pursuant to the requirements of SOPNo. 97-2, as amended by SOP No. 98-9.  Revenuesrecognized from multiple-element software arrangements are allocated to eachelement of the arrangement based on the fair values of the elements, such aslicenses for software products, maintenance, consulting services or customertraining. The determination of fair value is based on objective evidence, whichis specific to us. We limit our assessment of objective evidence for eachelement to either the price charged when the same element is sold separately or the price establishedby management having the relevant authority to do so, for an element not yetsold separately. If evidence of fair value of all undelivered elements existsbut evidence does not exist for one or more delivered elements, then revenue isrecognized under the residual method. Under the residual method, the fair value of the undelivered elements isdeferred and the remaining portion of the arrangement fee is recognized asrevenue.

 

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 recognition but cash or other consideration has not beenreceived from the customer.

 

*Services Revenu*e—Consulting services revenues and customertraining revenues are recognized as such services are performed. Maintenancerevenues, which include revenues bundled with software license agreements thatentitle the customers to technical support and future unspecified enhancementsto our products, are deferred and recognized ratably over the related agreementperiod, generally twelve months. Our professional services which consist of consulting, maintenance and trainingare delivered through BVGS.  Servicesthat we provide are not essential to the functionality of our software. Thisgroup provides consulting services, manages projects and client relationships,manages the needs of our partner community, provides training-related servicesto employees, customers and partners, and also provides software maintenanceservices, including technical support, to our customers and partners. We recordreimbursement by our customers for out-of-pocket expenses as a component of servicesrevenue.

 

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**Allowancesand Reserves**

 

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

 

**ImpairmentAssessments**

 

Werecord an investment impairment charge when we believe an investment hasexperienced a decline in value that is other than temporary. Future adversechanges in market conditions or poor operating results of underlyinginvestments could result in additional losses or an inability to recover thecarrying value of our investments that may not be reflected in our investments’current carrying value, thereby possibly requiring an impairment charge in thefuture. We periodically assess the value of goodwill and intangible assets toensure that the carrying amount of the assets are recoverable. It is possiblethat the estimates and assumptions used in our assessment may change in theshort term, which would result in further impairments of goodwill andintangible assets. For long-lived assets, accounting standards dictate thatassets become impaired when the undiscounted future cash flows expected to begenerated by them are less than their carrying amounts. When that occurs, theaffected assets are written down to their estimated fair value. As described in"Recent Accounting Pronouncements" in this document, our accountingfor goodwill changed in 2002 upon adoption of SFAS No. 142.

 

**DeferredTax Assets**

 

Weanalyze our deferred tax assets with regards to potential realization. We haveestablished a valuation allowance on our deferred tax assets to the extent thatwe determined that it is more likely than not that some portion or all of thedeferred tax asset will not be realized based upon the uncertainty of theirrealization. We have considered estimated future taxable income and ongoingprudent and feasible tax planning strategies in assessing the amount of thevaluation allowance.  Based upon thisanalysis, we recorded a valuation allowance for our deferred tax assets duringthe three months ended June 30, 2002, which resulted in a charge of $6.3million.

 

**Restructuring**

 

Basedon the downturn in the economy, our industry and our business, we have recordedrestructuring charges to align our cost structure with these changing marketconditions and to create a more efficient organization. To the extent actualevents and circumstances, such as the amount and timing of future subleaseincome, differ from estimates made when the restructuring charges are recorded,we may increase or decrease income in the period such changes are noted.

 

**LegalMatters**

 

Management’scurrent estimated range of liability related to pending litigation is based onclaims for which it is probable that a liability has been incurred and ourmanagement can estimate the amount and range of loss. We have recorded theminimum estimated liability related to those claims, where there is a range ofloss. Because of the uncertainties related to both the amount and range of losson the remaining pending litigation, management is unable to make a reasonableestimate of the probability of an unfavorable outcome and the liability thatcould result from an unfavorable outcome. As additional information becomesavailable, we will assess the probability and the potential liability relatedto our pending litigation and revise our estimates, if necessary. Suchrevisions in our estimates of the potential liability could materially impactour results of operations and financial position.

 

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***Results of Operations***

 

*Three and six months ended June 30, 2002 andJune 30, 2001*

 

***Revenues***

 

*Total revenues*decreased 49% during the quarter ended June 30, 2002 to $29.4 million ascompared to $58.0 million for the quarter ended June 30, 2001. Total revenuesdecreased 60% during the six months ended June 30, 2002 to $59.9 million ascompared to $150.8 million for the six months ended June 30, 2001.  A summary of our revenues by geographicregion is as follows:

