Support.com 10Q 2003 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2003

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File No. 000-30901

SUPPORTSOFT, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware

94-3282005

(State or Other Jurisdiction

of Incorporation or Organization)

(I.R.S. Employer

Identification No.)

575 Broadway

Redwood City, CA 94063

(Address of Principal Executive Offices)

(Zip Code)

Registrant’s Telephone Number, Including Area Code: (650) 556-9440

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter 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 x No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

On August 13, 2003, 34,329,889 shares of the Registrant’s Common Stock, $0.0001 par value, were outstanding.

SUPPORTSOFT, INC.

FORM 10-Q

QUARTERLY PERIOD ENDED JUNE 30, 2003

INDEX


		Page

Part I: Financial Information

Item 1:	Financial Statements (Unaudited)

	Condensed Consolidated Balance Sheets at June 30, 2003 and December 31, 2002	3

	Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2003 and 2002	4

	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2003 and 2002	5

	Notes to Condensed Consolidated Financial Statements	6

Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10

Item 3:	Quantitative and Qualitative Disclosures About Market Risk	21

Item 4:	Controls and Procedures	21

Part II: Other Information		22

Item 1:	Legal Proceedings	22

Item 4:	Submission of Matters to a Vote of Security Holders	22

Item 6:	Exhibits and Reports on Form 8-K	23

Signature		24

Exhibit Index		25

PART I. FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

SUPPORTSOFT, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

	June 30, 2003			December 31, 2002
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	17,906		$	17,067
Short-term investments		15,549			13,548
Accounts receivable, net		11,412			7,695
Prepaids and other current assets		1,938			2,452

Total current assets		46,805			40,762
Property and equipment, net		828			1,251
Other assets		144			147

Total assets	$	47,777		$	42,160

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	854		$	163
Accrued compensation		1,705			1,818
Other accrued liabilities		2,452			2,199
Capital lease obligations, current portion		381			511
Deferred revenue		13,293			12,153

Total current liabilities		18,685			16,844
Capital lease obligations, net of current portion		—			67
Deferred revenue—long-term portion		1,774			2,102
Commitments and contingencies
Stockholders’ equity:
Common stock		3			3
Additional paid-in capital		108,794			108,253
Accumulated other comprehensive loss		(19	)		(155	)
Accumulated deficit		(81,460	)		(84,954	)

Total stockholders’ equity		27,318			23,147

Total liabilities and shareholders’ equity	$	47,777		$	42,160

See accompanying notes.

SUPPORTSOFT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts; unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2003			2002			2003			2002
Revenue:
License fees	$	9,647		$	6,999		$	19,240		$	13,586
Services		2,964			2,467			5,365			4,645

Total revenue		12,611			9,466			24,605			18,231

Costs and expenses:
Cost of license fees		90			65			180			130
Cost of services		1,824			1,564			3,514			2,936
Amortization of purchased technology		—			598			—			1,196
Research and development		2,289			2,195			4,623			4,470
Sales and marketing		5,098			5,500			10,146			11,092
General and administrative		1,262			1,348			2,687			2,687
Amortization of deferred stock compensation		—			108			—			578

Total costs and expenses		10,563			11,378			21,150			23,089

Income (loss) from operations		2,048			(1,912	)		3,455			(4,858	)
Interest and other income, net		91			105			231			230

Income (loss) before income taxes		2,139			(1,807	)		3,686			(4,628	)
Income tax expense		(119	)		—			(192	)		—

Net income (loss)	$	2,020		$	(1,807	)	$	3,494		$	(4,628	)

Basic net income (loss) per share	$	0.06		$	(0.06	)	$	0.10		$	(0.14	)

Shares used in computing per share amounts		33,628			32,318			33,468			32,164

Diluted net income (loss) per share	$	0.06		$	(0.06	)	$	0.10		$	(0.14	)

Shares used in computing per share amounts		35,793			32,318			35,133			32,164

See accompanying notes.

SUPPORTSOFT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands; unaudited)

	Six Months Ended June 30,
	2003			2002
Operating Activities:
Net income (loss)	$	3,494		$	(4,628	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		765			1,122
Amortization of deferred stock compensation		—			578
Amortization of purchased technology		—			1,196
Other		145			(171	)
Changes in assets and liabilities:
Accounts receivable, net		(3,717	)		357
Prepaid and other current assets		514			(51	)
Accounts payable		691			(558	)
Accrued compensation		(113	)		114
Other accrued liabilities		253			(150	)
Deferred revenue		812			4,045

Net cash provided by operating activities		2,844			1,854

Investing Activities:
Purchases of property and equipment		(342	)		(1,016	)
Other assets		3			1
Payments on purchased technology obligation		—			(618	)
Purchases of short-term investments		(15,620	)		(5,902	)
Sales and maturities of short-term investments		13,610			6,000

Net cash used in investing activities		(2,349	)		(1,535	)

Financing Activities:
Proceeds from issuances of common stock, net of repurchases		541			241
Repayment of notes receivable from shareholders		—			324
Principal payments under capital lease obligations		(197	)		(381	)

Net cash provided by financing activities		344			184

Net increase in cash and cash equivalents		839			503
Cash and cash equivalents at beginning of period		17,067			17,757

Cash and cash equivalents at end of period	$	17,906		$	18,260

Supplemental Schedule of cash flow information
Taxes paid	$	192		$	—

See accompanying notes.

SUPPORTSOFT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(1) Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of SupportSoft, Inc. (the “Company” or “SupportSoft”) (formerly known as Support.com, Inc.) and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The balance sheet at June 30, 2003 and the statements of operations for the three and six months ended June 30, 2003 and 2002 and cash flows for the six months ended June 30, 2003 and 2002 are unaudited. In the opinion of management, these financial statements reflect all adjustments (consisting of normal reoccurring adjustments) that are necessary for a fair presentation of the results for and as of the periods shown. The results of operations for such periods are not necessarily indicative of the results expected for the full fiscal year or for any future period. The condensed consolidated financial statement information as of December 31, 2002 is derived from audited financial statements as of that date. These financial statements should be read with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 27, 2003. Certain prior period balances have been reclassified to conform to current period presentation.

Use of Estimates and Reclassifications

The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes. Actual results could differ materially from these estimates.

Financial Instruments

Estimated fair values of financial instruments are based on quoted market prices. The following is a summary of cash and available-for-sale securities (in thousands) at June 30, 2003:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Cash	$	6,889	$	—	$	—	$	6,889
Money market funds		8,020		—		—		8,020
Commercial paper		3,496		—		—		3,496
Federal agencies		4,745		7		—		4,752
Municipal bonds		1,800		1		—		1,801
Corporate bonds		2,596		1		—		2,597
Auction backed securities		5,900		—		—		5,900

	$	33,446	$	9	$	—	$	33,455

Classified as:
Cash and cash equivalents	$	17,906	$	—	$	—	$	17,906
Short-term investments		15,540		9		—		15,549

	$	33,446	$	9	$	—	$	33,455

Revenue Recognition

We recognize revenue in accordance with the American Institute of Certified Public Accountants’ (AICPA) Statement of Position (“SOP”) 97-2, Software Revenue Recognition, as amended by SOP 98-4 and SOP 98-9. License revenue is recognized when all of the following criteria are met:

•	Persuasive evidence of an arrangement exists;

•	Delivery has occurred;

•	No uncertainties surrounding product acceptance exist;

•	Collection is considered probable; and

•	The fees are fixed or determinable.