 
|                    |   | **Software**               |   | **%**  |   | **Services** |   | **%**  |   | **Total** |   | **%**  |    |
|-------------------------|--------|----------------------------|--------|--------|--------|--------------|--------|--------|--------|-----------|--------|--------|---------|
|                    |   | **(dollars in thousands)** |   |
| **Three Months Ended:** |   |                       |   |   |   |         |   |   |   |      |   |   |    |
|                    |   |                       |   |   |   |         |   |   |   |      |   |   |    |
| June 30, 2002           |   |                       |   |   |   |         |   |   |   |      |   |   |    |
| Americas                |   | $                          | 6,385  |   | 62     | %            | $      | 12,467 |   | 65        | %      | $      | 18,852  |   | 64 | % |
| Europe                  |   | 3,400                      |   | 33     |   | 5,598        |   | 29     |   | 8,998     |   | 31     |    |
| Asia/Pacific            |   | 524                        |   | 5      |   | 1,045        |   | 6      |   | 1,569     |   | 5      |    |
| Total                   |   | $                          | 10,309 |   | 100    | %            | $      | 19,110 |   | 100       | %      | $      | 29,419  |   | 100 | % |
|                    |   |                       |   |   |   |         |   |   |   |      |   |   |    |
| June 30, 2001           |   |                       |   |   |   |         |   |   |   |      |   |   |    |
| Americas                |   | $                          | 11,655 |   | 55     | %            | $      | 25,017 |   | 68        | %      | $      | 36,672  |   | 63 | % |
| Europe                  |   | 7,781                      |   | 37     |   | 8,772        |   | 24     |   | 16,553    |   | 29     |    |
| Asia/Pacific            |   | 1,593                      |   | 8      |   | 3,217        |   | 8      |   | 4,810     |   | 8      |    |
| Total                   |   | $                          | 21,029 |   | 100    | %            | $      | 37,006 |   | 100       | %      | $      | 58,035  |   | 100 | % |
|                    |   |                       |   |   |   |         |   |   |   |      |   |   |    |
| **Six Months Ended:**   |   |                       |   |   |   |         |   |   |   |      |   |   |    |
|                    |   |                       |   |   |   |         |   |   |   |      |   |   |    |
| June 30, 2002           |   |                       |   |   |   |         |   |   |   |      |   |   |    |
| Americas                |   | $                          | 10,344 |   | 56     | %            | $      | 26,710 |   | 65        | %      | $      | 37,054  |   | 62 | % |
| Europe                  |   | 7,579                      |   | 41     |   | 12,262       |   | 30     |   | 19,841    |   | 33     |    |
| Asia/Pacific            |   | 565                        |   | 3      |   | 2,414        |   | 5      |   | 2,979     |   | 5      |    |
| Total                   |   | $                          | 18,488 |   | 100    | %            | $      | 41,386 |   | 100       | %      | $      | 59,874  |   | 100 | % |
|                    |   |                       |   |   |   |         |   |   |   |      |   |   |    |
| June 30, 2001           |   |                       |   |   |   |         |   |   |   |      |   |   |    |
| Americas                |   | $                          | 37,813 |   | 59     | %            | $      | 59,770 |   | 69        | %      | $      | 97,583  |   | 65 | % |
| Europe                  |   | 21,054                     |   | 33     |   | 19,695       |   | 23     |   | 40,749    |   | 27     |    |
| Asia/Pacific            |   | 5,302                      |   | 8      |   | 7,130        |   | 8      |   | 12,432    |   | 8      |    |
| Total                   |   | $                          | 64,169 |   | 100    | %            | $      | 86,595 |   | 100       | %      | $      | 150,764 |   | 100 | % |

 

*Software  license revenues* decreased 51% during thecurrent quarter ended June 30, 2002 to $10.3 million as compared to $21.0million for the quarter ended June 30, 2001.  Software license revenues decreased 71% during the six months ended June30, 2002 to $18.5 million as compared to $64.2 million for the six months endedJune 30, 2001.  The decreases areattributable to an overall and continued decline in the economy throughout thefirst half of 2002 in comparison to the same period of 2001.  Continued economic uncertainty surroundingthe economic and information technology spending environment significantlyaffected our license revenue during the first half of 2002.  Software license revenues for our Enterpriseapplications decreased to $1.4 million for the quarter ended June 30, 2002 and$1.9 million for the six months ended June 30, 2002 as compared to $1.6 millionfor the quarter ended June 30, 2001 and $4.1 million for the six months endedJune 30, 2001.  Software licenserevenues for our packaged solutions decreased to $8.9 million and $16.6 millionfor the quarter ended and six months ended June 30, 2002, respectively, ascompared to $19.4 million and $60.1 million for the quarter ended and sixmonths ended June 30, 2001, respectively.  One-to-One Enterprise revenues represent revenues from sales of ourOne-to-One Enterprise product sold on a stand-alone basis.  One-to-One Packaged Solutions revenuesrepresent revenues derived from sales of our products excluding One-to-OneEnterprise sales on a stand-alone basis. Included in the Enterprise and packaged solutions numbers are deploymentlicense revenues, which decreased 82% to $1.4 million during the three monthsended June 30, 2002 as compared to $7.6 million during the three months endedJune 30, 2001.  Deployment licenserevenues decreased 79% to $3.9 million during the six months ended June 30,2002 as compared to $18.4 million during the six months ended June 30, 2001.

 

*Total*s*ervices revenues* decreased 48%during the current quarter ended June 30, 2002 to $19.1 million ascompared to $37.0 million for the quarter ended June 30, 2001.  Total services revenues decreased 52% duringthe

 

23

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six months ended June 30,2002 to $41.4 million as compared to $86.6 million for the six months endedJune 30, 2001.

 

The decreases in servicesrevenue is a result of decreased business volume associated with decreasedsoftware license revenues over the past four quarters and an overall decline inthe economy.  Maintenance relatedrevenues for technical support and product upgrades, which are included inservices revenues, were $9.4 million for the three months ended June 30, 2002as compared to $15.1 million for the three months ended June 30, 2001.  Maintenance related revenues were $19.9million for the six months ended June 30, 2002 as compared to $31.6 million forthe six months ended June 30, 2001.

 

***Cost ofRevenues***

** **

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 feesincurred on consulting projects, post-contract customer support andinstructional training services.

 

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

 
|                           |   | **Three Months Ended June 30,** |   | **Six Months Ended June 30,** |   |
|--------------------------------|--------|--------------------------------------|--------|------------------------------------|--------|
|                           |   | **2002**                             |   | **%**                              |   | **2001** |   | **%** |   | **2002** |   | **%** |   | **2001** |   | **%** |   |
|                           |   | **(dollars in thousands)**           |   |
| Cost of software  licenses (1) |   | $                                    | 903    |                               | 9      | % | $ | 2,655 |   | 13 | % | $ | 2,003 |   | 11 | % | $ | 4,895 |   | 8 | % |
| Cost of services  (2)          |   | 10,422                               |   | 55                                 |   | 30,595 |   | 83 |   | 22,756 |   | 55 |   | 69,573 |   | 80 |   |
|                           |   |                                 |   |                               |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total cost of  revenues (3)    |   | $                                    | 11,325 |                               | 38     | % | $ | 33,250 |   | 57 | % | $ | 24,759 |   | 41 | % | $ | 74,468 |   | 49 | % |

 

----

(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* decreased 66% inabsolute dollar terms during the current quarter ended June 30, 2002 to$903,000 as compared to $2.7 million for the quarter ended June 30, 2001.  Cost of software licenses decreased 59%, inabsolute dollar terms, during the six months ended June 30, 2002 to $2.0million as compared to $4.9 million for the six months ended June 30,2001.  In absolute dollar terms, thedecrease in cost of software licenses was principally a result of decreasedsales with associated royalties due with third party products.