SupportSoft considers all arrangements with payment terms extending beyond twelve months and other arrangements with payment terms longer than normal not to be fixed or determinable. If the fee is determined not to be fixed or determinable, revenue is recognized as payments become due from the customer.

License revenue is comprised of fees for term and perpetual licenses of our software. Perpetual license revenue is recognized using the residual method described in SOP 98-9 for arrangements in which licenses are sold with multiple elements. We allocate revenues on these licenses based upon the fair value of each undelivered element (for example, undelivered maintenance and support, training and consulting). The determination of fair value is based upon vendor specific objective evidence (VSOE). VSOE for maintenance and support is determined by the customer’s annual renewal rate for these services. VSOE for training or consulting is based upon separate sales of these services to other customers. Assuming all other revenue recognition criteria are met, the difference between the total arrangement fee and the amount deferred for each undelivered element is recognized as license revenue. Our perpetual arrangements may include initial maintenance extending over a period of time with no renewal rate, which requires license revenue to be taken ratably (monthly) over the contract period.

Term licenses are sold with maintenance for which SupportSoft does not have VSOE to determine fair value. As a result, license revenue for term licenses is recognized ratably over the service period of the agreement and license revenue includes maintenance for term licenses. We do not allocate maintenance revenue from term licenses to services revenue, as we do not believe there is an allocation methodology that provides a meaningful and supportable allocation between license and maintenance revenues.

The following is an example of our revenue recognition for a term license. If we receive an order from a customer for a 36-month term license in December of a year, we would recognize only one month of license fees for that year even if that customer prepaid 12 months of the 36-month term. Pursuant to this arrangement, we would record one year of fees in accounts receivable upon signing a new term license agreement, while recognizing only one month of revenue. As a result, our accounts receivable balance could represent a significant portion of our total revenue and increase our days sales outstanding (DSO) calculation.

We also recognize license revenue from arrangements with resellers. These arrangements may be either term or perpetual licenses of our software. When these arrangements include guaranteed minimum amounts due, revenue is recognized ratably over the term of the arrangement commencing when payments are made or become due. When the arrangements do not include guaranteed minimum amounts due and are based upon sell through activity, we recognize revenue when we receive evidence of sell-through, that is, persuasive evidence that the products have been sold to an end user if the reseller has been deemed credit-worthy. When resellers are not deemed credit-worthy, revenue is recognized upon cash receipt.

Services revenue is primarily comprised of revenue from professional services, such as deployment and consulting services, training, maintenance and support. Arrangements that include software services are evaluated to determine whether those services are essential to the functionality of other elements of the arrangement. Non-essential consulting and training revenues are generally recognized as the services are performed. When non-essential software services are bundled in a term licensing arrangement, revenue from the software services is recognized ratably over the period associated with the initial payment. Post-contract customer maintenance and support revenues are recognized over the term of the support period (generally one year). When the software services are considered essential to the functionality of other elements of the arrangement, revenue under the arrangement is recognized using contract accounting, typically using the percentage of completion method.

Concentration of Credit Risk and Significant Customers

SupportSoft performs ongoing evaluations of its customers’ financial condition and generally does not require collateral. Credit-worthiness and collectibility for customers are assessed based on payment history and credit profile. The Company recognizes revenue upon delivery when collectibility is probable. When a customer is not deemed credit-worthy, revenue is recognized upon cash receipt. SupportSoft maintains reserves for credit losses, and such losses have been within management’s expectations. If the financial condition of SupportSoft’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional reserves may be required. The Company had reserves for credit losses at June 30, 2003 and December 31, 2002 of $1.4 million and $924,000, respectively.

Net Income (Loss) Per Common Share

Basic and diluted net income (loss) per share are presented in accordance with Statement of Financial Accounting Standards No. 128, “Earnings per Share” (“SFAS 128”), for all periods presented.

SupportSoft computes basic income or loss per share using the weighted-average number of common shares outstanding during the period, less shares subject to repurchase. SupportSoft computes diluted income or loss per share using the weighted-average number of common and

dilutive common equivalent shares outstanding during the period. In loss periods, basic and dilutive loss per share is identical since the impact of common equivalent shares is anti-dilutive.

The following table sets forth the computation of basic and diluted net income (loss) per share (in thousands, except per share data):

	Three months ended June 30,						Six months ended June 30,
	2003			2002			2003			2002
Net income (loss)	$	2,020		$	(1,807	)	$	3,494		$	(4,628	)

Basic:
Weighted-average shares of common stock outstanding		33,896			33,500			33,841			33,478
Less: Weighted-average shares subject to repurchase		(268	)		(1,182	)		(373	)		(1,314	)

Shares used in computing basic net income (loss) per share		33,628			32,318			33,468			32,164

Basic net income (loss) per share	$	0.06		$	(0.06	)	$	0.10		$	(0.14	)

Diluted:
Weighted-average shares of common stock outstanding		33,896			33,500			33,841			33,478
Add: Common equivalent shares outstanding		1,897			—			1,292			—
Less: Weighted-average shares subject to repurchase		—			(1,182	)		—			(1,314	)

Shares used in computing diluted net income (loss) per share		35,793			32,318			35,133			32,164

Diluted net income (loss) per share:	$	0.06		$	(0.06	)	$	0.10		$	(0.14	)

Stock-Based Compensation

SupportSoft accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and has adopted the disclosure only alternative of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”) as amended by Statement of Financial Accounting Standards No. 148 (“SFAS 148”), “Accounting for Stock-Based Compensation—Transition and Disclosure.” Any deferred stock compensation calculated according to APB 25 is amortized over the vesting period of the individual options, generally four years, using the graded vesting method. The graded vesting method provides for vesting of portions of the overall awards at interim dates and results in greater vesting in earlier years than straight-line.

The fair value of options was estimated at the date of grant using the Black-Scholes valuation model. The following weighted-average assumptions were used:

	Three months end June 30,				Six months end June 30,
	2003		2002		2003		2002
Risk-free interest rate	2.30	%	2.07	%	2.20	%	2.07	%
Expected life (years)	4.0		4.0		4.0		4.0
Volatility	80.0	%	75.0	%	78.0	%	75.0	%
Dividend Yield	0.0	%	0.0	%	0.0	%	0.0	%

For purposes of pro forma disclosures pursuant to SFAS 123 as amended by SFAS 148, the estimated fair value of the options is amortized to expense over the vesting period of the options using a graded vesting method. The effects of applying SFAS 123 for pro forma disclosures are not likely to be representative of the effects on reported net income or loss for future years.