 

*Cost of services* decreased 66%, inabsolute dollar terms, during the current quarter ended June 30, 2002 to $10.4million as compared to $30.6 million for the quarter ended June 30, 2001. Costof services decreased 67%, in absolute dollar terms, during the six monthsended June 30, 2002 to $22.8 million as compared to $69.6 million during thesix months ended June 30, 2001.  Inabsolute dollar terms, the decrease in cost of services for the three and sixmonths ended June 30, 2002 was the result of reductions in force and relatedfacilities consolidations which resulted in decreased salary and facility relatedexpenses as well as decreased use of third party consultants.  The cost of services margins have improvedfor the three and six months ended June 30, 2002 as compared to the sameperiods in 2001 as a result of continued efforts to cut costs and make theorganization more efficient which has resulted in decreased salary andfacility-related costs.

 

***OperatingExpenses 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.

 

24

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General andadministrative expenses consist primarily of salaries, employee–relatedbenefit costs, accounts receivable reserves expense and professional servicefees.

 

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

 
|                                  |   | **Three Months Ended June 30,** |   | **Six Months Ended June 30,** |   |
|---------------------------------------|--------|--------------------------------------|--------|------------------------------------|--------|
|                                  |   | **2002**                             |   | **% (1)**                          |   | **2001** |   | **% (1)** |   | **2002** |   | **% (1)** |   | **2001** |   | **% (1)** |   |
|                                  |   | **(dollars in thousands)**           |   |
| Research and  development             |   | $                                    | 13,006 |                               | 44     | % | $ | 20,616 |   | 36 | % | $ | 26,981 |   | 45 | % | $ | 47,587 |   | 32 | % |
| Sales and  marketing                  |   | 15,803                               |   | 54                                 |   | 41,766 |   | 71 |   | 31,981 |   | 53 |   | 94,247 |   | 62 |   |
| General and  administrative           |   | 5,009                                |   | 17                                 |   | 14,268 |   | 25 |   | 11,202 |   | 19 |   | 24,858 |   | 16 |   |
| Goodwill and  intangible amortization |   | 887                                  |   | 3                                  |   | 66,297 |   | 114 |   | 1,774 |   | 3 |   | 132,577 |   | 88 |   |
| Restructuring  charge                 |   | 34,565                               |   | 117                                |   | 123,473 |   | 213 |   | 39,945 |   | 67 |   | 123,473 |   | 82 |   |
| Impairment of  assets                 |   | —                               |   | —                             |   | — |   | — |   | 2,276 |   | 4 |   | — |   | — |   |
| Total Operating  Expenses             |   | $                                    | 69,270 |                               | 235    | % | $ | 266,420 |   | 459 | % | $ | 114,159 |   | 191 | % | $ | 422,742 |   | 280 | % |

 

----

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

* *

*Research and development expenses*decreased 37% during the current quarter ended June 30, 2002 to $13.0 millionas compared to $20.6 million for the quarter ended June 30, 2001.  Research and development expenses decreased43% during the six months ended June 30, 2002 to $27.0 million as compared to$47.6 million for the six months ended June 30, 2001.  The decrease in research and development expenses is primarilyattributable to compensation reductions through salary reductions andreductions in force as well as other cost-cutting efforts, including facilityconsolidations, put in place commencing with the second quarter of fiscal 2001.

 

*Sales and marketing expenses* decreased 62%during the current quarter ended June 30, 2002 to $15.8 million as compared to$41.8 million for the quarter ended June 30, 2001.  Sales and marketing expenses decreased 66% during the six monthsended June 30, 2002 to $32.0 million as compared to $94.2 million during thesix months ended June 30, 2001.  Thedecreases were primarily a result of decreased salary expenses as a result ofthe reductions in force in addition to decreased commission expense as a resultof decreased license revenue.  Inaddition, marketing expenses declined due to fewer marketing-relatedactivities.

* *

*General and administrative expenses*decreased 65% during the current quarter ended June 30, 2002 to $5.0 million ascompared to $14.3 million for the quarter ended June 30, 2001.  General and administrative expensesdecreased 55% during the six months ended June 30, 2002 to $11.2 million ascompared to $24.9 million during the six months ended June 30, 2001.  The decrease in general and administrativeexpenses is primarily attributable to decreased salary expense as a result ofreductions in force along with a decrease in facilities costs as a result of continuedfacilities consolidations and decreases in professional services expenses andin the general 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 theCompany to profitability.  Shouldrevenues increase significantly, we would expect our expenses to increasecommensurate with increases in revenues.

* *

*Goodwilland intangible amortization.*As described in Note 8 in the Notes to the Condensed ConsolidatedFinancial Statements above, we no longer amortize goodwill or the assembledworkforce as we have identified the assembled workforce as an intangible assetwhich does not meet the criteria of recognizable intangible asset as defined bySFAS No. 142.  The remaining otherintangible assets are being amortized on a straight-line basis over theirremaining useful life of nine months as of June 30, 2002.  We periodically assess goodwill and otherintangibles for impairment as discussed in Note 8 of Notes to the CondensedConsolidated Financial Statements.  Theremaining intangible assets that are being amortized are a result of theInterleaf acquisition that was completed in April of 2000.  We have accounted for the acquisition as apurchase business combination.  Amortizationexpense is estimated to be $3.5 million in 2002 and $887,000 in 2003.