SupportSoft’s pro forma information follows (in thousands, except per share amounts):

	Three Months Ended June 30,						Six Months Ended June 30,
	2003			2002			2003			2002
Net income (loss) attributable to common stockholders—as reported	$	2,020		$	(1,807	)	$	3,494		$	(4,628	)
Add: Stock-based compensation included in reported net income (loss)		—			108			—			578
Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effect		(1,459	)		(1,486	)		(2,805	)		(2,960	)

Pro forma net income (loss)	$	561		$	(3,185	)	$	689		$	(7,010	)

Basic net income (loss) per share:
As reported	$	0.06		$	(0.06	)	$	0.10		$	(0.14	)
Pro forma		0.02			(0.10	)		0.02			(0.22	)
Diluted net income (loss) per share:
As reported	$	0.06		$	(0.06	)	$	0.10		$	(0.14	)
Pro forma		0.02			(0.10	)		0.02			(0.22	)

Warranties and Indemnifications

The Company generally provides a warranty for its software products and services to its customers and accounts for its warranties under the FASB’s Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies” (“SFAS No. 5”). In the event there is a failure of the product in breach of such warranties, the Company generally is obligated to correct the product or service to conform to the warranty provision or, if the Company is unable to do so, the customer is entitled to seek a refund of the purchase price of the product or service. The Company did not provide for a warranty accrual as of June 30, 2003 or December 31, 2002. To date, the Company’s product warranty expense has not been significant.

The Company generally agrees to indemnify its customers against legal claims that the Company’s software products infringe certain third-party intellectual property rights and accounts for its indemnification obligations under SFAS No. 5. To date, the Company has not been required to make any payment resulting from infringement claims asserted against our customers and has not recorded any related accruals.

(2) Recently Issued Accounting

In January 2003, the FASB issued FIN 46,“Consolidation of Variable Interest Entities.”FIN 46 requires us to consolidate a variable interest entity if we are subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provision of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. SupportSoft does not currently have any interests in variable interest entities and, accordingly, our adoption of FIN 46 is not expected to have any impact on our historical financial position, results of operations or cash flows.

(3) Comprehensive Income (Loss)

Statement of Financial Accounting No. 130, “Reporting Comprehensive Income” (“SFAS 130”) establishes standards for reporting and displaying comprehensive net income and its components in stockholders’ equity. However, it has no impact on our net income as presented in our financial statements. SFAS 130 requires foreign currency translation adjustments and changes in the fair value of available-for-sale securities to be included in comprehensive income.

The following are the components of comprehensive income (loss): (in thousands)

	Three months ended June 30,						Six months ended June 30,
	2003			2002			2003			2002
Net income (loss)	$	2,020		$	(1,807	)	$	3,494		$	(4,628	)
Net unrealized gain (loss) on available-for-sale securities		(13	)		2			(6	)		(33	)
Foreign currency translation gains (losses)		103			(69	)		142			(171	)

Comprehensive income (loss)	$	2,110		$	(1,874	)	$	3,630		$	(4,832	)

The components of accumulated other comprehensive income (loss) relate entirely to translation adjustment losses and unrealized gains on available-for-sale securities and are $(28,000) and $9,000 at June 30, 2003, respectively.

(4) Income Taxes

We recorded a provision for income taxes of approximately $119,000 and $192,000 for the three and six months ended June 30, 2003, respectively, and no provision for income taxes for the three and six months ended June 30, 2002. The effective rate used to record the provision for income taxes in the three and six months ended June 30, 2003 differed from the expected US federal statutory rate primarily due to the utilization of previously unbenefited net operating losses. No provision for income taxes was recorded in the three and six months ended June 30, 2002 due to a loss in the period and a history of operating losses in all prior periods.

As of June 30, 2003 our deferred tax assets are fully offset by a valuation allowance due to our history of operating losses.

(5) Contingencies

As we have previously disclosed in our annual report on Form 10-K for the year ended December 31, 2002, on or about November 30, 2001, Dana [sic] Risley, on behalf of herself [sic] and others similarly situated, filed a lawsuit, styled as a class action, against us and two of our officers in the United Stated District Court for the Southern District of New York. The complaint alleged, inter alia, that our registration statement and prospectus dated July 18, 2000 for the issuance and initial public offering 4,250,000 shares of our common stock contained material misrepresentations and/or omissions, related to the alleged inflated commissions received by the underwriters of the offering. Similar complaints have been filed against 55 underwriters and more than 300 other companies and other individual officers and directors of those companies. All of the complaints against the underwriters, issuers and individuals have been consolidated for pre-trial purposes before U.S. District Court Judge Scheindlin of the Southern District of New York. On June 26, 2003, the Plaintiffs’ Executive Committee announced that a proposed settlement between the issuer defendants and their directors and officers and the plaintiffs has been structured and would guarantee up to $1 billion to investors who are class members from the insurers of the issuers, depending on recoveries plaintiffs may obtain from the underwriter defendants. We have approved this proposed settlement, which will result in the plaintiffs’ dismissing the case against us and granting releases that extend to all of our officers and directors. As a result of the proposed settlement, which is subject to court approval, our insurance carrier will be responsible for any payments other than attorneys’ fees payable for the period prior to June 1, 2003. While we cannot predict with certainty the outcome of the litigation or whether the settlement will be approved, we believe that the claims against us and our officers are without merit.

SupportSoft is subject to other routine legal proceedings, as well as demands, claims and threatened litigation, that arise in the normal course of our business, including a notice of alleged material breach from a customer received several months ago and not since pursued by such customer. SupportSoft believes the alleged breach has not and will not result in material adverse effects to revenue recognized from the contract through June 30, 2003. SupportSoft began recognizing license revenue on a ratable basis only after receiving a letter from the customer indicating that the acceptance testing of the software was successfully completed. This revenue accounted for 2% of revenue for the six months ended June 30, 2003 and 3% of total revenue in 2002. We currently believe that the ultimate amount of liability, if any, for any pending claims of any type (either alone or combined) will not materially affect our financial position, results of operations or liquidity. However, the ultimate outcome of any litigation is uncertain, including any potential litigation arising from this alleged breach of contract, and either unfavorable or favorable outcomes could have a material negative impact. Regardless of outcome, litigation can have an adverse impact on SupportSoft because of defense costs, diversion of management resources and other factors.

ITEM 2:

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read together with the unaudited condensed consolidated financial statements and related notes appearing in Item 1 of this report on Form 10-Q and the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes included in SupportSoft’s Annual Report on Form 10-K for the year ended December 31, 2002.

This report on Form 10-Q contains forward-looking statements. These statements relate to our, and in some cases our customers’, or alliance partners’, future plans, objectives, expectations, intentions and financial performance, as well as statements as to the anticipated percentage of total revenue that ratable licensing arrangements, perpetual licensing arrangements and professional services may constitute in future periods, expected cash flows, the adequacy of capital resources, the ability to compete and respond to technological change and the acceptance and performance of our products and services. In some cases, you can identify forward-looking statements because they use terms such as anticipates, believes, continue, could, estimates, expects, intends, may, plans, potential, predicts, should or will or the negative of those terms or other comparable words. These statements involve risks and uncertainties that may cause our actual results, activities or achievements to be materially different from those expressed or implied by these statements. These risks and uncertainties include those listed under Factors that May Affect Future Results and Management’s Discussion and Analysis of Financial Condition and Results of Operations.

SupportSoft expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained in this report to conform these statements to actual results or changes in our expectations or in events, conditions or circumstances on which any such statement is based. You should not place undue reliance on these forward-looking statements, which apply only as of the date hereof.

Overview

We are a leading provider of service and support automation software. Our enterprise-class software solutions are designed to help corporations automate, manage and personalize the service and support they provide to their employees, customers and partners. Our software helps streamline the service and support process by solving and managing problems associated with the use of various types of computing endpoints and related technologies such as personal computers, network servers, operating systems, software applications, handheld devices, and wired or wireless networks. Our software helps reduce manual steps in the service and support process. We believe that as a result, our software helps corporations resolve problems faster and more cost efficiently while improving user satisfaction associated with the use of operating systems, networks, software applications, business processes and other technologies.

RESULTS OF OPERATIONS

The following table sets forth the results of operations for the three and six months ended June 30, 2003 and 2002 expressed as a percentage of total revenue.

	Three Months Ended June 30,				Six Months Ended June 30,
	2003		2002		2003		2002
Revenue:
License fees	76	%	74	%	78	%	75	%
Services	24		26		22		25

Net revenue	100		100		100		100

Costs and expenses:
Cost of license fees	1		1		1		1
Cost of services	14		17		14		16
Amortization of purchased technology	—		6		—		7
Research and development	18		23		19		24
Sales and marketing	41		58		41		61
General and administrative	10		14		11		15
Amortization of deferred stock compensation	—		1		—		3

Total costs and expenses	84		120		86		127

Income (loss) from operations	16		(20	)	14		(27	)
Interest and other income, net	1		1		1		2

Income (loss) before income taxes	17		(19	)	15		(25	)
Income tax expense	(1	)	—		(1	)	—

Net income (loss)	16	%	(19	)%	14	%	(25	)%

Three and Six Months Ended June 30, 2003 and 2002

Revenue

We generate revenue primarily from software licenses and related professional services. We market our products through a combination of direct sales, IT service providers and resellers. For the three months ended June 30, 2003 and 2002, ratable license revenue primarily from term licenses represented approximately 27% and 39% of total revenue, respectively. For the six months ended June 30, 2003 and 2002, ratable license revenue primarily from term licenses represented approximately 30% and 43%, respectively. Although the percentage of revenue we recognize in the future from licenses and services will vary from period to period, we currently anticipate that revenue from ratable licensing arrangements will represent approximately 25% to 30% of total revenue. The percentage of revenue that we recognize from professional services will be approximately 20% to 25% of total revenue. We consider both of these sources of revenue to be ratable. In total, ratable revenues comprise 45% to 55% of our revenue. We anticipate that revenue we recognize on an immediate basis from perpetual licensing arrangements will be approximately 45% to 55% of total revenue.

One customer accounted for 49% of our total revenue for the three months ended June 30, 2003 and the same customer accounted for 27% of our total revenue for the six months ended June 30, 2003. This same customer did not account for 10% or more of total revenue for the three months ended March 31, 2003. No other customer individually accounted for 10% or more of our total revenue for either the three or six months ended June 30, 2003. Revenue from customers outside the United States accounted for approximately 5% and 12% of our total revenue for the three and six months ended June 30, 2003, compared with 23% and 21% for the three and six months ended June 30, 2002. The mixture of the arrangements in the period was more heavily weighted towards term arrangements that will be recognized ratably compared with a high level of immediate revenue recognized from perpetual licensing arrangements from international orders during the three months ended June 30, 2002.

License revenue

License revenue increased to $9.6 million for the three months ended June 30, 2003 from $7.0 million for the three months ended June 30, 2002 and to $19.2 million for the six months ended June 30, 2003 from $13.6 million for the six months ended June 30, 2002. The increase in license revenue was due primarily to greater demand for our software products, an increase in our licensing mix to more perpetual arrangements and expansion of our product line.

Services revenue

Services revenue increased to $3.0 million for the three months ended June 30, 2003 from $2.5 million for the three months ended June 30, 2002 and to $5.4 million for the six months ended June 30, 2003 from $4.6 million for the six months ended June 30, 2002. These increases were primarily due to increased maintenance revenue associated with the growth in our customer base from prior years and the overall number of maintenance contracts and to a lesser extent to an increase in implementation and consulting services performed.

Cost of License Fees

Cost of license fees consists primarily of costs related to license fees paid to third parties under technology license arrangements. Cost of license revenue increased to $90,000 in the three months ended June 30, 2003 from $65,000 in the three months ended June 30, 2002. Cost of license revenue for the six months ended June 30, 2003 increased to $180,000 compared to $130,000 for the same period in 2002.

Cost of Services Revenue

Cost of services revenue consists primarily of salaries, travel costs, related overhead expenses and payments made to third parties for consulting services. Cost of services revenue increased to $1.8 million for the three months ended June 30, 2003 from $1.6 million for the three months ended June 30, 2002. Cost of services revenue for the six months ended June 30, 2003 increased to $3.5 million compared to $2.9 million for the same period in 2002. These increases were due primarily to an increase in salary and travel expenses as a result of an increase in headcount.

Amortization of Purchased Technology

Amortization of purchased technology was zero for both the three and six months ended June 30, 2003 compared to $598,000 and $1.2 million for three and six months ended June 30, 2002. As of September 30, 2002, the purchased intangibles balance was fully amortized and therefore we do not anticipate future amortization expense as a result of prior arrangements.

Research and Development Expense

Research and development expense consists primarily of payroll and consulting expenses and related costs for research and development personnel. Research and development expense increased to $2.3 million for the three months ended June 30, 2003 from $2.2 million for the three months ended June 30, 2002. Research and development expense for the six months ended June 30, 2003 increased to $4.6 million as compared to $4.5 million for the same period in 2002. These increases were due to an increase in salary expenses offset by a slight decrease in third party consulting services.

Sales and Marketing Expense

Sales and marketing expense consists primarily of salary and commission costs as well as promotional expenses, including public relations, advertising and trade shows. Sales and marketing expense decreased to $5.1 million for the three months ended June 30, 2003 from $5.5 million for the three months ended June 30, 2002. Sales and marketing expense for the six months ended June 30, 2003 decreased to $10.1 million as compared to $11.1 million for the same period in 2002. These decreases were due primarily to a reduction in salary and related expenses offset by increases in promotional expenses, including trade shows and other program events.

General and Administrative Expense

General and administrative expense consists primarily of salary expense and related costs of administrative personnel and professional fees for legal, accounting and other professional services. During both the three and six months ended June 30, 2003 and 2002, general and administrative expenses were $1.3 million and $2.7 million. General and administrative expenses remained constant as a result of a reduction in salary expenses offset by a similar increase in professional fees for legal and accounting services made necessary by emerging corporate governance requirements.

Amortization of Deferred Stock Compensation

We amortized deferred compensation expense of zero during the three and six months ended June 30, 2003 as compared to $108,000 and $578,000 during the same periods in 2002. This compensation expense relates to options awarded to individuals in all operating expense categories. As of June 30, 2002, all existing deferred stock compensation balances have been fully amortized.

Interest income and Other, Net

Interest income and other, net was $91,000 and $231,000 for the three and six months ended June 30, 2003, respectively, as compared to interest income and other, net of $105,000 and $230,000 for the same periods in 2002. For the three months ended June 30, 2003, the decrease in interest income and other, net was due to lower interest earned on our cash, cash equivalents and short-term investments. For the six months ended June 30, 2003, the balances remained constant due to an increase in other income on a foreign currency transaction gain offset by a slight decrease in interest earned on our cash, cash equivalents and short-term investments.

Income Tax Expense

Income tax expense was $119,000 and $192,000 for the three and six months ended June 30, 2003, respectively, and zero for both the three and six months ended June 30, 2002. These increases are due to income generated from operations. No provision for income taxes was recorded in the three and six months ended June 30, 2002 due to a loss in the period and a history of operating losses in all prior periods.