* *

*RestructuringCharge. *During thefirst and second quarter of 2002, we approved restructuring plans to, amongother things, 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. A pre-tax charge of $34.6 million and $5.4 million was recorded in thesecond and first quarter of 2002, respectively, which includes severance andbenefits charges, lease abandonment costs, asset impairment charges and othercharges incurred as a direct result of the restructuring.  We determined a range of expected losses onlease abandonment.  We accrued forlosses at the low-end of a range in accordance with SFAS No. 5, *Accounting*

 

25

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*forContingencies*.  Thehigh-end of the range is estimated at $35.3 million for the second quarter offiscal 2002 charge and $6.3 million for the first quarter of fiscal 2002charge.  Total severance and benefitscosts were $3.8 million during the second quarter of fiscal 2002 and $1.1million during the first quarter of fiscal 2002.  $817,000 of severance and benefits costs were unpaid as of December31, 2001 as a result of our 2001 restructuring.  Approximately $2.6 million was paid out during the six monthsended June 30, 2002 resulting in $3.0 million of unpaid severance and benefitsas of June 30, 2002 which is expected to be paid in full by June 30, 2003.  During the three months ended June 30, 2002,our restructuring plan included plans to terminate 201 employees in North andSouth America and 49 employees throughout Europe and Asia/Pacific.  230 employees were terminated as of June 30,2002.  As a result of these reductions,we expect to save approximately $21.3 million in annual salaries costs.  These terminations impacted all departmentswithin the Company.  During the sixmonths ended June 30, 2002, our restructuring plan included plans toterminate  265 employees in North andSouth America and approximately 90 employees throughout Europe and the AsiaPacific impacting all departments within the Company.  Approximately 335 employees were terminated as of June 30, 2002.  As a result of the reduction in force, weexpect annual salaries savings of approximately $22.5 million.  Total facilities and excess assets chargeswere $30.5 million and $4.1 million during the second and first quarter offiscal 2002, respectively and included $17.2 million and $1.0 million of assetimpairment charges during the second and first quarter of fiscal 2002,respectively.  Approximately $89.9million of facilities related costs were unpaid as of December 31, 2001 as aresult of the Company’s 2001 restructuring. Approximately $66.4 million was paid out during the six months endedJune 30, 2002, resulting in approximately $39.8 million, $16.6 million of whichis expected to be paid out over the next twelve months and $23.2 million fromJuly 1, 2003 through the first quarter of fiscal 2010.  The $39.8 million includes approximately$47.8 million of estimated sublease income of which approximately $21.4 millionrepresents sublease agreements yet to be negotiated.  We recorded other restructuring charges of $320,000 and $155,000during the second quarter and first quarter of fiscal 2002, respectively, forvarious incremental costs incurred as a direct result of therestructuring.  As of June 30, 2002,approximately $223,000 of other restructuring costs remains unpaid and isexpected to be fully paid by the end of the fourth quarter of 2002.  Actual future cash requirements may differmaterially from the accrual at June 30, 2002, particularly if actual subleaseincome is significantly different from current estimates.  Adjustments to the restructuring reserveswill be made in future periods, if necessary, based upon the then currentactual events and circumstances.

* *

*Impairment of assets. *During the firstquarter of 2002 we engaged a third party firm to conduct a physical inventoryof our computer hardware assets located in North America.  We conducted an internal physical inventoryon computer hardware assets located outside of North America.  The objective of the physical inventory was toverify the amount and location of our computer hardware.  As a result of the findings of the physicalinventory and related reconciliation with the Company’s asset records, werecorded an asset impairment charge of approximately $2.3 million net bookvalue related to computer hardware during the first quarter of fiscal 2002.

 

*Other income (expense), net.  *Other income(expense), net consists of interest income, interest expense and othernon-operating expenses.  Other income(expense), net increased to $1.4 million for the three months ended June 30,2002 as compared to ($876,000) during the three months ended June 30,2001.  Other income (expense), netdecreased to ($6.7 million) for the six months ended June 30, 2002 as comparedto ($379,000) for the six months ended June 30, 2001.  Interest income decreased $1.8 million to $1.2 million for thequarter ended June 30, 2002 as compared to $3.0 million for the quarter endedJune 30, 2001 and interest income decreased $4.0 million to $2.7 million forthe six months ended June 30, 2002 as compared to $6.7 million for the sixmonths ended June 30, 2001 as a result of a decrease in overall cash andinvestments.  Losses on asset disposalsdecreased approximately $1.0 million for the three and six months ended June30, 2002 as compared to the same periods in 2001.  This decrease is primarily related to a loss of approximately$1.3 million on the sale of various computers and related equipment andfurniture of E-Publishing Corporation, a wholly owned subsidiary of the Companywhich was included in the second quarter of fiscal 2001.  Gains on sales of investments decreased$328,000 and $874,000 for the quarter ended and six months ended June 30, 2002,respectively.  There was a decrease inequity in net losses from an unconsolidated subsidiary of $1.3 million for thequarter ended June 30, 2002 and $2.4 million for the six months ended June 30,2002 and a decrease in realized losses on cost-method investments of $587,000for the quarter ended June 30, 2002 and an increase of $6.8 million for the sixmonths ended June 30, 2002.  Losses oncurrency decreased $1.0 million and $1.4 million for the three months and sixmonths ended June 30, 2002, respectively.

 

***Income Taxes***

 

During thequarter ended June 30, 2002, we recognized tax expense of $6.9 million.   This includes a valuation provision for ourdeferred tax asset in the amount of $6.3 million recorded in the second quarterof fiscal 2002.  We recognized incometax expense of $7.1 million during the six months ended June 30, 2002.  The tax expense during both periods,excluding the deferred tax asset valuation provision, mainly relates to foreignwithholding taxes and state income taxes.

 

26

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**LIQUIDITYAND CAPITAL RESOURCES**

 
|                                                     |   | **June 30,  2002** |    | **December 31,  2001** |   |
|----------------------------------------------------------|--------|--------------------|---------|-----------------------------|--------|
|                                                     |   | **(in thousands)** |    |
| Cash, cash equivalents and liquid short-term investments |   | $                  | 111,381 |                        | $      | 141,463 |   |
|                                                     |   |               |    |                        |   |
| Long-term liquid  investments                            |   | $                  | 3,581   |                        | $      | 22,135 |   |
| Restricted cash  and investments                         |   | $                  | 27,374  |                        | $      | 29,949 |   |
| Working capital                                          |   | $                  | 20,226  |                        | $      | 67,165 |   |
|                                                     |   |               |    |                        |   |
| Working capital  ratio                                   |   | 1.2 : 1            |    | 1.5 : 1                     |   |

 

At June 30, 2002, we had$142.3 million of cash, cash equivalents, liquid short-term investments,long-term investments, and restricted cash and investments, which represents adecrease of $51.2 million as compared to December 31, 2001. We have a creditfacility with Silicon Valley Bank that includes term loans in the form ofpromissory notes and a revolving line of credit (the "SVB Facility")for up to $25.0 million. Under the revolving line of credit portion of the SVBFacility, amounts borrowed bear interest at the bank’s prime rate (4.75% as ofJune 30, 2002) and interest is due monthly, with the principal due atexpiration of the SVB Facility.   Wehave two outstanding term loans under the SVB Facility. The total outstandingamount of these term loans were $3.4 million as of June 30, 2002 and $3.9million as of December 31, 2001. Interest on these term loans are at the bank’s prime rate (4.75% as ofJune 30, 2002 and December 31, 2001) and prime rate plus 1.25% (6.0% as of June30, 2002 and December 31, 2001). Principal and interest are due in consecutivemonthly payments through maturity of these term loans in March 31, 2005 andSeptember 30, 2006. Principal payments of $977,000 are due annually from 2000through 2004, $611,000 due in 2005, and a final payment of $357,000 due in2006.