LIQUIDITY AND CAPITAL RESOURCES

Since our incorporation in December 1997, we have financed our operations primarily through cash flows from operations, our initial public offering and, to a lesser extent, from the private placement of our preferred and common stock, bank borrowings and capital equipment lease financing.

Operating Activities

Net cash generated by operating activities was $2.8 million in the six months ended June 30, 2003, an increase of $990,000 over the $1.9 million generated by operating activities during the six month period ended June 30, 2002. Depreciation of fixed assets which is included in net loss but does not require the use of cash amounted to $765,000 for the six months ended June 30, 2003. Net cash generated by operating activities in the six month period was primarily the result of net income of $3.5 million, an increase of $691,000 in accounts payable, $253,000 in other accrued liabilities and $812,000 in deferred revenue and a decrease in prepaid and other current assets of $514,000, offset by an increase in accounts receivable of $3.7 million and a decrease in accrued compensation of $113,000.

Investing Activities

Net cash used in investing activities was $2.3 million in the six months ended June 30, 2003, a decrease of $814,000 over the $1.5 million used in investing activities in the comparable period ended June 30, 2002. Net cash used in investing activities for the six months ended June 30, 2003, was due primarily to the purchase of $15.6 million in short-term investments offset by the sale and maturity of $13.6 million in short-term investments.

Financing Activities

Net cash provided by financing activities was $344,000 for the six months ended June 30, 2003 and $184,000 for the six months ended June 30, 2002. For the period ended June 30, 2003, cash provided by financing activities was attributable to net proceeds from the purchase of common stock under the Employee Stock Purchase Plan and the exercise of employee stock options offset by the repayment of principal payments under capital lease obligations.

Commitments

As of June 30, 2003, our principal commitments consisted of obligations outstanding under a technology acquisition agreement and capital and operating leases. We anticipate requiring minimal additional space in the next 12 months. The following summarizes our contractual obligations as of June 30, 2003 and the effect these contractual obligations are expected to have on our liquidity and cash flows in future periods (in thousands).

	Payments Due By Period
	Total		1 Year or Less		1–3 Years		After 3 Years
Operating leases	$	1,372	$	710	$	662	$	—
Purchased technology		309		309		—		—
Capital lease obligations		381		381		—		—

Total	$	2,062	$	1,400	$	662	$	—

During the quarter ended June 30, 2003, we signed an eighteen month lease for our corporate headquarters in Redwood City, CA. The contractual future payments have been accounted for in the above schedule.

Working Capital and Capital Expenditure Requirements

As of June 30, 2003, we had stockholders’ equity of $27.3 million and working capital of $28.1 million. Included in working capital is deferred revenue of $13.3 million, which will not require dollar for dollar of cash to settle, but will be recognized as revenue in the future. We believe that our existing cash balances will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months. We evaluate potential acquisitions of other businesses, products and technologies and may in the future require additional equity or debt financings to accomplish any potential acquisitions.

If we require additional capital resources to grow our business internally or to acquire complementary technologies and businesses at any time in the future, we may seek to sell additional equity or debt securities. The sale of additional equity or debt securities could result in more dilution to our stockholders. Financing arrangements may not be available to us, or may not be available in amounts or on terms acceptable to us.

Critical Accounting Policies and Estimates

The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Our significant accounting policies are described in Note 1 to the consolidated financial statements. We believe the following critical accounting policies affect our more significant judgments and estimates used in preparing our consolidated financial statements.

Revenue Recognition

•

Persuasive evidence of an arrangement exists;

•

Delivery has occurred;

•

No uncertainties surrounding product acceptance exist;

•

Collection is considered probable; and

•

The fees are fixed or determinable.

We consider all arrangements with payment terms extending beyond twelve months and other arrangements with payment terms longer than normal not to be fixed or determinable. If the fee is determined not to be fixed or determinable, revenue is recognized as payments become due from the customer.

Term licenses are sold with maintenance for which we do not have VSOE to determine fair value. As a result, license revenue for term licenses is recognized ratably over the service period of the agreement and license revenue includes maintenance for term licenses. We do not allocate maintenance revenue from term licenses to services revenue, as we do not believe there is an allocation methodology that provides a meaningful and supportable allocation between license and maintenance revenues.

based upon sell through activity, we recognize revenue when we receive evidence of sell-through, that is, persuasive evidence that the products have been sold to an end user if the reseller has been deemed credit-worthy. When resellers are not deemed credit-worthy, revenue is recognized upon cash receipt.

Allowance for Bad Debt

We maintain reserves for estimated credit losses resulting from the inability of its customers to make required payments. A considerable amount of judgment is required when we assess the realization of receivables, including assessing the probability of collection and the current credit-worthiness of each customer. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional reserves may be required.

Factors that May Affect Future Results

We have a history of losses and only recently became profitable. If we do not continue to be profitable, we may not be able to continue to operate.

We incurred net losses of approximately $81.5 million for the period from December 3, 1997 through June 30, 2003 and have only been profitable since the third quarter of 2002. If we do not continue to be profitable, we may not be able to increase our number of employees in sales, marketing and research and development programs or increase our investment capital equipment or otherwise execute our business plan. If we fail to sustain or increase profitability in the future, our business will suffer and we may not be able to continue to operate.

Our quarterly results are difficult to predict and may fluctuate. If we do not meet quarterly financial expectations, our stock price would likely decline.

Because of our limited operating history, our quarterly revenue and operating results are difficult to predict and may fluctuate from quarter to quarter. Our operating results in some quarters may fall below our predictions or the expectations of securities analysts or investors, which would likely cause the market price of our common stock to decline.

Several factors are likely to cause fluctuations in our operating results, including:

•

demand for our service and support automation software;

•

the mix of perpetual license revenue versus term license revenue;

•

the price and mix of products and services we or our competitors offer;

•

our ability to gain and retain customers;

•

the amount and timing of operating costs and capital expenditures relating to expansion of our business, infrastructure and marketing activities;

•

size and timing of customer orders and the timing of customer license payments;

•

our ability to recognize revenue in a given quarter;

•

general economic conditions and their affect on our operations; and

•

the effects of external events such as the war on terrorism and any related conflicts or similar events worldwide.

Our quarterly results depend on the size of a small number of orders, so the delay or loss of any single large order during a quarterly period, and especially an order for a perpetual license rather than a term license, could harm that quarter’s results and cause our stock price to decline.

Our operating results could suffer if any large orders are delayed or cancelled in any future period. Each quarter, we derive a significant portion of our license revenue from a small number of relatively large orders for the licensing of our service and support automation software. We license our service and support automation software under perpetual and term licenses. Perpetual licenses typically result in our recognition of a larger amount of revenue in the quarter in which the license is granted as compared with term licenses. Revenue from a perpetual license is generally recognized upon delivery of a product. Revenue from a term license is recognized on a monthly basis over the agreement term, which is typically three years. We expect that we will continue to depend upon a small number of large orders for a significant portion of our license revenue.

Because a small number of customers have historically accounted for and may in future periods account for substantial portions of our revenue, our revenue could decline because of delays of customer orders or the failure of existing customers to pay for their licenses or renew licenses.

One customer accounted for 49% of our total revenue for the three months ended June 30, 2003 and the same customer accounted for 27% of our total revenue for the six months ended June 30, 2003. This same customer did not account for 10% or more of total revenue for the three months ended March 31, 2003. No other customer individually accounted for 10% or more of our total revenue for either the three or six months ended June 30, 2003. Because we have a small number of customers and a few customers are likely to continue to account for a significant portion of our revenue, our revenue could decline because of the loss or delay of a single customer order or the failure of an existing customer to renew its term license. We may not obtain additional customers. The failure to obtain additional customers, the loss or delay of customer orders and the failure of existing customers to renew licenses or pay fees due will harm our operating results.

Our sales cycle can be lengthy and if revenue forecasted for a particular quarter is not realized in that quarter, significant expenses incurred may not be offset by corresponding sales.

Our sales cycle for our service and support automation software can range from three months to nine months or more and may vary substantially from customer to customer. While our customers are evaluating our products and services, we may incur substantial sales and marketing expenses and spend significant management effort. Any delay in completing sales in a particular quarter could cause our operating results to be below expectations.

We must achieve broad adoption and acceptance of our service and support automation products and services or we will not increase our market share or grow our business.

We must achieve broad market acceptance and adoption of our products and services or our business and operating results will suffer. Specifically, we must encourage our customers to transition from using traditional support methods. To accomplish this, we must:

•

continually improve the performance, features and reliability of our products and services to address changing industry standards and customer needs; and

•

develop integration with other support-related technologies.

Our product innovations may not achieve the market penetration or price stability necessary for us to maintain profitability.

If we fail to develop, in a timely manner, new or enhanced versions of our service and support automation software or to provide new products and services that achieve rapid and broad market acceptance or price stability, we may not maintain our profitability. We may fail to identify new product and service opportunities successfully. Our existing products will become obsolete if we fail to introduce new products or product enhancements that meet new customer demands, support new standards or integrate with new or upgraded versions of packaged applications. We may have little or no control over the factors that might influence market acceptance of our products and services. These factors include:

•

the willingness of enterprises to transition to service and support automation solutions; and

•

acceptance of competitors’ service and support automation solutions or other similar technologies.

Our software may not operate with the hardware and software platforms that are used by our customers now or in the future, and as a result our business and operating results may suffer.

We currently serve a customer base with a wide variety of constantly changing hardware, packaged software applications and networking platforms. If there is widespread adoption of other operating system environments, and if we fail to release versions of our service and support automation software that are compatible with these other operating systems, our business and operating results will suffer. Our future success also depends on:

•

our ability to integrate our product with multiple platforms and to modify our product as new versions of packaged applications are introduced;

•

the number of different operating systems and databases that our product can work with; and

•

our management of software being developed by third parties for our customers or for use with our products.

We rely on third-party technologies and our inability to use or integrate third-party technologies could delay product or service development.

We intend to continue to license technologies from third parties, including applications used in our research and development activities and technologies, which are integrated into our products and services. Our inability to obtain or integrate any of these licenses could delay product and service development until equivalent technology can be identified, licensed and integrated. These technologies may not continue to be available to us on commercially reasonable terms or at all. We may fail to successfully integrate any licensed technology into our products or services. This would harm our business and operating results. Third-party licenses also expose us to increased risks that include:

•

risks of product malfunction after new technology is integrated;

•

the diversion of resources from the development of our own proprietary technology; and

•

our inability to generate revenue from new technology sufficient to offset associated acquisition and maintenance costs.

We may engage in future acquisitions or investments that could dilute our existing stockholders, or cause us to incur significant expenses.

We may acquire or invest in complementary businesses, technologies or products. If we are unable to use or integrate any newly acquired entities or technologies effectively or profitably, our operating results could suffer. Acquisitions by us could also result in large and immediate write-offs, incurrence of debt and contingent liabilities or amortization of expenses related to goodwill and other intangibles, which could harm our operating results. Additional funds to finance any acquisitions may not be available on terms that are favorable to us, and, in the case of equity financings, may dilute our stockholders.

We may need additional capital and if funds are not available on acceptable terms, we may not be able to hire and retain employees, fund our expansion or compete effectively.

We believe that our existing capital resources will enable us to maintain our operations for at least the next 12 months. However, if our capital requirements vary materially from those currently planned, we may require additional financing sooner than anticipated. This financing may not be available in sufficient amounts or on terms acceptable to us and may be dilutive to existing stockholders. If adequate funds are not available or are not available on acceptable terms, our ability to hire, train or retain employees, to fund our expansion, take advantage of unanticipated opportunities, develop or enhance services or products, or respond to competitive pressures would be significantly limited.

We may lose the services of our key personnel, which in turn would harm the market’s perception of our business and our ability to achieve our business goals.

Our success will depend on the skills, experience and performance of our senior management, engineering, sales, marketing and other key personnel. The loss of the services of any of our senior management or other key personnel, including our president, chief executive officer and chairman, Radha R. Basu, our executive vice president of finance and administration and chief financial officer, Brian Beattie, our vice president of engineering and chief technical officer, Scott W. Dale, and our chief software officer, Cadir B. Lee, could harm the market’s perception of our business and our ability to achieve our business goals.

Our failure to establish and expand strategic alliances would harm our ability to achieve market acceptance of our service and support automation software.

If we fail to maintain, establish or successfully implement strategic alliances, our ability to achieve market acceptance of our automation software will suffer and our business and operating results will be harmed. Specifically, we must establish and extend existing distribution alliances with specialized technology and services firms such as support outsourcers.

Our products depend on and work with products containing complex software and if our products fail to perform properly due to errors or similar problems in the software, we may need to spend resources to correct the errors or compensate for losses from these errors and our reputation could be harmed.

Our products depend on complex software, both internally developed and licensed from third parties. Also, our customers may use our products with other companies’ products which also contain complex software. Complex software often contains errors and may not perform properly. These errors could result in:

•

delays in product shipments;

•

unexpected expenses and diversion of resources to identify the source of errors or to correct errors;

•

damage to our reputation;

•

lost sales;

•

demands, claims and litigation and related defense costs;

•

product liability claims; and

•

product returns, refunds or other damages claims.

Our system security is important to our customers and we may need to spend significant resources to protect against or correct problems caused by security breaches.

A fundamental requirement for online communications, transactions and support is the secure transmission of confidential information. Third parties may attempt to breach our security or that of our customers. We may be liable to our customers for any breach in security and any breach could harm our business and reputation. Also, computers are vulnerable to computer viruses, physical or electronic break-ins and similar disruptions, which could lead to interruptions, delays or loss of data. We may be required to expend significant capital and other resources to further protect against security breaches or to correct problems caused by any breach.

We may face claims of invasion of privacy or inappropriate disclosure, use or loss of our customers’ information and any liability imposed could harm our reputation and cause us to lose customers.

Our software contains features which may allow us or our customers to control, monitor or collect information from computers running the software without notice to the computing users. Therefore we may face claims about invasion of privacy or inappropriate disclosure, use or loss of this information. Any imposition of liability could harm our operating results.

We have limited experience in international operations and if our revenue from international operations does not exceed the expense of establishing and maintaining our international operations, our business could suffer.