 

Borrowings under the SVBFacility are collateralized by substantially all of our owned assets and we aresubject to certain covenants, including restrictions on payment of dividendsand other distributions as well as an obligation to maintain a certain amountof available cash, cash equivalents, short-term investments and long-terminvestments (excluding equity investments). As of June 30, 2002, we were incompliance with all specified financial covenants.  During the second quarter of 2002 we drew down $25.0 million onour revolving line of credit as partial funding of our PacShores Building 4 and5 Termination Agreement.  See"Recent Events" under Management’s Discussion and Analysis for moreinformation.  Interest is payablemonthly at the bank’s prime rate (4.75% annually as of June 30, 2002) andprincipal is due in full in March, 2003. $25.0 million was outstanding as of June 30, 2002.  There were no outstanding amounts under therevolving line of credit as of December 31, 2001.  Commitments totaling $27.4 million and $25.0 million inthe form of standby letters of credit were issued from financial institutionsas of June 30, 2002 and December 31, 2001 in favor of our various landlords tosecure obligations under our facility leases. These letters of creditare collateralized by a security agreement, under which we are required tomaintain in a restricted specified interest bearing account approximately $27.4million and $29.9 million of available cash equivalents and short-terminvestments as of June 30, 2002 and December 31, 2001, respectively. The $27.4million has been presented as $10.8 million of restricted cash and $16.6million of restricted cash and investments in the accompanying condensed consolidatedbalance sheet at June 30, 2002.  The$29.9 million has been presented as restricted cash and investments in theaccompanying condensed consolidated balance sheet at December 31, 2001.

 

Cash used for operatingactivities was $76.6 million for the six months ended June 30, 2002 and $33.0million for the six months ended June 30, 2001, respectively. The primaryreason for the cash used for operating activities for the six months ended June30, 2002 is due to the net loss of $92.8 million adjusted by approximately$51.9 million for certain non-cash items such as depreciation expense,amortization of intangibles, impairment of assets, non-cash restructuringcharge, and provision for deferred tax asset valuation as well as a decrease inrestructuring reserves of approximately $46.8 million, a decrease in unearnedrevenues and deferred maintenance of $9.2 million partially offset by adecrease in accounts receivable of $19.3 million and a decrease in othercurrent assets of $1.9 million. Cash provided by investing activities was $47.4million for the six months ended June 30, 2002 and $5.3 million for the sixmonths ended June 30, 2001. Cash provided by investing activities for the sixmonths ended June 30, 2002 was primarily due to net sales/maturities of investmentsof $45.6 million and $2.6 million released from restricted cash andinvestments.  Cash provided by financingactivities was $27.3 million and $12.2 million for the six months ended June30, 2002 and 2001, respectively.  Netcash provided by financing activities for the six months ended June 30, 2002consists of $2.8 million of net proceeds from the issuance of common stock and$25.0 million in proceeds from borrowings less $490,000 of repayments onborrowings.

 

27

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Capital expenditures were$1.1 million and $47.5 million for the six months ended June 30, 2002 and 2001,respectively.  Our capital expendituresconsisted of purchases of operating resources to manage our operations andincluded computer hardware and software, office furniture and fixtures andleasehold improvements.

 

In connection with ourrestructuring plan initiated during 2001, we consolidated various operatingfacilities during 2001 and the first and second quarter of 2002. Lease terminationcosts include the abandonment of certain excess lease facilities for theremaining lease terms. This cost totaled $143.8, including $36.8 million inleasehold improvements impairments, in 2001 and $34.6 million, including $19.2million in leasehold improvements impairments, during the six months ended June30, 2002. Total lease termination costs include the abandonment of leaseholdimprovements and the remaining lease liabilities and brokerage fees, offset byestimated sublease income.  Theestimated costs of abandoning these facilities, estimated costs to sublease aswell as estimated sublease income, were based upon market information analysesprovided by a commercial real estate brokerage firm retained by us. As of June30, 2002, $39.8 million of lease termination costs, net of $47.8 million ofanticipated sublease income of which approximately $21.4 million representssublease agreements yet to be negotiated, remains accrued and is expected to bepaid out by the first quarter of 2010. See Note 7 of Notes to CondensedConsolidated Financial Statements for additional information.

 

We expect to incursignificant operating expenses for the foreseeable future in order to executeour business plan. As discussed in Note 4 of Notes to Condensed ConsolidatedFinancial Statements, our operating lease commitments, which exclude facilitiesthat are included in our restructuring plan, consist of the following futureminimum lease payments as of June 30, 2002 (in thousands):

 
| **Year Ended December 31,** |   | **Operating  leases** |    |
|----------------------------------|--------|-----------------------|---------|
|                             |   |                  |    |
| 2002                             |   | 3,560                 |    |
| 2003                             |   | 5,081                 |    |
| 2004                             |   | 6,748                 |    |
| 2005                             |   | 12,054                |    |
| 2006                             |   | 12,647                |    |
| 2007 and thereafter              |   | 99,159                |    |
| Total minimum lease payments     |   | $                     | 139,249 |   |
|                                  |        |                       |         |  |

 

Our future minimum leasecommitments have not been reduced by approximately $26.4 million of minimumsublease rentals due in the future under noncancelable subleases related toexcess lease facilities.  In addition,our future minimum lease commitments include lease commitments for excessfacilities that have been accrued as a restructuring liability.

 

On May 9, 2002 we enteredinto the Buildings 4 and 5 Termination Agreement with one of our landlords inrelation to two of our facilities located in Redwood City, California wherebytwo of our leases were terminated. In conjunction with the termination, subjectto certain conditions, the landlord will release all security deposits held byit relating to these premises and we paid to the landlord a termination fee of$45.0 million as a termination fee (the "Termination Fee"). Thispayment of the Termination Fee was funded partially by drawing down theavailable line of credit of $25.0 million under the SVB Facility and partiallywith $20.0 million of our available cash, cash equivalents and short-terminvestments.

 

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

 

We currently expect to fundour short-term working capital and operating resource expenditure requirements,for at least the next twelve months, from our existing cash and cashequivalents and short-term investment resources and our anticipated cash flowsfrom operations. However, we could experience unforeseen circumstances such asa worsening economic downturn, legal or lease settlements and less thananticipated cash inflows that may increase our use of available cash or need toobtain additional financing.  Also, wemay find it necessary to obtain additional equity or debt financing in order tosupport more rapid expansion, develop new or enhanced services, respond tocompetitive pressures, acquire complementary businesses or technologies orrespond to unanticipated requirements. We may seek to raise additional fundsthrough private or public sales of securities, strategic relationships, bankdebt, financing under leasing arrangements or otherwise. If additional fundsare raised through the issuance of equity securities, the percentage ownershipof our stockholders will be reduced, stockholders

 

28

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may experience additional dilution or such equity securities may haverights, preferences or privileges senior to those of the holders of our commonstock. There can be no assurance that additional financing will be available onacceptable terms, if at all. If adequate funds are not available or are notavailable on acceptable terms, we may be unable to develop our products, takeadvantage of future opportunities or respond to competitive pressures orunanticipated requirements, which could have a material adverse effect on ourbusiness, financial condition and future operating results.

 

***Factors That May Affect FutureOperating Results***

 

We may experiencesignificant fluctuations in quarterly operating results that may be caused bymany factors including, but not limited to, those discussed below and herein,as set out in Items 7 and 7A in our annual report on Form 10-K for the yearended December 31, 2001 and elsewhere therein and as disclosed in otherdocuments filed with the Securities and Exchange Commission.

 

Significant fluctuations infuture quarterly operating results may be caused by many factors including,among others, the timing of introductions or enhancements of products andservices by us or our competitors, market acceptance of new products, the mixof our products sold, changes in pricing policies by us or our competitors, ourability to retain customers, changes in our sales incentive plans, budgetingcycles of our customers, customer order deferrals in anticipation of newproducts or enhancements by us or our competitors, nonrenewal of 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 operating results from timeto time will not meet the expectations of market analysts or investors, whichmay have an adverse effect on the price of our common stock.

 

We have experienced adecline in revenues sequentially for the first three quarters of fiscal 2001 andthe first two quarters of 2002 and the outlook on future quarters is uncleargiven the general economic conditions. Furthermore, we incurred net losses forthe past nine quarters and have not achieved positive cash flow from operationsin the last seven quarters. We do not expect to be profitable from operationsfor the near term and may continue to incur negative cash flow. If the negativecash flow continues, our liquidity and ability to operate our business would beseverely and adversely impacted. Additionally, our ability to raise financialcapital may be hindered due to our operational losses and negative cash flows,reducing our operating flexibility.

 

We are continuing efforts toreduce our expense structure. We believe strict cost containment and expensereductions are essential to achieving positive cash flow and profitability. Anumber of factors could preclude us from successfully bringing costs andexpenses in line with our revenues, including unplanned-for use of cash,inability to accurately forecast business activities and further deteriorationof our revenues. If we are not able to effectively reduce our costs and achievean expense structure commensurate with our business activities and revenues, wemay have inadequate levels of cash for operations or for capital requirements,which could significantly harm the our ability to operate our business.

 

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

 

Our success depends largelyon the skills, experience and performance of key personnel. If we lose one ormore key personnel, our business could be harmed. Our future success depends onour ability to continue attracting and retaining highly skilled personnel. Wemay not be successful in attracting, assimilating and retaining qualifiedpersonnel in the future. Furthermore, the significant downturn in our businessenvironment had a negative impact on our operations. We are currentlyrestructuring our operations and have taken actions to reduce our workforce and

 

29

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implement other cost containment activities. These actions could leadto disruptions in our business, reduced employee morale and productivity,increased attrition and problems with retaining existing employees andrecruiting future employees and increased financial costs.

 

We effected aone-for-nine reverse stock split.  Priorto the effective time of the reverse stock split our common stock was tradingat below $1.00 per share.  The Nasdaqhas a $1.00 per share minimum bid requirement, pursuant to which our commonstock could be de-listed from the Nasdaq National Market if it trades below$1.00 for thirty consecutive trading days and does not subsequently trade above$1.00 for 10 consecutive days.  There canbe no assurance that our trading price will remain above the $1.00 per sharerequirement for the necessary time period mandated by Nasdaq.  If we do not meet the Nasdaq requirements tomaintain our listing on the Nasdaq National Market, our common stock couldtrade on the OTC Bulletin Board or in the "pink sheets" maintained bythe National Quotation Bureau, Inc. Such alternatives are generally consideredto be less efficient markets, and our stock price, as well as the liquidity ofour common stock, will be adversely impacted as a result.

 

Some of these risks anduncertainties relate to the rapidly evolving nature of the markets in which weoperate. These related market risks include, among other things, the evolutionof the online commerce market, the dependence of online commerce on thedevelopment of the Internet and its related infrastructure, the uncertaintypertaining to widespread adoption of online commerce and the risk of governmentregulation of the Internet. Other risks and uncertainties relate to our abilityto, among other things, successfully implement our marketing strategies,respond to competitive developments, continue to develop and upgrade ourproducts and technologies more rapidly than our competitors, and commercializeour products and services by incorporating these enhanced technologies. Therecan be no assurance that we will succeed in addressing any or all of theserisks.

 

There has been a generaldownturn in the economy. Therefore, financial comparisons discussed herein maynot be indicative of future performance. If the economic environment continuesto decline, our future results may be significantly impacted. We believe thatthe current economic decline has increased the average length of our salescycle and our operating results could suffer and our stock price could declineif we do not achieve the level of revenues we expect.

 

Like other U.S. companies,our business and operating results are subject to uncertainties arising out ofthe recent terrorist attacks on the United States, including potentialworsening 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 uncertaintiescould also lead to delays or cancellations of customer orders, a generaldecrease in corporate spending or our inability to effectively market and sellour products. Any of these results could substantially harm our business andresults of operations, causing a decrease in our revenues.

 

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

 

Our exposure to market riskfor changes in interest rates relates primarily to our investment portfolio. Wehad no derivative financial instruments as of June 30, 2002 and December 31,2001. We place our investments in instruments that meet high credit qualitystandards and the amount of credit exposure to any one issue, issuer and typeof instrument is limited.  Our interestrate risk related to borrowings historically has been minimal as interestexpense related to borrowings has been immaterial for the three and six monthsended June 30, 2002.

 

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

 

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

 

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

 

Our short-term investmentsconsist of debt securities that are classified as available-for-sale. Our debtsecurities are carried at fair value with related unrealized gains or lossesreported as other comprehensive income, net of tax. Included in our long-terminvestments are investments in debt securities that are classified asavailable-for-sale. These securities have remaining maturities greater than oneyear from June 30, 2002. These investments are carried at fair value withrelated unrealized gains or losses reported as other comprehensive income, netof tax.

 

All short-term investments have a remaining maturity oftwelve months or less. Total short-term and long-term investment unrealizedgains (losses) were approximately ($1.5 million) and $3.0 million for the sixmonths ended June 30, 2002 and 2001, respectively. Total realized gains duringthe six months ended June 30, 2002 and 2001 were $664,000 and $852,000 and areincluded in other income in the accompanying Condensed Consolidated Statementsof Operations.

 

Our cash and cash equivalents, short-term investments andlong-term investments consisted of the following as of June 30, 2002 (inthousands):

 
|                      |   | **Amortized  Cost** |    | **Unrealized  Gains** |   | **Unrealized  Losses** |   | **Fair  Value** |   |
|---------------------------|--------|---------------------|---------|-----------------------|--------|------------------------|--------|-----------------|--------|
| Cash                      |   | $                   | 49,490  |                  | $      | —                 |   | $               | — |   | $ | 49,490 |   |
| Money market              |   | 37,080              |    | $                     | — |                   | — |            | 37,080 |   |
| Corporate notes/bonds     |   | 42,647              |    | 387                   |   | —                 |   | 43,034          |   |
| Government notes/bonds    |   | 12,723              |    | 10                    |   | (1                     | )      | 12,732          |   |
|                      |   | $                   | 141,940 |                  | $      | 397                    |   | $               | (1     | ) | $ | 142,336 |   |
| Cash and cash equivalents |   | $                   | 101,196 |                  | $      | —                 |   | $               | — |   | $ | 101,196 |   |
| Short-term investments    |   | 37,206              |    | 354                   |   | (1                     | )      | 37,559          |   |
| Long-term investments     |   | 3,538               |    | 43                    |   | —                 |   | $               | 3,581  |   |
|                      |   | $                   | 141,940 |                  | $      | 397                    |   | $               | (1     | ) | $ | 142,336 |   |

 

Included inthe table above in cash and cash equivalents are current restricted cash of$10.8 million and non-current restricted cash and investments of $16.6 million.

 

Our cash andcash equivalents, short-term investments and long-term investments consisted ofthe

following as of December 31,2001 (in thousands):

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

 

Included inthe table above in short-term investments are non-current restricted cash andinvestments of $29.9 million.

 

Remainingmaturities of our long-term investments as of June 30, 2002 are as follows:

 
|                  |   | **2003** |   | **2004** |   | **Total** |   |
|-----------------------|--------|----------|--------|----------|--------|-----------|--------|
| Corporate notes/bonds |   | $        | 1,925  |     | $      | 1,656     |   | $ | 3,581 |   |
|                       |        |          |        |          |        |           |        |  |  |  |

 

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***Concentrations of Credit Risk***

 

Financialassets that potentially subject us to significant concentrations of credit riskconsist principally of cash, cash equivalents, short-term investments,long-term investments and trade accounts receivable. We analyzed our cash,short-term and long-term investment holdings for interest rate risk andestimate that the impact of a change in interest rates of one-half of onepercent would be approximately $460,000 on annual interest income. We marketand sell our products throughout the world and perform ongoing creditevaluations of our customers. We maintain reserves for potential credit losses.For the three months and six months ended June 30, 2002, no single customeraccounted for more than 10% of total revenues. For the three months ended June 30, 2001 no single customer accountedfor more than 10% of total revenues. For the six months ended June 30, 2001, one customer accounted for morethan 10% of total revenues.  As of June30, 2002 one customer accounted for more than 10% of our accountsreceivable.  As of December 31, 2001, nocustomer individually accounted for more than 10% of our accounts receivable.

** **

***Fair Value of Financial Instruments***

 

Our financialinstruments consist of cash equivalents, short-term investments, long-terminvestments, accounts receivable, accounts payable and debt. We do not have anyderivative financial instruments. We believe the reported carrying amounts ofour financial instruments approximates fair value, based upon the shortmaturity of cash equivalents, short-term investments, accounts receivable andpayable, and based on the current rates available to us on similar debt issues.

** **

***Equity Investments***

 

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

 

Thetotal fair value of our cost method long-term equity investments in public andnon-public companies was $3.3 million as of June 30, 2002. This includes $1.3million for the three months ended June 30, 2002 and $9.8 million for the sixmonths ended June 30, 2002 of write-downs of investments due to an other thantemporary decline in fair value. The total unrealized loss in our cost methodlong-term equity investments was $0 during the three and six months ended June30, 2002.

 

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**PARTII.  OTHER INFORMATION**

**Item 1.            LegalProceedings**

 

In April 2001, severalpurported class action lawsuits were filed against the Company and certain ofits officers and directors.  In each ofthe lawsuits, the plaintiffs sought to assert claims on behalf of a class ofall persons who purchased securities of BroadVision between January 26, 2001and April 2, 2001. The complaints alleged that BroadVision and the individualdefendants violated federal securities laws in connection with its reporting offinancial results for the quarter ended December 31, 2000. The lawsuits wereconsolidated into a single action and all defendants filed motions to dismiss theconsolidated complaint. On November 5, 2001, BroadVision and the individualdefendants filed motions to dismiss the consolidated complaint. On February 22,2002, the Court granted these motions, dismissed the consolidated complaintwithout prejudice and ordered the lead plaintiff to file an amended complaintwithin 30 days. On March 25, 2002, the plaintiff filed its Second AmendedConsolidated Complaint, which added claims for breach of fiduciary duty andnamed members of the Company’s board of directors as additional defendants. Alldefendants filed motions to dismiss the Second Amended Consolidated Complainton May 10, 2002. The hearing on the defendant’s motion to dismiss is scheduledfor August 30, 2002. The Company believes that the lawsuits are without meritand 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 thecomplaint denying all allegations and is defending itself vigorously.

 

On July 18, 2002, AvalonPartners, Inc., doing business as Cresa Partners, filed a suit against theCompany claiming broker commissions related to the Company’s termination andrestructuring of certain facilities leases associated with the Company’srestructuring plans taken during the second quarter of 2002.  The Company is currently evaluating theclaims and expects to defend itself vigorously and will be answering thecomplaint by August 17, 2002.

 

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

 
| **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**                                                              |
| (a)         |   | The Annual Meeting of Stockholders of the Company was held on June  26, 2002.                                         |
| (b)         |   | Pehong Chen,  David Anderson, Todd Garrett, Koh Boon Hwee, Klaus Luft and Carl Pascarella  were elected as Directors. |
| (c)         |   | The matters voted upon and the voting of stockholders with respect thereto  are as follows:                           |

 
|   | i. | The election of Directors: |
|--------|----|----------------------------|

 

|            |   | **For**     |   | **Withheld** |   |
|-----------------|--------|-------------|--------|--------------|--------|
| Pehong Chen     |   | 208,269,742 |   | 6,409,535    |   |
| David Anderson  |   | 211,734,903 |   | 2,947,374    |   |
| Todd Garrett    |   | 211,694,595 |   | 2,987,682    |   |
| Koh Boon Hwee   |   | 211,815,939 |   | 2,866,338    |   |
| Klaus Luft      |   | 211,736,825 |   | 2,945,452    |   |
| Carl Pascarella |   | 206,427,697 |   | 8,254,580    |   |

 

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|   | ii.    | To approve an amendment to the Company’s  Amended and Restated Certificate of Incorporation to affect a stock  combination (reverse stock split) of the Company’s issued and outstanding  common stock in a ratio of one-for-five, one-for-six or one-for-nine, if and  as determined by the Company’s Board of Directors, at any time before the  2003 Annual Meeting of Stockholders. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |
|   |   | For:   209,421,536   Against:  4,916,083               Abstain:  344,658                                                                                                                                                                                                                                |
|   |   |
|   | iii.   | To approve the Company’s Equity Incentive  Plan, as amended, to increase the aggregate number of shares of common stock  authorized for issuance under such plan by 12,000,000 shares.                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   | For:  66,787,860     Against:  14,775,787             Abstain:  563,055                                                                                                                                                                                                                                 |
|   |   | Not  Voted:  132,555,575                                                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                   |
|   | iv.    | To approve the Company’s Employee Stock  Purchase Plan, as amended, to increase the aggregate number of shares of  common stock authorized for issuance under such plan by 4,500,000 shares.                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   | For:   74,795,023     Against:  6,822,453               Abstain:  517,985                                                                                                                                                                                                                     |
|   |   | Not Voted:   132,547,816                                                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                   |
|   | v.     | To ratify the selection of BDO Seidman, LLP  as independent auditors for the fiscal year ending December 31, 2002.                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   | For:   212,627,509   Against:  1,168,075               Abstain:  886,693                                                                                                                                                                                                                                |
|        |        |                                                                                                                                                                                                                                                                                                                                                                                                        |  |

 
| **Item 5.** |   | **Other Information**                 |
|-------------|--------|---------------------------------------|
|        |   |                                  |
|        |   | **Not applicable.**                   |
|        |   |                                  |
| **Item 6.** |   | **Exhibits and  Reports on Form 8-K** |

 

(a)               Exhibits

 
| **Exhibits** |   | **Description**                                                                                                                                        |
|--------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.28        |   | Agreement to Resolve Certain Tenant Improvement  Disputes with Respect to B-4, B-5 & B-6                                                           |
| 10.29        |   | First Amendment  to Lease (Building 4 and 5 - 1700 and 1800 Seaport Boulevard) (Lease  Termination and Mutual General Release Agreement), May 9, 2002. |
| 10.30        |   | First Amendment to Lease (Building 6 - 1600 Seaport  Boulevard), May 9, 2002                                                                           |
| 10.31        |   | Offer Letter, dated May 14, 2002, by and between the  Company and Andrew Nash.                                                                         |
| 99.1         |   | Certification pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                                                                               |

 

(b)     Reportson Form 8-K

 

On April 15, 2002, we fileda Form 8-K with the Securities and Exchange Commission by the Company on April8, 2002 reporting that the Company had received notice from its independentpublic accountants, Arthur Andersen LLP, of its resignation as the Company’sauditors as a result of the Company’s plan to change independent publicaccountants for the fiscal year ending December 31, 2002 due to anunanticipated future non-audit business relationship between the two companies.

 

On May 13, 2002, we filed aForm 8-K with the Securities and Exchange Commission to report the Company’s selectionof its independent public accountants, BDO Seidman, LLP, as auditors for thefiscal year ending December 31, 2002.

 

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**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:  | August 14, 2002 | By:    | /s/  Pehong  Chen                                                                                             |
|   |            |   | Pehong Chen  Chairman of the Board, President and Chief Executive Officer (Principal  Executive Officer)           |
|   |            |   |                                                                                                               |
|   |            |   |                                                                                                               |
| Date:  | August 14, 2002 | By:    | /s/  Francis  Barton                                                                                          |
|   |            |   | Francis Barton  Executive Vice President and Chief Financial Officer  (Principal Financial and Accounting Officer) |

 

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