We intend to expand further into international markets. We have limited experience in international operations and may not be able to compete effectively in international markets. If we do not generate enough revenue from international operations to offset the expense of these operations, our business could suffer. Risks we face in conducting business internationally include:

•

difficulties and costs of staffing and managing international operations;

•

differing technology standards and legal considerations;

•

longer sales cycles and collection periods;

•

changes in currency exchange rates and controls;

•

dependence on local vendors; and

•

the effects of external events such as the war on terrorism and any related conflicts, the outbreak of severe acute respiratory syndrome, or SARS, or similar events worldwide.

Any system failure that causes an interruption in our customers’ ability to use our products or services or a decrease in their performance could harm our relationships with our customers and result in reduced revenue.

Our software may depend on the uninterrupted operation of our internal and outsourced communications and computer systems. These systems are vulnerable to damage or interruption from computer viruses, human error, natural disasters and intentional acts of vandalism and similar events. Our disaster recovery plan may not be adequate and business interruption insurance may not be enough to compensate us for losses that occur. These problems could interrupt our customers’ ability to use our service and support automation products or services, which could harm our reputation and cause us to lose customers and revenue.

We may not obtain sufficient patent protection, and this could harm our competitive position and increase our expenses which would harm our business.

Our success and ability to compete depend to a significant degree upon the protection of our software and other proprietary technology. It is possible that:

•

our pending patent applications may not be issued;

•

competitors may independently develop similar technologies or design around any of our patents;

•

patents issued to us may not be broad enough to protect our proprietary rights; and

•

our issued patents could be successfully challenged.

We rely upon trademarks, copyrights and trade secrets to protect our proprietary rights and if these rights are not sufficiently protected, it could harm our ability to compete and to generate revenue.

We also rely on a combination of laws, such as copyright, trademark and trade secret laws, and contractual restrictions, such as confidentiality agreements and licenses, to establish and protect our proprietary rights. Our ability to compete and grow our business could suffer if these rights are not adequately protected. Our proprietary rights may not be adequately protected because:

•

laws and contractual restrictions may not prevent misappropriation of our technologies or deter others from developing similar technologies; and

•

policing unauthorized use of our products and trademarks is difficult, expensive and time-consuming, and we may be unable to determine the extent of this unauthorized use.

Also, the laws of other countries in which we market our products may offer little or no protection of our proprietary technologies. Reverse engineering, unauthorized copying or other misappropriation of our proprietary technologies could enable third parties to benefit from our technologies without paying us for them, which would harm our competitive position and market share.

We may face intellectual property infringement claims that could be costly to defend and result in our loss of significant rights.

Other parties may assert intellectual property infringement claims against us or our customers and our products may infringe the intellectual property rights of third parties. Intellectual property litigation is expensive and time-consuming and could divert management’s attention from our business. If there is a successful claim of infringement, we may be required to develop non-infringing technology or enter into royalty or license agreements which may not be available on acceptable terms, if at all. Our failure to develop non-infringing technologies or license the proprietary rights on a timely basis would harm our business. Our products may infringe issued patents that may relate to our products.

Also, patent applications may have been filed by third parties which relate to our software products. The adoption in March of 2002 of the new trademark and corporate name SupportSoft increases the risk that a prior user could view the mark or name to be confusingly similar to the prior user’s mark or name. Although the we have conducted limited trademark and trade name searches, and do not believe the SupportSoft trademark and corporate name will infringe any known party’s trademark rights, it is possible that a third party will claim our use of SupportSoft infringes its trademark.

We must compete successfully in the service and support automation market or we will lose market share and our business will fail.

The market for our products is intensely competitive, rapidly changing and significantly affected by new product introductions and other market activities of industry participants. Competitive pressures could reduce our market share or require us to reduce the price of products and services and therefore our gross margin, which could harm our business and operating results. Our integrated software solution competes against various vendors’ software products designed to accomplish specific elements of a complete service and support automation solution. For example, in the market for automated delivery of service and support solutions, we compete with Motive Communications, Inc.

We may encounter competition from companies such as:

•

customer communications software companies;

•

question and answer companies;

•

customer relationship management solution providers;

•

consolidated service desk solution vendors;

•

Internet infrastructure companies; and

•

operating systems providers.

Our potential competitors may have longer operating histories, significantly greater financial, technical, and other resources or greater name recognition than we do. Our competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements. In addition, our competitors may complete strategic transactions with our other competitors or companies with whom we have strategic alliances, making it difficult for us to compete for market share. If we fail to compete effectively, we may lose or be unable to expand our market share and our business and operating results would suffer.

Because our service and support automation software is designed to support businesses operating over the Internet, our success depends on the continued growth and levels of performance of Internet usage.

Because a majority of our products are designed to support businesses operating over or benefiting from the Internet, the success of our business will depend on the continued improvement of the Internet as a convenient means of consumer interaction and commerce, as well as an efficient medium for the delivery and distribution of information by enterprises to their employees and extended enterprise. Because global commerce on the Internet and the online exchange of information is evolving, we cannot predict whether the Internet will continue to be a viable commercial marketplace or whether access to the Internet via a broadband connection will continue to be adopted.

We may experience a decrease in market demand due to an uncertain economy in the United States, which has been further stymied by the concerns of terrorism, war and social and political instability.

Economic growth has slowed significantly, and some analysts believe the United States economy is experiencing a recession; the timing of an economic recovery is uncertain. In addition, the terrorists attacks in the United States and turmoil in the Middle East have increased the uncertainty in the United States economy and may further add to the decline in the United States business environment. The war on terrorism, along with the effects of the terrorist attack and other similar events, or war in general, could contribute further to a slowdown of the market demand for goods and services, including service and support automation software. If the economy continues to decline as a result of the recent economic, political and social turmoil, or if there are further terrorist attacks in the United States or elsewhere, we may experience decreases in the demand for our products and services, which may harm our operating results.

Governmental regulation and legal changes could impair the growth of the Internet and decrease demand for our products or increase our cost of doing business.

The laws and regulations that govern our business change rapidly. Any change in laws and regulations could impair the growth of the Internet and could reduce demand for our products, subject us to liability or increase our cost of doing business. The United States government and the governments of states and foreign countries have attempted to regulate activities on the Internet and the distribution of software. Also, in 1998, Congress passed the Internet Freedom Act, which imposed a three-year moratorium on state and local taxes on Internet-based transactions. In late 2001, this moratorium was extended for two years. In January 2003, several members of Congress proposed a bill that would make the moratorium on state and local taxes on Internet-based transactions permanent. Failure to renew this moratorium or to pass a bill that would permanently prohibit state and local taxes on Internet-based transactions would allow states to impose taxes on e-commerce. This might harm our business directly and indirectly by harming the businesses of our customers, potential customers and the parties to our business alliances. The applicability to the Internet of existing laws governing issues is uncertain and may take years to resolve. Evolving areas of law that are relevant to our business include privacy laws, intellectual property laws, proposed encryption laws, content regulation and sales and use tax laws and regulations.

Our directors, executive officers, and principal stockholders own a substantial portion of our common stock and this concentration of ownership may allow them to elect most of our directors and could delay or prevent a change in control of SupportSoft.

Our directors, executive officers, and stockholders who currently own over 5% of our common stock collectively beneficially own approximately 41% of our outstanding common stock as of August 13, 2003. These stockholders, if they vote together, will be able to significantly influence all matters requiring stockholder approval. For example, they may be able to elect most of our directors, delay or prevent a transaction in which stockholders might receive a premium over the market price for their shares or prevent changes in control or management.

Our stock price may be highly volatile and may decline significantly because of stock market fluctuations and other factors that affect the prices of technology stocks. A decline in our stock price could result in securities class action litigation against us. Securities class action litigation diverts management’s attention and may harm our business.

The stock market has experienced significant price and volume fluctuations that have adversely affected the market prices of common stock of technology companies. These broad market fluctuations may reduce the market price of our common stock. Other factors that may lead to high volatility or have an adverse affect on the market price of our common stock include:

•

actual or anticipated fluctuations in our operating results;

•

changes in or our failure to meet securities analysts’ expectations; and

•

sales of shares of our common stock by our affiliates or others.

In the past, securities class action litigation has often been brought against a company after periods of volatility in the market price of securities.

On or about November 30, 2001, Dana [sic] Risley, on behalf of herself [sic] and other similarly situated, filed a securities class action lawsuit against SupportSoft. We may again in the future be a target of similar litigation. Securities litigation could result in substantial costs and divert management’s attention and resources, which could harm our ability to execute our business plan.

We may be required to change our business practices if there are changes in accounting regulations and related interpretations and policies.

Policies, guidelines and interpretations related to revenue recognition, expensing options, income taxes, investments in equity securities, facilities consolidation, accounting for acquisitions, allowances for doubtful accounts and other financial reporting matters are often among topics under re-examination by accounting standards groups and regulators. These standard groups and regulators could promulgate interpretations and guidance that could result in material and potentially adverse, changes to our business practices and accounting policies.

New rules and regulations for public companies may increase our administrative costs.

The Sarbanes-Oxley Act of 2002, as well as new rules subsequently implemented by the Securities and Exchange Commission, have required changes in corporate governance practices of public companies. In addition to final rules and rule proposals already made by the Securities and Exchange Commission, Nasdaq has proposed revisions to its requirements for companies that are Nasdaq-listed. We expect these new rules and regulations to increase our legal and financial compliance costs, and to make some activities more time consuming and/or costly. We also expect these new rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These new rules and regulations could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee, and qualified executive officers.

ITEM 3:

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Qualitative and Quantitative Disclosures about Market Risk

We develop products in the United States and market and sell in North America, South American, Asia and Europe. As a result, our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. As most sales are currently made in U.S. dollars, a strengthening of the dollar could make our products less competitive in foreign markets.

Our interest income is sensitive to changes in the general level of U.S. interest rates. However, due to the nature of our cash equivalents and short-term investments, we have concluded that there is not material market risk exposure.

Our investment policy requires us to invest funds in excess of operating requirements in:

•

obligations of the U.S. government and its agencies;

•

securities of U.S. corporations rated A1 or the equivalent for short-term ratings and A2 or the equivalent for long-term ratings by Standard and Poors or the Moody’s equivalent; and

•

money market funds or deposits issued or guaranteed by U.S. and non-U.S. commercial banks, meeting credit rating and net worth requirements with maturities of less than eighteen months.

At June 30, 2003, our cash and cash equivalents consisted primarily of money market funds held by large institutions in the U.S. and our short-term investments were primarily invested in government debt securities, corporate bonds and auction backed securities maturing or resetting in less than eighteen months.

ITEM 4:

CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures

We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, our Chief Executive Officer and Chief Financial Officer have concluded that, subject to the limitations noted above, our disclosure controls and procedures were effective to ensure that material information relating to us, including our consolidated subsidiaries, is made known to them by others within those entities, particularly during the period in which this Quarterly Report on Form 10-Q was being prepared.

Changes in internal controls

There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) identified in connection with the evaluation described above that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Controls

Our management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

PART II: OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

On or about July 1, 2003, Amy Liu and Antoine Kasprzak, on behalf of themselves and all others similarly situated, served an amended complaint on SupportSoft in the United States District Court for the Southern District of Florida. The amended complaint alleged, inter alia, that our registration statement and prospectus dated July 18, 2000 for the issuance and initial public offering of 4,250,000 shares of our common stock contained material misrepresentations and/or omissions, related to the underwriter’s analysts who allegedly issued reports that under-estimated a company’s prospects in order to create a fictional laddering of upside surprises. The defendants named in the lawsuit are SupportSoft, Credit Suisse First Boston Corporation and 11 other companies for which Credit Suisse First Boston Corporation underwrote share offerings. Before the time to respond to the complaint, however, plaintiffs voluntarily dismissed the case against SupportSoft and its officers named as defendants and, by order signed on July 31, 2003, the court formally dismissed the case without prejudice.

We are subject to other routine legal proceedings, as well as demands, claims and threatened litigation, that arise in the normal course of our business. The ultimate outcome of any litigation is uncertain, and either unfavorable or favorable outcomes could have a material negative impact on our operations. Regardless of outcome, litigation can have an adverse impact on us because of defense costs, diversion of management resources and other factors.

ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

On May 27, 2003, we held our annual stockholders’ meeting. At such meeting, the following actions were voted upon:

(a)

Election of the following directors to serve until the 2004 Annual Meeting of Stockholders and thereafter until their successors are elected and qualified:

Director	Votes For	Votes Withheld
Radha R. Basu	26,559,322	73,360
Manuel F. Diaz	26,572,922	59,760
Kevin C. Eichler	26,572,922	59,760
Claude M. Leglise	26,572,922	59,760
Edward S. Russell	26,572,922	59,760
James Thanos	26,383,269	249,413
Dick Williams	26,383,269	249,413

(b)

To ratify the appointment of Ernst & Young LLP as the Company’s independent auditors for the fiscal year ending December 31, 2003:

Votes For		Votes Against		Abstentions
26,594,214		22,270		16,198

ITEM 6.

EXHIBITS AND REPORTS OF FORM 8-K.

(a) Exhibits.


10.1		First Amendment to Lease effective as of May 31, 2003 by and between MPTP Holding, LLC and the Registrant

31.1		Chief Executive Officer Section 302 Certification.

31.2		Chief Financial Officer Section 302 Certification.

32.1		Statement of the Chief Executive Officer under 18 U.S.C. § 1350

32.2		Statement of the Chief Financial Officer under 18 U.S.C. § 1350

(b) Reports on Form 8-K.

On April 21, 2003, the Company filed a Form 8-K furnishing under item 12 the Company’s press release announcing its March 31, 2003 quarterly results. The information contained in this Form 8-K shall not be deemed “filed” with the SEC as a result of its reference herein.

SIGNATURE

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

August 14, 2003

SUPPORTSOFT, INC.

By:		/s/ BRIAN M. BEATTIE
		Brian M. Beattie Executive Vice President of Finance and Administration and Chief Financial Officer (Principal Financial Officer, Chief Accounting Officer and Duly Authorized Signatory)

EXHIBIT INDEX TO SUPPORTSOFT, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2003

Exhibit Number		Description

10.1		First Amendment to Lease effective as of May 31, 2003 by and between MPTP Holding, LLC and the Registrant

31.1		Chief Executive Officer Section 302 Certification

31.2		Chief Financial Officer Section 302 Certification

32.1		Statement of Chief Executive Officer Under 18 U.S.C. § 1350

32.2		Statement of Chief Financial Officer Under 18 U.S.C. § 1350

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. freshman Good

Support.com (SPRT) 10-Q2003 Q2 Quarterly report

Content analysis

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents