**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

** **

**Washington, DC 20549**

 

**FORM 10-Q**

 

**(Mark One)**

ý         **QUARTERLY REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the Quarter ended September 30,2005**

 

**OR**

 

**o****        TRANSITION REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

**0-28252**

**(Commission File Number)**

 

**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 markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days. Yes ý No o

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act). Yes ý No o

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes o No ý

 

As of November 5, 2005there were 34,428,665 shares of the Registrant’s Common Stock issued andoutstanding.

 

 

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**BROADVISION, INC. AND SUBSIDIARIES**

**FORM 10-Q**

**Quarter Ended September 30, 2005**

 

**TABLE OF CONTENTS**

 
| **PART I.**  | **FINANCIAL INFORMATION **                                                                                                                |   |
|-------------------|------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| Item 1.           | Financial Statements                                                                                                                           |   |
|              | Condensed Consolidated  Balance Sheets-September 30, 2005 and December 31, 2004                                                      |   |
|              | Condensed Consolidated  Statements of Operations and Comprehensive Income (Loss)-Three and nine  months ended September 30, 2005 and 2004 |   |
|              | Condensed Consolidated  Statements of Cash Flows-Nine months ended September 30, 2005 and 2004                                            |   |
|              | Notes to Condensed  Consolidated Financial Statements                                                                                          |   |
| Item 2.           | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                    |   |
| Item 3.           | Quantitative  and Qualitative Disclosures About Market Risk                                                                                    |   |
| Item 4.           | Controls and  Procedures                                                                                                                       |   |
| **PART II.** | **OTHER INFORMATION**                                                                                                                          |   |
| Item 1.           | Legal Proceedings                                                                                                                              |   |
| Item 2.           | Unregistered  Sales of Equity 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                                                                                                                                       |   |
| **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)**

 
| ** **                                                                                                                                                                                                | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                | ** ** | **(unaudited)**              | ** ** | ** **                  | ** ** |
| **ASSETS**                                                                                                                                                                                                |       |                         |       |                        |       |
| Current  assets:                                                                                                                                                                                          |       |                         |       |                        |       |
| Cash and  cash equivalents                                                                                                                                                                                |       | $                            | 6,066      |                        | $          | 41,851 |   |
| Accounts receivable, less receivable  reserves of $1,090 as of September 30, 2005 and $1,409 as of  December 31, 2004                                                                           |       | 10,576                       |       | 14,370                      |       |
| Restricted  cash, current portion                                                                                                                                                                         |       | —                       |       | 21,933                      |       |
| Prepaids and  other                                                                                                                                                                                       |       | 1,879                        |       | 2,232                       |       |
| Total current assets                                                                                                                                                                                      |       | 18,521                       |       | 80,386                      |       |
|                                                                                                                                                                                                      |       |                         |       |                        |       |
| Property and  equipment, net                                                                                                                                                                              |       | 2,612                        |       | 3,566                       |       |
| Restricted  cash, net of current portion                                                                                                                                                                  |       | 1,997                        |       | 2,323                       |       |
| Equity  investments                                                                                                                                                                                       |       | —                       |       | 574                         |       |
| Goodwill                                                                                                                                                                                                  |       | 43,236                       |       | 56,434                      |       |
| Other assets                                                                                                                                                                                              |       | 1,077                        |       | 1,370                       |       |
| Total assets                                                                                                                                                                                              |       | $                            | 67,443     |                        | $          | 144,653 |   |
|                                                                                                                                                                                                      |       |                         |       |                        |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                            |       |                         |       |                        |       |
| Current  liabilities:                                                                                                                                                                                     |       |                         |       |                        |       |
| Bank  borrowings and current portion of long-term debt                                                                                                                                                    |       | $                            | 11,768     |                        | $          | 25,566 |   |
| Accounts  payable                                                                                                                                                                                         |       | 4,561                        |       | 7,470                       |       |
| Accrued  expenses                                                                                                                                                                                         |       | 16,168                       |       | 40,745                      |       |
| Warrant  liability                                                                                                                                                                                        |       | 687                          |       | 4,899                       |       |
| Unearned  revenue                                                                                                                                                                                         |       | 3,043                        |       | 3,870                       |       |
| Deferred  maintenance                                                                                                                                                                                     |       | 12,454                       |       | 15,972                      |       |
| Total current liabilities                                                                                                                                                                                 |       | 48,681                       |       | 98,522                      |       |
|                                                                                                                                                                                                      |       |                         |       |                        |       |
| Long-term  debt, net of current portion                                                                                                                                                                   |       | —                       |       | 7,443                       |       |
| Other  non-current liabilities                                                                                                                                                                            |       | 2,282                        |       | 8,278                       |       |
| Total liabilities                                                                                                                                                                                         |       | 50,963                       |       | 114,243                     |       |
|                                                                                                                                                                                                      |       |                         |       |                        |       |
| Commitments  and contingencies (Note 4)                                                                                                                                                                   |       |                         |       |                        |       |
|                                                                                                                                                                                                      |       |                         |       |                        |       |
| Stockholders’  equity:                                                                                                                                                                               |       |                         |       |                        |       |
| Convertible preferred stock, $0.0001 par  value; 10,000 shares authorized; none issued and outstanding                                                                                                    |       | —                       |       | —                      |       |
| Common stock, $0.0001 par value; 2,000,000  shares authorized; 34,429 shares issued and outstanding as of  September 30, 2005 and 33,951 shares issued and outstanding as of  December 31, 2004 |       | 3                            |       | 3                           |       |
| Additional  paid-in capital                                                                                                                                                                               |       | 1,215,217                    |       | 1,214,619                   |       |
| Accumulated  other comprehensive income (loss)                                                                                                                                                            |       | (168                         | )          | (172                        | )          |
| Accumulated  deficit                                                                                                                                                                                      |       | (1,198,572                   | )          | (1,184,040                  | )          |
| Total stockholders’ equity                                                                                                                                                                           |       | 16,480                       |       | 30,410                      |       |
|                                                                                                                                                                                                      |       |                         |       |                        |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                          |       | $                            | 67,443     |                        | $          | 144,653 |   |

 

*See Accompanying Notes to Condensed ConsolidatedFinancial Statements*

 

3

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**BROADVISION, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**AND COMPREHENSIVE INCOME (LOSS)**

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

 
| ** **                                                                                            | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                            | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Revenues:**                                                                                         |       |                                       |       |                                      |       |   |   |   |   |
| Software licenses                                                                                     |       | $                                          | 3,134      |                                      | $          | 4,654 |   | $ | 10,941 |   | $ | 19,591 |   |
| Services                                                                                              |       | 10,943                                     |       | 12,570                                    |       | 35,017 |   | 38,650 |   |
| Total revenues                                                                                        |       | 14,077                                     |       | 17,224                                    |       | 45,958 |   | 58,241 |   |
|                                                                                                  |       |                                       |       |                                      |       |   |   |   |   |
| **Cost of revenues:**                                                                                 |       |                                       |       |                                      |       |   |   |   |   |
| Cost of software licenses                                                                             |       | 106                                        |       | 256                                       |       | (137 | ) | 1,147 |   |
| Cost of services                                                                                      |       | 5,641                                      |       | 6,391                                     |       | 17,235 |   | 18,970 |   |
| Total cost of revenues                                                                                |       | 5,747                                      |       | 6,647                                     |       | 17,098 |   | 20,117 |   |
|                                                                                                  |       |                                       |       |                                      |       |   |   |   |   |
| Gross profit                                                                                          |       | 8,330                                      |       | 10,577                                    |       | 28,860 |   | 38,124 |   |
|                                                                                                  |       |                                       |       |                                      |       |   |   |   |   |
| **Operating expenses:**                                                                               |       |                                       |       |                                      |       |   |   |   |   |
| Research and development                                                                              |       | 3,095                                      |       | 4,600                                     |       | 11,337 |   | 13,997 |   |
| Sales and marketing                                                                                   |       | 2,948                                      |       | 6,020                                     |       | 13,819 |   | 20,365 |   |
| General and administrative                                                                            |       | 2,162                                      |       | 2,335                                     |       | 7,526 |   | 7,152 |   |
| Business combination costs                                                                            |       | 977                                        |       | —                                    |       | 977 |   | — |   |
| Restructuring charge (credit)                                                                         |       | 245                                        |       | (25,454                                   | )          | (150 | ) | (24,205 | ) |
| Goodwill impairment                                                                                   |       | 13,198                                     |       | —                                    |       | 13,198 |   | — |   |
| Total operating expenses (benefit)                                                                    |       | 22,625                                     |       | (12,499                                   | )          | 46,707 |   | 17,309 |   |
|                                                                                                  |       |                                       |       |                                      |       |   |   |   |   |
| Operating income (loss)                                                                               |       | (14,295                                    | )          | 23,076                                    |       | (17,847 | ) | 20,815 |   |
|                                                                                                  |       |                                       |       |                                      |       |   |   |   |   |
| Interest (expense) income, net                                                                        |       | (1,002                                     | )          | 77                                        |       | (2,836 | ) | 288 |   |
| Other income, net                                                                                     |       | 220                                        |       | 238                                       |       | 3,648 |   | 59 |   |
|                                                                                                  |       |                                       |       |                                      |       |   |   |   |   |
| Income (loss) before provision for income  taxes                                                      |       | (15,077                                    | )          | 23,391                                    |       | (17,035 | ) | 21,162 |   |
|                                                                                                  |       |                                       |       |                                      |       |   |   |   |   |
| Benefit (provision) for income taxes                                                                  |       | 540                                        |       | (11                                       | )          | 2,503 |   | (141 | ) |
|                                                                                                  |       |                                       |       |                                      |       |   |   |   |   |
| Net income (loss)                                                                                     |       | $                                          | (14,537    | )                                         | $          | 23,380 |   | $ | (14,532 | ) | $ | 21,021 |   |
|                                                                                                  |       |                                       |       |                                      |       |   |   |   |   |
| Basic income (loss) per share                                                                         |       | $                                          | (0.42      | )                                         | $          | 0.70 |   | $ | (0.43 | ) | $ | 0.63 |   |
| Diluted income (loss) per share                                                                       |       | $                                          | (0.42      | )                                         | $          | 0.69 |   | $ | (0.43 | ) | $ | 0.61 |   |
| **Shares used in computing:**                                                                         |       |                                       |       |                                      |       |   |   |   |   |
| Basic income (loss) per share                                                                         |       | 34,320                                     |       | 33,599                                    |       | 34,159 |   | 33,459 |   |
| Diluted income (loss) per share                                                                       |       | 34,320                                     |       | 34,052                                    |       | 34,159 |   | 34,322 |   |
| **Comprehensive income (loss):**                                                                      |       |                                       |       |                                      |       |   |   |   |   |
| Net income (loss)                                                                                     |       | $                                          | (14,537    | )                                         | $          | 23,380 |   | $ | (14,532 | ) | $ | 21,021 |   |
| Other comprehensive gain (loss), net of  tax:                                                         |       |                                       |       |                                      |       |   |   |   |   |
| Unrealized investment gains less  reclassification adjustment for gains included in net income (loss) |       | —                                     |       | 188                                       |       | — |   | 238 |   |
| Foreign currency translation adjustment                                                               |       | (19                                        | )          | —                                    |       | 4 |   | — |   |
| Total comprehensive income (loss)                                                                     |       | $                                          | (14,556    | )                                         | $          | 23,568 |   | $ | (14,528 | ) | $ | 21,259 |   |

 

*See Accompanying Notes to Condensed ConsolidatedFinancial Statements*

 

4

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**BROADVISION, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(In thousands; unaudited)**

 
| ** **                                                                             | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                             | ** ** | **2005**                                 | ** ** | **2004** | ** ** |
| **Cash flows from operating activities:**                                              |       |                                     |       |   |   |
| Net income (loss)                                                                      |       | $                                        | (14,532    | ) | $ | 21,021 |   |
| Adjustments to reconcile net income (loss)  to net cash used for operating activities: |       |                                     |       |   |   |
| Depreciation and amortization                                                          |       | 973                                      |       | 3,129 |   |
| Stock-based compensation credit                                                        |       | —                                   |       | (15 | ) |
| Release of doubtful accounts and reserves                                              |       | (319                                     | )          | (1,722 | ) |
| Amortization of prepaid royalties                                                      |       | 54                                       |       | 494 |   |
| Unrealized loss on investments                                                         |       | —                                   |       | 50 |   |
| (Gain) loss on cost method investments                                                 |       | (1,117                                   | )          | 517 |   |
| Loss (gain) on sale or abandonment of fixed  assets                                    |       | 78                                       |       | (96 | ) |
| Non-cash restructuring charge (reversal)                                               |       | —                                   |       | (24,855 | ) |
| Release of income tax accrual                                                          |       | (2,032                                   | )          | — |   |
| (Gain) loss on revaluation of warrants                                                 |       | (4,212                                   | )          | 272 |   |
| Amortization of discount on convertible  notes                                         |       | 2,382                                    |       | — |   |
| Amortization of goodwill                                                               |       | 13,198                                   |       | — |   |
| Changes in operating assets and  liabilities:                                          |       |                                     |       |   |   |
| Accounts receivable                                                                    |       | 4,113                                    |       | 5,002 |   |
| Prepaids and other                                                                     |       | 299                                      |       | 754 |   |
| Other non-current assets                                                               |       | 293                                      |       | 735 |   |
| Accounts payable and accrued expenses                                                  |       | (5,220                                   | )          | 1,128 |   |
| Restructuring accrual                                                                  |       | (24,215                                  | )          | (38,969 | ) |
| Unearned revenue and deferred maintenance                                              |       | (4,345                                   | )          | (6,105 | ) |
| Other noncurrent liabilities                                                           |       | (80                                      | )          | (184 | ) |
| Net cash used for operating activities                                                 |       | (34,682                                  | )          | (38,844 | ) |
|                                                                                   |       |                                     |       |   |   |
| **Cash flows from investing activities:**                                              |       |                                     |       |   |   |
| Purchase of property and equipment                                                     |       | (132                                     | )          | (489 | ) |
| Transfer from (to) restricted cash                                                     |       | 20,324                                   |       | (1,132 | ) |
| Purchase of long-term investments                                                      |       | —                                   |       | (100 | ) |
| Proceeds from sale of cost method  investments                                         |       | 590                                      |       | 574 |   |
| Proceeds from dividends                                                                |       | 1,101                                    |       | 277 |   |
| Net cash (used in) provided by investing  activities                                   |       | 21,883                                   |       | (870 | ) |
|                                                                                   |       |                                     |       |   |   |
| **Cash flows from financing activities:**                                              |       |                                     |       |   |   |
| Proceeds from bank line of credit, term  debt, and convertible notes                   |       | 35,000                                   |       | 69,076 |   |
| Repayments of bank line of credit, term  debt, and convertible notes                   |       | (58,623                                  | )          | (81,744 | ) |
| Proceeds from issuance of common stock, net                                            |       | 598                                      |       | 1,561 |   |
| Net cash (used in) provided by financing  activities                                   |       | (23,025                                  | )          | (11,107 | ) |
|                                                                                   |       |                                     |       |   |   |
| Effect of exchange rates on cash and cash  equivalents                                 |       | 39                                       |       | 189 |   |
|                                                                                   |       |                                     |       |   |   |
| Net decrease in cash and cash equivalents                                              |       | (35,785                                  | )          | (50,632 | ) |
| Cash and cash equivalents at beginning of  period                                      |       | 41,851                                   |       | 78,776 |   |
| Cash and cash equivalents at end of period                                             |       | $                                        | 6,066      |   | $ | 28,144 |   |
| **Supplemental disclosures of cash flow  information:**                                |       |                                     |       |   |   |
| Cash paid for interest                                                                 |       | $                                        | 663        |   | $ | 87 |   |
| Cash paid (refunds received) for income  taxes                                         |       | $                                        | (547       | ) | $ | 227 |   |

* *

*See Accompanying Notes to Condensed ConsolidatedFinancial Statements*

 

5

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**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**(All quarterly data herein is unaudited)**

 

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

 

***Nature of Business***

 

BroadVision, Inc.(collectively with its subsidiaries, the “Company”) was incorporated in thestate of Delaware in May 1993 and has been a publicly traded corporationsince 1996. BroadVision solutions help customers rapidly increase revenues andreduce costs by moving interactions and transactions to personalizedself-service via the web. Our integrated self-service applicationsuite–including process, commerce, portal and content–offers rich functionalityout of the box, and is easily configured for each customer’s e-businessenvironment.

 

Over 1,000 customers —including U.S. Air Force, Lockheed Martin, Netikos, Circuit City, Iberia L.A.E.and Vodafone — have licensed BroadVision solutions to power and personalizetheir mission-critical web initiatives.

 

***Merger Agreement***

 

In July 2005, theCompany entered into an Agreement and Plan of Merger (the “Merger Agreement”)with Bravo Holdco (“Bravo Holdco”), an exempted company with limited liabilityincorporated under the laws of the Cayman Islands and wholly owned subsidiaryof Vector Capital Corporation (“Vector”), and Bravo Merger Sub, LLC, a newly formedDelaware limited liability company and wholly owned subsidiary of Bravo Holdco(“Merger Sub”), pursuant to which, subject to satisfaction or waiver of theconditions therein, it is intended that the Company will merge with and intoMerger Sub, and the Company’s separate corporate existence will thereuponcease.  Under the terms of the MergerAgreement, the holders of shares of the Company’s common stock (other thanstockholders who exercise appraisal rights under Delaware law) that areoutstanding immediately prior to the consummation of the Merger will receive$0.84 in cash for each share of common stock at the time of the consummation ofthe Merger (the “Effective Time”).

 

The consummation of theMerger is conditioned upon, among other things, the adoption of the MergerAgreement by the holders of a majority of the outstanding shares of the Company’scommon stock and other closing conditions. A proxy card and proxy statement describing the terms of the MergerAgreement were mailed in September 2005 to stockholders of record as of September 16,2005.  Such materials included the boardof directors’ recommendation FOR the approval of the Merger Agreement.  As of November 11, 2005, approximately13.0 million shares had been voted in favor of the transaction, which is over92% of the total shares voted but less than the nearly 17.2 million sharesrequired to achieve a quorum to hold the meeting and approve thetransaction.  On November 11, 2005,in order to extend the period during which stockholders may submit proxies, theCompany adjourned its special stockholder meeting until December 21,2005.  Previously, the Company hadadjourned its special stockholder meeting from October 12, 2005successively to October 26, 2005, November 4, 2005 and November 11,2005.

 

There can be no assurancethat a sufficient number of stockholder votes will be received in the timeperiods required under the Merger Agreement in order to approve the transactionor that the transaction otherwise will be completed.  On November 3, 2005, Vector and BravoHoldco filed a second amended statement to their Schedule 13D filed withthe Securities and Exchange Commission (the “SEC”) on August 4, 2005, inwhich Bravo Holdco stated its belief that 1) certain conditions to the closingof the Merger would not and cannot be satisfied, 2) Bravo Holdco has the rightto terminate the Merger Agreement, 3) Bravo Holdco would have no obligationunder the Merger Agreement to proceed with the Merger even if the Merger isapproved by the Company’s stockholders and 4) Bravo Holdco does not intend asof the date of such filing to waive any of the conditions to the closing of theMerger.  The Company disagrees that anyconditions to closing would not and cannot be satisfied, and believes that theparties to the Merger Agreement would be obligated to complete the Merger if itis approved by the Company’s stockholders. Following the October 12, 2005 special stockholder meeting at whicha quorum was not present, the Company and Vector also engaged in negotiationsregarding a potential alternative transaction pursuant to which the Companywould file for protection under Chapter 11 of the Bankruptcy Code, and BravoHoldco would acquire certain assets and assume certain liabilities of theCompany in a transaction pursuant to Section 363 of the Bankruptcy Code,in which case it would not be necessary to obtain the approval of the Company’sstockholders to complete the transaction. However, these negotiations did notlead to any agreement, and all proposals for such a transaction made by Vectorwould have resulted in the Company’s stockholders receiving an amount, if any,that is significantly less than the $0.84 per share in cash provided for in theMerger Agreement.  The Company terminatedthese

 

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discussions on November 9,2005 and continues to believe that the Merger remains the best availableoutcome for all of its stakeholders.  TheCompany also believes that, if the Merger is not completed, the Company willlikely become insolvent, unless its obligations under the Notes discussed belowor other significant financial obligations are significantly restructured.  For additional information about the Company’sliquidity situation, see the sections entitled “Convertible Note Agreements”and “Liquidity” below.

 

***Convertible NoteAgreements***

 

In November 2004, theCompany entered into a definitive agreement for the private placement of up to$20.0 million of convertible notes to five institutional investors (the “SecuritiesPurchase Agreement”).  Under the terms ofthe Securities Purchase Agreement, the Company issued an initial $16.0 millionof convertible notes (the “Notes”) which are convertible, at the holders’option, into common stock at a conversion price of $2.76 per share.  The Notes bear interest at a rate of sixpercent per annum, and we were originally obligated to repay the principalamount of the initial $16.0 million of Notes in 15 equal monthly installmentsof $1.1 million, which began in June 2005. Under the terms of the Notes,the holders have the right to increase the Company’s monthly principalrepayment obligation to $2.1 million as of December 2005 due to our cashbalances falling below certain defined levels as of September 30, 2005.This increase, if invoked, would have the effect of requiring us to repay theprincipal amount in eight installments through June 2006.  Certain principal payments that were due inthe quarter ended September 30, 2005, have been deferred at the electionof the investors for a period of eighteen months under the terms of thenotes.  Payments of future principal andinterest may be made in either cash or, upon satisfaction of various conditionsset forth in the notes, shares of our common stock.  However, we currently have not satisfied theconditions required to make payments in stock, and we anticipate having to usecash to satisfy our future payment obligations under the Notes.

 

On July 25, 2005, theCompany entered into an agreement with certain of the holders of its Notesregarding the treatment in connection with the Merger of the convertible notesand warrants issued to the noteholders under the Securities Purchase Agreement(the “July Noteholder Agreement”). Under the terms of the July Noteholder Agreement, all principal andaccrued interest on the notes that is outstanding at the Effective Time of theMerger, together with certain other amounts payable to the noteholders, will berepaid within one business day following the Effective Time of the Merger andthe notes and warrants will be extinguished. Subject to our performance of our obligations under the July NoteholderAgreement, the noteholders have consented to the completion of the Merger.

 

In October 2005, theCompany inadvertently did not make timely payment of the third quarter interestpayment due under the Notes of approximately $201,000 that was due on October 1,2005.  Lack of timely payment became anevent of default on October 8, 2005 after non-payment continued for aperiod of over five business days.  TheCompany made the third quarter interest payment promptly after discovery of thenonpayment, on October 14, 2005. The event of default permits each noteholder to require the Company toredeem 120% of all or any portion of the amounts outstanding under the applicableNote by delivering notice of such redemption to the Company, which redemptionis required under the Notes to be paid within five business days after receiptof such redemption notice.  If all of thenoteholders elect such redemption, the Company will be obligated to pay withinfive business days after receipt of such election approximately $15.5 millionin unpaid principal and interest.  Theaccelerated repayment of all or any significant portion of such amount wouldleave the Company with insufficient working capital to conduct its business,and the Company does not presently have sufficient cash to meet such anaccelerated repayment obligation.

 

OnOctober 25, 2005, the Company entered into an agreement with thenoteholders under which the noteholders agreed not to require redemption of theNotes, including the 20% premium payable thereunder, prior to November 16,2005.

 

OnOctober 29, 2005, Vector informed the Company that Vector Capital III,L.P. (“Vector III”), an entity affiliated with Vector,  had entered into transfer agreements with thenoteholders pursuant to which Vector III agreed to acquire all of the issuedand outstanding Notes.  However, theCompany believes that, under the terms of the July Noteholder Agreement,the noteholders are required to obtain its consent, not to be unreasonablywithheld, prior to any transfer of the Notes. The Company has declined to provide its consent to date and at this timedoes not intend to provide its consent, which it believes is reasonable underthe circumstances. Both Vector and the noteholders have disputed whether theCompany’s consent is required in connection with the purported transfer of theNotes and questioned the reasonableness of the Company’s refusal to consent,and these disputes are unresolved.

 

7

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OnNovember 8, 2005, counsel for the noteholders delivered to the Company aletter purporting to terminate the July Noteholder Agreement based on theCompany’s alleged breaches of material representations, warranties or covenantsby reason of the October 8, 2005 event of default and the Company’srefusal to consent to the transfer of the Notes to Vector III.  Based on such purported termination, thenoteholders assert that the Company’s consent to the transfer of the Notes fromthe noteholders to Vector III is not required and the other provisions of the July NoteholderAgreement are no longer effective. The noteholders’ letter also asserts thatthe Company’s refusal to consent to the transfer is a breach of the October 25,2005 agreement with the noteholders and entitles the noteholders to recoverfrom the Company their attorneys’ fees in connection with the allegedbreaches.  On November 9, 2005,Vector III notified us that it had completed its purchase of the Notes.

 

OnNovember 9, 2005, the Company’s Chief Executive Officer and largeststockholder, Pehong Chen, advised the Company that he had offered to purchasethe Notes from Vector III for a price equal to its cost plus an amountnecessary to defray its reasonable expenses in connection with the purchase andsale of the Notes. Dr. Chen has also advised the Company’s Board ofDirectors that, if he becomes the owner of the Notes, he will negotiate in goodfaith with the Company to restructure the Notes so as to relieve the Company ofany short-term liquidity threat. Pursuant to the July Noteholder Agreement, the Company’s Board ofDirectors has consented to the acquisition of the Notes by Dr. Chen. Tothe Company’s knowledge, Vector III has not accepted Dr. Chen’s offer topurchase the Notes, and there can be no assurance that Dr. Chen willacquire the Notes or that the Company’s obligations under the Notes will berestructured.

 

***Stockholder Class-ActionComplaints***

 

On July 28, 2005,representatives of the Company received copies of four complaints relating topurported class action lawsuits, each filed by an alleged holder of shares ofour common stock and each filed in California Superior Court for the county ofSan Mateo. These complaints are captioned *GaryGoberville, et al., vs. Pehong Chen, et al.,*Civ 448490, *Cookie Schwartz, et al., vs. BroadVision,Inc., et al*,Civ 448516, *Leon Kotovich, et al., vs.BroadVision, Inc., et al*, Civ 448518 and *Anthony Noblett, et al., vs. BroadVision, Inc.,et al*, Civ 448519. Each claim names the Company’s directors andBroadVision, Inc. as defendants, and each alleges that the directordefendants violated their fiduciary duties to stockholders by, among otherthings, failing to maximize the Company’s value and ignoring, or failing toadequately protect against, certain purported conflicts of interest. Eachcomplaint seeks, among other things, injunctive relief and damages in anunspecified amount. On September 21, plaintiff Goberville filed an amendedcomplaint alleging that defendants caused materially misleading informationregarding a proposed merger to be disseminated to the Company’sstockholders.  On October 20, 2005,the Court ordered consolidation of the four pending actions pursuant to theparties’ stipulation.  In accordance withthe Court’s order, plaintiffs’ consolidated amended complaint must be filed andserved no later than December 5, 2005. In addition, defendants must complete by December 5, 2005, theirproduction of relevant documents responsive to the first request for productionof documents that were served on defendants by plaintiff Kotovich on August 9,2005 and plaintiff Goberville on August 31, 2005.

 

***Liquidity***

 

Due to a combination offactors, the Company currently is experiencing severe liquidity challenges andbelieves that its available cash resources will be insufficient to meet itspayment obligations by some point in the fourth quarter of 2005 unless itsobligations under the Notes discussed above or other significant financialobligations are significantly restructured. The factors contributing to thisbelief include lower-than-anticipated revenues in 2005, costs associated withthe Merger and cash payment requirements under the Notes, which will be subjectto potential demand for payment in full by the holder(s) thereof on and after November 16,2005.  If the Company’s cash resourcesbecome insufficient to meet its obligations as they become due, which they willif repayment of any significant portion of the Notes is demanded and may evenin the absence of such a demand, its business and future prospects would beseriously harmed and its ability to operate the business as a going concern andcomplete the merger would be seriously jeopardized. The Merger is subject tonumerous conditions, including the approval of the Company’s stockholders, thatcould considerably delay or even prevent its completion, and there is noassurance that the Company will be able to obtain additional financing underits existing bank credit facility or otherwise. The requirements the Companymust meet in order to obtain financing under its bank credit facility becamemore stringent as of July 2005.  TheCompany was unable to meet such requirements as of September 30, 2005, andit presently anticipates being unable to meet the requirements for theforeseeable future. In order to obtain financing from any other source, theCompany would be required to obtain the approval of both the Vector portfoliocompany with which it has agreed to merge (provided that the Merger Agreementremains in full force and effect) and the holder(s) of the Notes.  There can be no assurance that the Company’sobligations under the Notes or other

 

8

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significant financialobligations will be restructured.

 

If the Merger is notconsummated, the Company will be required to raise additional funds, and it maybe unable to do so on acceptable terms or at all. Its ability to obtain debt orequity funding would depend on a number of factors, including restrictivecovenants contained in its current convertible note agreement and creditfacilities, market conditions, its operating performance and investorinterest.  If adequate additional fundingwere not available, the Company would have insufficient working capital tocontinue executing its current business plan. Even if additional funding were available, the Company’s indebtednessand debt service obligations could continue to increase its vulnerability togeneral adverse economic and industry conditions, limit its flexibility inplanning for, or reacting to, changes in its business and the industry in whichit competes, and place it at a competitive disadvantage to less leveragedcompetitors and those with better access to capital resources.

 

***Basis of Presentation —Going Concern Uncertainty***

 

The accompanyingconsolidated financial statements have been prepared on a going concern basis,which contemplates the realization of assets and the settlement of liabilitiesin the normal course of business.  The Companyis currently experiencing severe liquidity challenges.  At September 30, 2005, the Company’scurrent liabilities exceed its current assets by approximately $30 million(negative working capital) resulting in a working capital ratio of less than0.4 to 1.0.  The Company currently doesnot have any additional financing arrangement in place from which to borrowadditional funds as may be required to meet its near term cash requirements.  Further, due to the event of default whichoccurred on October 8, 2005 relative to the convertible notes and thesubsequent agreement entered into on October 25, 2005 with the convertiblenoteholders, the noteholders can demand payment in full on the approximate$15.5 million outstanding note balance and interest on or after November 16,2005.  If this were to occur, and if theCompany was not able to obtain financing sufficient to fully repay the notesupon such demand, the Company would be forced to seek protection under thebankruptcy laws.  These matters raisesubstantial doubt about the ability of the Company to continue in existence asa going concern.  No adjustments to thecarrying values or classification of the assets and liabilities in theaccompanying financial statements have been made to take account of this uncertainty.

 

The accompanyingconsolidated financial statements include the accounts of the Company and itswholly-owned subsidiaries. All significant intercompany transactions have beeneliminated in consolidation.  In theCompany’s opinion, the consolidated financial statements presented hereininclude all necessary adjustments, consisting of normal recurring adjustments,to fairly state the Company’s financial position, results of operations andcash flows for the periods indicated. The preparation of consolidated financial statements in conformity withgenerally accepted accounting principles in the United States of Americarequires management to make certain assumptions and estimates that affectreported amounts of assets and liabilities as of the date of the financialstatements and the reported amount of revenues and expenses during thereporting period. Actual results could differ from estimates. The financialresults and related information as of September 30, 2005 and for the threeand nine months ended September 30, 2005 and 2004 are unaudited. Thecondensed consolidated balance sheet at December 31, 2004 has been derivedfrom the audited consolidated financial statements as of that date but does notnecessarily reflect all of the informational disclosures previously reported inaccordance with generally accepted accounting principles in the United Statesof America.

 

The accompanying condensedconsolidated financial statements should be read in conjunction with theconsolidated financial statements and notes thereto included with the Company’sForm 10-K and other documents that have been filed with the SEC. Theresults of the Company’s operations for the interim periods presented are notnecessarily indicative of operating results for the full fiscal year or anyfuture periods.

 

***Revenue Recognition***

 

*Overview*

 

The Company’s revenueconsists of fees for licenses of the Company’s software products, maintenance,consulting services and customer training. The Company generally charges feesfor licenses of its software products either based on the number of personsregistered to use the product or based on the number of Central ProcessingUnits (“CPUs”) on the machine on which the product is installed. Licenses forsoftware whereby fees charged are based upon the number of persons registeredto use the product are differentiated between licenses for development use andlicenses for use in deployment of the customer’s website. Licenses for softwarewhereby fees charged are on a per-CPU basis do not differentiate betweendevelopment and deployment usage. The Company’s revenue

 

9

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recognition policies are inaccordance with Statement of Position (“SOP”) 97-2, as amended, SOP 98-9 andthe SEC’s Staff Accounting Bulletin (“SAB”) No. 101, *Revenue Recognition in Financial Statements*(“SAB101”).

 

***Software License Revenue***

 

The Company licenses itsproducts through its direct sales force and indirectly through resellers. Ingeneral, software license revenues are recognized when a non-cancelable licenseagreement has been signed and the customer acknowledges an unconditionalobligation to pay, the software product has been delivered, there are nouncertainties surrounding product acceptance, the fees are fixed and determinableand collection is considered probable. Delivery is considered to have occurredwhen title and risk of loss have been transferred to the customer, whichgenerally occurs when media containing the licensed programs is provided to acommon carrier. In case of electronic delivery, delivery occurs when thecustomer is given access to the licensed programs. For products that cannot beused without a licensing key, the delivery requirement is met when thelicensing key is made available to the customer. If collectibility is notconsidered probable, revenue is recognized when the fee is collected.Subscription-based license revenues are recognized ratably over thesubscription period. The Company enters into reseller arrangements thattypically provide for sublicense fees payable to the Company based upon apercentage of list price. The Company does not grant its resellers the right ofreturn.

 

The Company recognizesrevenue using the residual method pursuant to the requirements of SOP 97-2, asamended by SOP 98-9. Revenues recognized from multiple-element softwarearrangements are allocated to each element of the arrangement based on the fairvalues of the elements, such as licenses for software products, maintenance,consulting services or customer training. The determination of fair value isbased on objective evidence, which is specific to the Company. The Companylimits its assessment of objective evidence for each element to either theprice charged when the same element is sold separately or the price establishedby management having the relevant authority to do so, for an element not yetsold separately. If evidence of fair value of all undelivered elements existsbut evidence does not exist for one or more delivered elements, then revenue isrecognized using the residual method. Under the residual method, the fair valueof the undelivered elements is deferred and the remaining portion of thearrangement fee is recognized as revenue.

 

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

 

*ServicesRevenue*

 

Consulting services revenuesand customer training revenues are recognized as such services are performed.Maintenance revenues, which include revenues bundled with software licenseagreements that entitle the customers to technical support and futureunspecified enhancements to the Company’s products, are deferred and recognizedratably over the related agreement period, generally twelve months. The Company’sconsulting services, which consist of consulting, maintenance and training, aredelivered through the BroadVision Global Services (“BVGS”) organization.Services that the Company provides are not essential to the functionality ofthe software. The Company records reimbursement from its customers forout-of-pocket expenses as an increase to services revenues.

 

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

 

The Company accounts foremployee stock-based awards in accordance with the provisions of AccountingPrinciples Board (“APB”) Opinion 25 (“APB 25”), Financial Accounting StandardsBoard (“FASB”) Interpretation No. 44 (“FIN 44”), *Accounting for Certain Transactions Involving StockCompensation—an Interpretation of APB Opinion 25* and relatedinterpretations. As such, compensation expense is recorded on the date of grantonly if the current market price of the underlying stock exceeded the exerciseprice. Pursuant to Statement of Financial Accounting Standards (“SFAS”) 123,the Company discloses the pro forma effects of using the fair value method ofaccounting for stock-based compensation arrangements. The Company accounts forequity instruments issued to non-employees in accordance with the provisions ofSFAS 123 and Emerging Issues Task Force (“EITF”) 96-18, *Accounting for Equity Instruments That Are Issued toOther Than Employees For Acquiring or in Conjunction with Selling Goods orServices.*

 

The Company applies APB 25and related interpretations when accounting for its stock option and stockpurchase plans. In accordance with APB 25, we apply the intrinsic value methodin accounting for employee stock options.

 

10

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Accordingly, the Companygenerally recognizes no compensation expense with respect to stock-based awardsto employees.

 

During the nine months endedSeptember 30, 2004, the Company recorded a stock-based compensation creditof $15,000. This credit was recorded as a result of granting a third partyconsultant shares of our common stock. The credit, which was calculated using the Black-Scholes model, wasrecorded as a reduction of sales and marketing expense.

 

We have determined pro formainformation regarding net income (loss) and net income (loss) per share as ifwe had accounted for employee stock options under the fair value method asrequired by SFAS 123, *Accounting for StockCompensation*. The fair value of these stock-based awards toemployees was estimated using the Black-Scholes option pricing model. Hadcompensation cost for our stock option plan and employee stock purchase planbeen determined consistent with SFAS 123, our reported net income (loss) andnet income (loss) per share would have been changed to the amounts indicatedbelow (in thousands except per share data):

 
| ** **                                                                                                                                    | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income (loss), as reported                                                                                                                |       | $                                          | (14,537    | )                                         | $          | 23,380 |   | $ | (14,532 | ) | $ | 21,021 |   |
| Add: Stock-based employee compensation  (income) expense included in reported net income (loss), net of related tax  effects                  |       | —                                     |       | —                                    |       | — |   | (15 | ) |
| Deduct: Total stock-based employee  compensation expense determined under fair value based method for all awards,  net of related tax effects |       | (219                                       | )          | (1,256                                    | )          | (1,668 | ) | (6,020 | ) |
| Pro forma net income (loss)                                                                                                                   |       | $                                          | (14,756    | )                                         | $          | 22,124 |   | $ | (16,200 | ) | $ | 14,986 |   |
| Income (loss) per share:                                                                                                                      |       |                                       |       |                                      |       |   |   |   |   |
| Basic—as reported                                                                                                                        |       | $                                          | (0.42      | )                                         | $          | 0.70 |   | $ | (0.43 | ) | $ | 0.63 |   |
| Basic—pro forma                                                                                                                          |       | $                                          | (0.43      | )                                         | $          | 0.66 |   | $ | (0.47 | ) | $ | 0.45 |   |
|                                                                                                                                          |       |                                       |       |                                      |       |   |   |   |   |
| Diluted—as reported                                                                                                                      |       | $                                          | (0.42      | )                                         | $          | 0.69 |   | $ | (0.43 | ) | $ | 0.61 |   |
| Diluted—pro forma                                                                                                                        |       | $                                          | (0.43      | )                                         | $          | 0.65 |   | $ | (0.47 | ) | $ | 0.44 |   |

 

***Earnings Per Share Information***

 

Basic income (loss) pershare is computed using the weighted-average number of shares of common stockoutstanding less shares subject to repurchase. Diluted income (loss) per shareis computed using the weighted-average number of shares of common stockoutstanding and, when dilutive, common equivalent shares from outstanding stockoptions and warrants using the treasury stock method, potential common sharesfrom the conversion of convertible debt using the as-if converted method, andshares subject to repurchase. The following table sets forth the basic anddiluted income (loss) per share computational data for the periods presented.

 

There were potential commonshares from the conversion of outstanding convertible notes excluded in thediluted shares outstanding during the three months and nine months ended September 30,2005 as the effect of such shares is anti-dilutive.

 
| ** **                                                                                    | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                    | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income (loss)                                                                             |       | $                                          | (14,537    | )                                         | $          | 23,380 |   | $ | (14,532 | ) | $ | 21,021 |   |
|                                                                                          |       |                                       |       |                                      |       |   |   |   |   |
| Weighted average common shares outstanding  utilized for basic net income (loss) per share    |       | 34,320                                     |       | 33,599                                    |       | 34,159 |   | 33,459 |   |
| Potential common stock issued for options                                                     |       | —                                     |       | 453                                       |       | — |   | 863 |   |
| Weighted average common shares outstanding  utilized for diluted net income (loss) per share: |       | 34,320                                     |       | 34,052                                    |       | 34,159 |   | 34,322 |   |
|                                                                                          |       |                                       |       |                                      |       |   |   |   |   |
| Basic net income (loss) per share                                                             |       | $                                          | (0.42      | )                                         | $          | 0.70 |   | $ | (0.43 | ) | $ | 0.63 |   |
| Diluted net income (loss) per share                                                           |       | $                                          | (0.42      | )                                         | $          | 0.69 |   | $ | (0.43 | ) | $ | 0.61 |   |

 

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***Allowances and Reserves***

 

Occasionally, the Company’scustomers experience financial difficulty after the Company records the revenuebut 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 30to 90 days from invoice date. If the financial condition of the Company’scustomers was to deteriorate, resulting in an impairment of their ability tomake payments, additional allowances may be required.

 

***Restructuring***

 

Through September 30,2005, we have approved certain restructuring plans to, among other things,reduce our workforce and consolidate facilities. Restructuring and assetimpairment charges were taken to align our cost structure with changing marketconditions and to create a more efficient organization. Our restructuringcharges are comprised primarily of: (i) severance and benefits terminationcosts related to the reduction of our workforce; (ii) lease terminationcosts and/or costs associated with permanently vacating our facilities; (iii) otherincremental costs incurred as a direct result of the restructuring plan; and (iv) impairmentcosts related to certain long-lived assets abandoned. We account for each ofthese costs in accordance with SAB No. 100, *Restructuring and Impairment Charges*(“SAB 100”)*.*

 

*Severanceand Termination Costs*. We account for severance and benefits termination costs as follows:

 

•  Forexit or disposal activities initiated on or prior to December 31, 2002, weaccount for costs in accordance with EITF Issue No. 94-3, *Liability Recognition for Certain EmployeeTermination Benefits and Other Costs to Exit an Activity (Including CertainCosts Incurred in a Restructuring)*(“EITF 94-3”). Accordingly, werecord the liability related to these termination costs when the followingconditions have been met: (i) management with the appropriate level ofauthority approves a termination plan that commits us to such plan andestablishes the benefits the employees will receive upon termination; (ii) thebenefit arrangement is communicated to the employees in sufficient detail toenable the employees to determine the termination benefits; (iii) the planspecifically identifies the number of employees to be terminated, theirlocations and their job classifications; and (iv) the period of time toimplement the plan does not indicate changes to the plan are likely

 

•  Forexit or disposal activities initiated after December 31, 2002, we accountfor costs in accordance with SFAS No. 146, *Accounting for Costs Associated with Exit Activities*(“SFAS146”). SFAS 146 requires that a liability for a cost associated with an exit ordisposal activity be recognized and measured initially at fair value only whenthe liability is incurred.

 

*ExcessFacilities Costs*.We account for excess facilities costs as follows:

 

• Forexit or disposal activities initiated on or prior to December 31, 2002, weaccount for lease termination and/or abandonment costs in accordance with EITF88-10, *Costs Associated with LeaseModification or Termination*. Accordingly, we recorded the costs associated with lease terminationand/or abandonment when the leased property had no substantive future use orbenefit to us.

 

•  Forexit or disposal activities initiated after December 31, 2002, we account forlease termination and/or abandonment costs in accordance with SFAS 146, whichrequires that a liability for such costs be recognized and measured initiallyat fair value on the cease use date of the facility.

 

Severance and terminationcosts and excess facilities costs we record under these provisions are notassociated with nor do they benefit continuing activities.

 

Inherent in the estimationof the costs related to our restructuring efforts are assessments related tothe most likely expected outcome of the significant actions to accomplish therestructuring. In determining the charges related to the restructurings todate, the majority of estimates made by management have related to charges forexcess facilities. In determining the charges for excess facilities, we wererequired to estimate future sublease income, future net operating expenses ofthe facilities, and brokerage commissions, among other expenses. The mostsignificant of

 

12

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these estimates have relatedto the timing and extent of future sublease income in which to reduce our leaseobligations. We based our estimates of sublease income, in part, on theopinions of independent real estate experts, current market conditions andrental rates, an assessment of the time period over which reasonable estimatescould be made, the status of negotiations with potential subtenants, and thelocation of the respective facility, among other factors. The Company hasrecorded the low-end of a range of assumptions modeled for restructuringcharges, in accordance with SFAS No. 5, *Accountingfor Contingencies*(“SFAS 5”). Adjustments to the facilities accrualwill be required if actual lease exit costs or sublease income differ fromamounts currently expected. We will review the status of restructuringactivities on a quarterly basis and, if appropriate, record changes to ourrestructuring obligations in current operations based on management’s mostcurrent estimates.

 

***Legal Matters***

 

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

 

On June 10, 2004,Metropolitan Life Insurance Company (“MetLife”) filed a complaint in the SuperiorCourt of the State of California, County of Los Angeles, naming the Company asa defendant. The complaint alleged that the Company was liable for unlawfuldetainer of premises leased from the plaintiff. The plaintiff thereafter fileda First Amended Complaint alleging that the Company no longer held possessionof the premises but was in breach of the lease. In February 2005, MetLifeand the Company reached agreement and executed documents regarding a settlementof the pending lawsuit under which the Company paid MetLife an aggregate of$1.9 million in consideration for termination of the lease, dismissal of thelawsuit and in full settlement of approximately $3.1 million of past and futurelease obligations. The three installment payments were made in February 2005,May 2005, and September 2005.

 

***Concentrations of Credit Risk***

 

Financial assets thatpotentially subject us to significant concentrations of credit risk consistprincipally of cash, cash equivalents, and trade accounts receivable. TheCompany maintains its cash and cash equivalents with two separate financialinstitutions. The Company markets and sells its products throughout the worldand performs ongoing credit evaluations of its customers. The Company maintainsreserves for potential credit losses. For the three months ended September 30,2005 and September 30, 2004, no one customer accounted for more than 10%of total revenue. As of September 30, 2005 and December 31, 2004, nocustomer individually accounted for more than 10% of accounts receivable.

 

***Foreign Currency Transactions***

 

During fiscal 2004, theCompany changed the functional currencies of all foreign subsidiaries from theU.S. dollar to the local currency of the respective countries. Assets andliabilities of these subsidiaries are translated into U.S. dollars at thebalance sheet date. Income and expense items are translated at average exchangerates for the period. Foreign exchange gains and losses resulting from theremeasurement of foreign currency assets and liabilities are included in otherincome (expense), net in the Condensed Consolidated Statements of Operations.

 

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

 

The Company periodicallyassesses the impairment of long-lived assets in accordance with the provisionsof SFAS No. 144, *Accounting for theImpairment or Disposal of Long-Lived Assets*.  The Company assesses the impairment ofgoodwill and identifiable intangible assets in accordance with SFAS No. 141,*Business Combinations*(“SFAS 141”)and SFAS No. 142, *Goodwill and OtherIntangible Assets*(“SFAS 142”). The Company adopted the provisionsof SFAS 142 as of January 1, 2002.

 

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***Reclassification***

 

Certain reclassificationshave been made to prior year balances in order to conform to the current periodpresentation. These reclassifications do not impact BroadVision’s consolidatedfinancial condition, results of operation or cash flows.

 

***Fair Value of Financial Instruments***

 

The Company’s financialinstruments consist of cash and cash equivalents, restricted cash, accountsreceivable, accounts payable, debt, and at December 31, 2004, equityinvestments. The Company does not have any derivative financial instruments.The Company believes the reported carrying amounts of its financial instrumentsapproximates fair value, based upon the maturities and nature of its cashequivalents, accounts receivable and payable, and based on the current ratesavailable 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 such assets are considered to be impaired, theimpairment to be recognized is measured by the amounts by which the carryingamount exceeds its fair market value.

 

***Comprehensive Income (Loss)***

 

Comprehensive income (loss)includes net income (loss) and other comprehensive income (loss), whichconsists of unrealized gains and losses on available-for-sale securities andcumulative translation adjustments. Total accumulated other comprehensiveincome (loss) is displayed as a separate component of stockholder’s equity inthe accompanying Condensed Consolidated Balance Sheets. The accumulatedbalances for each classification of comprehensive income (loss) consist of thefollowing, net of taxes (unaudited, in thousands):

 
| ** **                        | ** ** | **Foreign  Currency  Translation** | ** ** | **Accumulated Other  Comprehensive  Income (Loss)** | ** ** |
|-----------------------------------|------------|------------------------------------|------------|-----------------------------------------------------|------------|
| Balance,  December 31, 2004  |       | $                                  | (172       | )                                                   | $          | (172 | ) |
| Net change during  period         |       | 4                                  |       | 4                                                   |       |
| Balance,  September 30, 2005 |       | $                                  | (168       | )                                                   | $          | (168 | ) |

 

# ***New AccountingPronouncements***

# *** ***

In December 2004, theFASB issued SFAS No. 123 (revised 2004), *Share-BasedPayment*(“SFAS 123R”), which replaces SFAS 123 and supercedes APB25. SFAS 123R requires all share-based payments to employees, including grantsof employee stock options, to be recognized in the financial statements basedon their fair values beginning with the first interim or annual periodbeginning after June 15, 2005, with early adoption encouraged. On April 14,2005, the Securities and Exchange Commission adopted a new rule thatamends the compliance dates for SFAS 123(R). Under the new rule, the Company isrequired to adopt SFAS 123(R) in the first quarter of fiscal 2006, beginning January 2,2006. The pro forma disclosures previously permitted under SFAS 123 no longerwill be an alternative to financial statement recognition. Under SFAS 123R, wemust determine the appropriate fair value model to be used for valuingshare-based payments, the amortization method for compensation cost and thetransition method to be used at date of adoption. The transition methodsinclude prospective and retroactive adoption options. We have not yetdetermined the method of adoption or the effect of adopting SFAS 123R. We areassessing the requirements of SFAS 123R and expect that its adoption will havea material impact on the Company’s results of operations and earnings (loss)per share.

 

In December 2004, theFASB issued SFAS No. 153, *Exchanges ofNonmonetary Assets, an amendment of APB Opinion No. 29, Accounting forNonmonetary Transactions*(“SFAS 153”). SFAS 153 eliminates theexception from fair value measurement for nonmonetary exchanges of similarproductive assets in paragraph 21(b) of APB Opinion No. 29, *Accounting for Nonmonetary Transactions*,and replaces it with an exception for exchanges that do not have commercialsubstance. SFAS 153 specifies that a nonmonetary exchange has commercialsubstance if the future cash flows of the entity are expected to changesignificantly as a result of the exchange. SFAS 153 is effective for periodsbeginning after June 15, 2005. We do not expect that adoption of SFAS 153will have a material effect on our consolidated financial position,consolidated results of operations, or liquidity.

 

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**Note 2.Selected Balance Sheet Detail**

 

Property and equipmentconsisted of the following (in thousands):

 
| ** **                                      | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                      | ** ** | **(unaudited)**              | ** ** | ** **                  | ** ** |
| Furniture and fixtures                          |       | $                            | 3,781      |                        | $          | 4,036 |   |
| Computers and software                          |       | 48,550                       |       | 49,258                      |       |
| Leasehold improvements                          |       | 6,185                        |       | 6,086                       |       |
|                                            |       | 58,516                       |       | 59,380                      |       |
| Less accumulated depreciation and  amortization |       | (55,904                      | )          | (55,814                     | )          |
|                                            |       | $                            | 2,612      |                        | $          | 3,566 |   |

 

Accrued expenses consistedof the following (in thousands):

 
| ** **                 | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|----------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                 | ** ** | **(unaudited)**              | ** ** | ** **                  | ** ** |
| Employee benefits          |       | $                            | 1,226      |                        | $          | 1,253 |   |
| Commissions and bonuses    |       | 643                          |       | 1,334                       |       |
| Sales and other taxes      |       | 3,767                        |       | 5,085                       |       |
| Restructuring (See Note 6) |       | 6,058                        |       | 26,292                      |       |
| Other                      |       | 4,474                        |       | 6,781                       |       |
|                       |       | $                            | 16,168     |                        | $          | 40,745 |   |

 

Other noncurrent liabilitiesconsisted of the following (in thousands):

 
| ** **                  | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-----------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                  | ** ** | **(unaudited)**              | ** ** | ** **                  | ** ** |
| Restructuring  (See Note 6) |       | $                            | 1,955      |                        | $          | 7,871 |   |
| Other                       |       | 327                          |       | 407                         |       |
|                        |       | $                            | 2,282      |                        | $          | 8,278 |   |

 

**Note3.  Bank Borrowings, Long-Term Debt andOther Non-Current Liabilities**

 

Bank borrowings andlong-term debt consists of the following (in thousands):

 
| ** **                                                                           | ** ** | **September 30, 2005** | ** ** | **December 31, 2004** | ** ** |
|--------------------------------------------------------------------------------------|------------|-----------------------------|------------|----------------------------|------------|
| ** **                                                                           | ** ** | **(unaudited)**             | ** ** | ** **                 | ** ** |
| Convertible notes, 6% coupon, due in  various maturities beginning in June 2005 |       | $                           | 11,265     |                       | $          | 11,982 |   |
| Bank borrowings                                                                      |       | —                      |       | 20,000                     |       |
| Term debt                                                                            |       | 503                         |       | 1,027                      |       |
|                                                                                 |       | 11,768                      |       | 33,009                     |       |
| Less: Current portion of long-term debt                                              |       | (11,768                     | )          | (25,566                    | )          |
| Long-term debt, net of current portion                                               |       | $                           | —     |                       | $          | 7,443 |   |

 

In November 2004, theCompany entered into a definitive agreement for the private placement of up to$20.0 million of convertible notes to five institutional investors. The Companyissued an initial $16.0 million of convertible notes which are convertible, atthe holders’ option, into common stock at a conversion price of $2.76 pershare. The convertible notes bear interest at a rate of six percent per annum,and the Company was originally obligated to repay the principal amount of theinitial $16.0 million of notes in 15 equal monthly installments of $1.1million, which began in June 2005.  Under the terms of the notes, ,the holders have the right to increase the Company’s monthly principalrepayment obligation to $2.1 million as of December 2005 due to theCompany’s cash balances falling below certain defined levels as of September 30,2005.  This increase, if invoked, would have the effect of requiring theCompany to repay the principal amount in eight installments through June 2006. Certain principal payments that were due in the quarter ended September 30,2005, have been deferred at the election of the investors for a period ofeighteen months under the terms of the notes. Payments of future principal and interest may be made in either cash or,upon satisfaction of various conditions set forth in the notes, shares ofcommon

 

15

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stock. However, the Companycurrently has not satisfied the conditions required to make payments in stock,and anticipates having to use cash to satisfy all of its future paymentobligations under the notes.

 

Investors also receivedwarrants to purchase approximately 1.7 million shares of the Company’s commonstock at a price of $3.58 per share. The warrants will be exercisable beginningsix months after the closing date, and have a term of five years.  As of September 30, 2005 and December 31,2004, a total of $12.9 million and $16.0 million, respectively, in face valueconvertible notes was outstanding. The Company is recording the differencebetween the face value and discounted amount as additional interest expenseover the estimated life of the notes. These notes are recorded on the Condensed Consolidated Balance Sheets atDecember 31, 2004, and September 30, 2005, at the discounted amountsof $12.0 million and $11.3 million, respectively.

 

In October 2005, theCompany inadvertently did not make timely payment of the third quarter interestpayment due under the Notes of approximately $201,000 that was due on October 1,2005.  Lack of timely payment became anevent of default on October 8, 2005 after non-payment continued for aperiod of over five business days.  TheCompany made the third quarter interest payment promptly after discovery of thenonpayment, on October 14, 2005. The event of default permits each noteholder to require the Company toredeem 120% of all or any portion of the amounts outstanding under theapplicable Note by delivering notice of such redemption to the Company, whichredemption is required under the Notes to be paid within five business daysafter receipt of such redemption notice. If all of the noteholders elect such redemption, the Company will beobligated to pay within five business days after receipt of such electionapproximately $15.5 million in unpaid principal and interest.  The accelerated repayment of all or anysignificant portion of such amount would leave the Company with insufficientworking capital to conduct its business, and the Company does not presentlyhave sufficient cash to meet such an accelerated repayment obligation.

 

On October 25, 2005,the Company entered into an agreement with the noteholders under which thenoteholders agreed not to require redemption of the Notes, including the 20%premium payable thereunder, prior to November 16, 2005.

 

In June 2005, theCompany renewed and amended its revolving credit facility. The amount availableunder the revolving line of credit is up to $15.0 million, subject to certainborrowing limitations based on the Company’s unrestricted cash balances.Borrowings under the revolving line of credit are collateralized by all of theCompany’s assets and bear interest at the bank’s prime rate at December 31,2004 and prime rate plus 1.0% at September 30, 2005 (6.75% as of September 30,2005 and 5.25% as of December 31, 2004). As of December 31, 2004,$20.0 million, was outstanding under the Company’s revolving creditfacility.  As of September 30, 2005,there was no outstanding balance on the line of credit. As of July 1,2005, under the renewed and amended agreement, the requirements the Companymust meet in order to access the credit facility became more stringent.  The Company was not in compliance with thesenew requirements as of September 30, 2005, and expects that it will beunable to meet the new requirements in future periods.

 

As of September 30,2005 and December 31, 2004, outstanding term debt borrowings wereapproximately $503,000 and $1.0 million, respectively. Borrowings bear interestat the bank’s prime rate of 5.25% plus up to 1.25% as of December 31, 2004and the bank’s prime rate of 6.75% plus up to 3.0% as of September 30,2005. Under the terms of the term debt agreements, principal and interestpayments of $40,000 are due monthly through October 2006 and payments of$11,000 are due thereafter.   Due to theCompany’s default under its convertible debentures described above, the termdebt is also in default, and there the entire balance of $503,000 at September 30,2005 is classified as currently due.

 

Commitments totaling $2.0million and $24.3 million in the form of standby letters of credit were issuedon the Company’s behalf from financial institutions as of September 30,2005 and December 31, 2004, respectively, primarily in favor of theCompany’s various landlords to secure obligations under the Company’s facilityleases.  As these letters of credit werecash secured, $2.0 million and $24.3 million have been presented as restrictedcash in the accompanying Condensed Consolidated Balance Sheets as of September 30,2005 and December 31, 2004, respectively.

 

16

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**Note 4.Commitments and Contingencies**

 

*Warrantiesand Indemnification*

 

The Company provides awarranty to its customers that its software will perform substantially inaccordance with documentation typically for a period of 90 days followingreceipt of the software. The Company also indemnifies certain customers fromthird-party claims of intellectual property infringement relating to the use ofits products.  Historically, costs related to these guarantees have notbeen significant and the Company is unable to estimate the maximum potentialimpact of these guarantees on its future results of operations.

 

The Company has agreementswhereby it indemnifies its officers and directors for certain events oroccurrences while the officer is, or was, serving in such capacity. The term ofthe indemnification period is for so long as such officer or director issubject to an indemnifiable event by reason of the fact that such person wasserving in such capacity. The maximum potential amount of future payments theCompany could be required to make under these indemnification agreements isunlimited; however, the Company has a director and officer insurance policythat limits its exposure and enables the Company to recover a portion of anyfuture amounts paid. As a result of the Company’s insurance policy coverage,the Company believes the estimated fair value of these indemnificationagreements is insignificant. Accordingly, the Company has no liabilitiesrecorded for these agreements as of either September 30, 2005 or December 31,2004. The Company assesses the need for an indemnification reserve on aquarterly basis and there can be no guarantee that an indemnification reservewill not become necessary in the future.

 

*Leases*

 

The Company leases itsheadquarters facility and its other facilities under non-cancelable operatinglease agreements expiring through the year 2010. Under the terms of theagreements, the Company is required to pay lease costs, property taxes,insurance and normal maintenance costs.

 

A summary of total futureminimum lease payments, net of future sublease income, as of September 30,2005, under noncancelable operating lease agreements is as follows (inmillions):

 
| **Years Ending December 31,** | ** ** | **Operating  Leases** | ** ** |
|------------------------------------|------------|-----------------------|------------|
| 2005                               |       | $                     | 1.2        |   |
| 2006                               |       | 3.2                   |       |
| 2007                               |       | 4.2                   |       |
| 2008                               |       | 2.1                   |       |
| 2009 and  thereafter               |       | 6.2                   |       |
| Total  minimum lease payments      |       | $                     | 16.9       |   |

 

See Note 6 of Notes toCondensed Consolidated Financial Statements for information about additionalpayments due under previously negotiated lease buyout transactions.

 

*StandbyLetter of Credit Commitments*

 

As of September 30,2005, the Company had $2.0 million of outstanding commitments in the form ofstandby letters of credit, primarily in favor of the Company’s variouslandlords to secure obligations under the Company’s facility leases.

 

*LegalProceedings*

 

The Company is subject tovarious other claims and legal actions arising in the ordinary, course ofbusiness. In the opinion of management, after consultation with legal counsel,the ultimate disposition of these matters is not expected to have a materialeffect on the Company’s business, financial condition or results of operations.Although management currently believes that the outcome of these 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.

 

On June 10, 2004,MetLife filed a complaint in the Superior Court of the State of California,County of Los Angeles, naming the Company as a defendant. The complaint allegedthat the Company was liable for unlawful detainer of premises leased from theplaintiff. The plaintiff thereafter filed a First Amended Complaint allegingthat the Company no longer held possession of the premises but was in breach ofthe lease. In February 2005, MetLife and the Company reached agreement andexecuted documents regarding a settlement of the pending lawsuit under

 

17

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which the Company paidMetLife an aggregate of $1.9 million in consideration for termination of thelease, dismissal of the lawsuit and in full settlement of approximately $3.1million of past and future lease obligations. The three installment paymentswere made in February 2005, May 2005 and September 2005.

 

On July 28, 2005,representatives of the Company received copies of four complaints relating topurported class action lawsuits, each filed by an alleged holder of shares ofour common stock and each filed in California Superior Court for the county ofSan Mateo. These complaints are captioned *GaryGoberville, et al., vs. Pehong Chen, et al.,*Civ 448490, *Cookie Schwartz, et al., vs. BroadVision,Inc., et al*,Civ 448516, *Leon Kotovich, et al., vs.BroadVision, Inc., et al*, Civ 448518 and *Anthony Noblett, et al., vs. BroadVision, Inc.,et al*, Civ 448519. Each claim names the Company’s directors andBroadVision, Inc. as defendants, and each alleges that the directordefendants violated their fiduciary duties to stockholders by, among otherthings, failing to maximize the Company’s value and ignoring, or failing toadequately protect against, certain purported conflicts of interest. Eachcomplaint seeks, among other things, injunctive relief and damages in anunspecified amount. On September 21, plaintiff Goberville filed an amendedcomplaint alleging that defendants caused materially misleading informationregarding a proposed merger to be disseminated to the Company’sstockholders.  On October 20, 2005,the Court ordered consolidation of the four pending actions pursuant to theparties’ stipulation.  In accordance withthe Court’s order, plaintiffs’ consolidated amended complaint must be filed andserved no later than December 5, 2005. In addition, defendants must complete by December 5, 2005, theirproduction of relevant documents responsive to the first request for productionof documents that were served on defendants by plaintiff Kotovich on August 9,2005 and plaintiff Goberville on August 31, 2005.

 

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

 

The Company operates in onesegment, electronic business commerce solutions. The Company’s reportablesegment includes the Company’s facilities in North America (“Americas”), Europeand Asia Pacific and the Middle East (“Asia/Pacific”). The Company’s ChiefExecutive Officer (“CEO”) is the Company’s chief operating decision maker. TheCEO reviews financial information presented on a consolidated basis accompaniedby disaggregated information about revenues by geographic region and by productfor purposes of making operating decisions and assessing financial performance.

 

The disaggregated revenueinformation reviewed by the CEO is as follows (unaudited, in thousands):

 
| ** **           | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **           | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Software  licenses   |       | $                                          | 3,134      |                                      | $          | 4,654 |   | $ | 10,941 |   | $ | 19,591 |   |
| Consulting  services |       | 4,403                                      |       | 5,013                                     |       | 14,706 |   | 15,105 |   |
| Maintenance          |       | 6,540                                      |       | 7,557                                     |       | 20,311 |   | 23,545 |   |
| Total revenues       |       | $                                          | 14,077     |                                      | $          | 17,224 |   | $ | 45,958 |   | $ | 58,241 |   |

 

The Company sells itsproducts and provides services worldwide through a direct sales force andthrough a channel of independent distributors, VARs and ASPs. In addition, thelicenses of the Company’s products are promoted through independentprofessional consulting organizations known as systems integrators. The Companyprovides services worldwide through its BroadVision Global ServicesOrganization and indirectly through distributors, VARs, ASPs and systemsintegrators.

 

18

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Disaggregated financialinformation regarding the Company’s geographic revenues and long-lived assetsis as follows (unaudited, in thousands):

 
| ** **      | ** ** | **Three months ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **      | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues:       |       |                                       |       |                                      |       |   |   |   |   |
| Americas        |       | $                                          | 8,252      |                                      | $          | 9,269 |   | $ | 25,948 |   | $ | 27,772 |   |
| Europe          |       | 4,359                                      |       | 6,134                                     |       | 15,688 |   | 25,210 |   |
| Asia/Pacific    |       | 1,466                                      |       | 1,821                                     |       | 4,322 |   | 5,259 |   |
| Total  revenues |       | $                                          | 14,077     |                                      | $          | 17,224 |   | $ | 45,958 |   | $ | 58,241 |   |

 
| ** **              | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Long-Lived  Assets:     |       |                         |       |                        |       |
| Americas                |       | $                            | 47,806     |                        | $          | 60,312 |   |
| Europe                  |       | 291                          |       | 531                         |       |
| Asia/Pacific            |       | 463                          |       | 527                         |       |
| Total long-lived assets |       | $                            | 48,560     |                        | $          | 61,370 |   |

 

During the three and nine monthsended September 30, 2005 and 2004, no single customer accounted for morethan 10% of the Company’s revenues.

 

**Note 6.Restructuring Charges**

 

Through September 30,2005, the Company has approved certain restructuring plans to, among otherthings, reduce its workforce and consolidate facilities. Restructuring andasset impairment charges have been taken to align our cost structure withchanging market conditions and to create a more efficient organization. Ourrestructuring charges have been comprised primarily of: (i) severance andbenefits termination costs related to the reduction of our workforce; (ii) leasetermination costs and/or costs associated with permanently vacating ourfacilities; (iii) other incremental costs incurred as a direct result ofthe restructuring plan; and (iv) impairment costs related to certainlong-lived assets abandoned. We account for each of these costs in accordancewith SFAS 146, *Accounting for CostsAssociated with Exit or Disposal Activities.*

 

For each of the periods presentedherein, restructuring charges consist solely of:

 

•  *Severance and Termination Benefits*— These costs represent severance, payrolltaxes and COBRA benefits related to restructuring plans implemented prior tothe date recognized.

 

•  *Excess Facilities*— These costs represent future minimum lease payments related to excessand abandoned space under lease, net of estimated sublease income and plannedcompany occupancy.

 

As of September 30,2005, the total restructuring accrual of $8.0 million consisted of thefollowing (in millions):

 
| ** **                 | ** ** | **Current** | ** ** | **Non-Current** | ** ** | **Total** | ** ** |
|----------------------------|------------|-------------|------------|-----------------|------------|-----------|------------|
| Severance  and Termination |       | $           | 0.7        |            | $          | —    |       | $ | 0.7 |   |
| Excess  Facilities         |       | 5.4         |       | 1.9             |       | 7.3       |       |
| Total                      |       | $           | 6.1        |            | $          | 1.9       |       | $ | 8.0 |   |

 

The Company estimates thatthe $0.7 million severance and termination accrual will be nearly paid in fullby December 31, 2005. We expect to pay the excess facilities amountsrelated to restructured or abandoned leased space as follows (in millions):

 
| **Years ending December 31,**               | ** ** | **Total future  minimum  payments** | ** ** |
|--------------------------------------------------|------------|-------------------------------------|------------|
| 2005                                             |       | $                                   | 0.4        |   |
| 2006                                             |       | 5.2                                 |       |
| 2007                                             |       | 0.7                                 |       |
| 2008                                             |       | 0.6                                 |       |
| 2009 and  thereafter (through October 2010) |       | 0.4                                 |       |
| Total  minimum facilities payments               |       | $                                   | 7.3        |   |

 

19

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The following tablesummarizes the activity related to the restructuring plans initiated subsequentto December 31, 2002, and accounted for in accordance with FAS 146 (inthousands):

 
| ** **                                           | ** ** | **Accrued  restructuring  costs  beginning** | ** ** | **Amounts  charged to  restructuring  costs  and other** | ** ** | **Amounts paid  or written off** | ** ** | **Accrued  restructuring  costs, ending** | ** ** |
|------------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------|------------|-------------------------------------------|------------|
| **Three Months Ended September 30, 2005**       |       |                                         |       |                                                     |       |                             |       |                                      |       |
| Lease cancellations and commitments                  |       | $                                            | 3,964      |                                                     | $          | (61                              | )          | $                                         | 175        |   | $ | 4,078 |   |
| Termination payments to employees and  related costs |       | 655                                          |       | 443                                                      |       | (775                             | )          | 323                                       |       |
|                                                 |       | $                                            | 4,619      |                                                     | $          | 382                              |       | $                                         | (600       | ) | $ | 4,401 |   |
| **Three Months Ended September 30, 2004**       |       |                                         |       |                                                     |       |                             |       |                                      |       |
| Lease cancellations and commitments                  |       | $                                            | 12,394     |                                                     | $          | 9,643                            |       | $                                         | (340       | ) | $ | 21,697 |   |
| Termination payments to employees and  related costs |       | 164                                          |       | 582                                                      |       | (175                             | )          | 571                                       |       |
| Write-off on disposal of assets and related  costs   |       | 9,289                                        |       | (1,193                                                   | )          | (8,096                           | )          | —                                    |       |
|                                                 |       | $                                            | 21,847     |                                                     | $          | 9,032                            |       | $                                         | (8,611     | ) | $ | 22,268 |   |
| **Nine Months Ended September 30, 2005**        |       |                                         |       |                                                     |       |                             |       |                                      |       |
| Lease cancellations and commitments                  |       | $                                            | 21,824     |                                                     | $          | (838                             | )          | $                                         | (16,908    | ) | $ | 4,078 |   |
| Termination payments to employees and  related costs |       | 365                                          |       | 975                                                      |       | (1,017                           | )          | 323                                       |       |
|                                                 |       | $                                            | 22,189     |                                                     | $          | 137                              |       | $                                         | (17,925    | ) | $ | 4,401 |   |
| **Nine Months Ended September 30, 2004**        |       |                                         |       |                                                     |       |                             |       |                                      |       |
| Lease cancellations and commitments                  |       | $                                            | 11,894     |                                                     | $          | 9,643                            |       | $                                         | 160        |   | $ | 21,697 |   |
| Termination payments to employees and related  costs |       | 242                                          |       | 1,058                                                    |       | (729                             | )          | 571                                       |       |
| Write-off on disposal of assets and related  costs   |       | 9,789                                        |       | (1,193                                                   | )          | (8,596                           | )          | —                                    |       |
|                                                 |       | $                                            | 21,925     |                                                     | $          | 9,508                            |       | $                                         | (9,165     | ) | $ | 22,268 |   |

 

The following tablesummarizes the activity related to the restructuring plans initiated on orprior to December 31, 2002, and accounted for in accordance with EITF 94-3(in thousands):

 
| ** **                                           | ** ** | **Accrued  restructuring  costs,  beginning** | ** ** | **Amounts  charged to  restructuring  costs  and other** | ** ** | **Amounts paid  or written off** | ** ** | **Accrued  restructuring  costs, ending** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------|------------|-------------------------------------------|------------|
| **Three Months Ended September 30, 2005**       | ** ** | ** **                                    | ** ** | ** **                                               | ** ** | ** **                       | ** ** | ** **                                | ** ** |
| Lease cancellations and commitments                  |       | $                                             | 6,326      |                                                     | $          | (137                             | )          | $                                         | (2,930     | ) | $ | 3,259 |   |
| Termination payments to employees and  related costs |       | 422                                           |       | —                                                   |       | (70                              | )          | 352                                       |       |
|                                                 |       | $                                             | 6,748      |                                                     | $          | (137                             | )          | $                                         | (3,000     | ) | $ | 3,611 |   |
| **Three Months Ended September 30, 2004**       |       |                                          |       |                                                     |       |                             |       |                                      |       |
| Lease cancellations and commitments                  |       | $                                             | 71,707     |                                                     | $          | (34,477                          | )          | $                                         | (23,629    | ) | $ | 13,601 |   |
| Termination payments to employees and  related costs |       | 429                                           |       | —                                                   |       | —                           |       | 429                                       |       |
| Write-off on disposal of assets and related  costs   |       | 1,486                                         |       | (9                                                       | )          | (115                             | )          | 1,362                                     |       |
|                                                 |       | $                                             | 73,622     |                                                     | $          | (34,486                          | )          | $                                         | (23,744    | ) | $ | 15,392 |   |
| **Nine Months Ended September 30, 2005**        |       |                                          |       |                                                     |       |                             |       |                                      |       |
| Lease cancellations and commitments                  |       | $                                             | 11,515     |                                                     | $          | (287                             | )          | $                                         | (7,969     | ) | $ | 3,259 |   |
| Termination payments to employees and  related costs |       | 459                                           |       | —                                                   |       | (107                             | )          | 352                                       |       |
|                                                 |       | $                                             | 11,974     |                                                     | $          | (287                             | )          | $                                         | (8,076     | ) | $ | 3,611 |   |
| **Nine Months Ended September 30, 2004**        |       |                                          |       |                                                     |       |                             |       |                                      |       |
| Lease cancellations and commitments                  |       | $                                             | 81,143     |                                                     | $          | (33,704                          | )          | $                                         | (33,838    | ) | $ | 13,601 |   |
| Termination payments to employees and  related costs |       | 429                                           |       | —                                                   |       | —                           |       | 429                                       |       |
| Write-off on disposal of assets and related  costs   |       | 1,883                                         |       | (9                                                       | )          | (512                             | )          | 1,362                                     |       |
|                                                 |       | $                                             | 83,455     |                                                     | $          | (33,713                          | )          | $                                         | (34,350    | ) | $ | 15,392 |   |

 

On June 29, 2005, theCompany’s Board of Directors approved a business restructuring plan, primarilyconsisting of headcount reductions, designed to adjust expenses to a level moreconsistent with anticipated revenues. The reduction included approximately 63 employees, or 22% of the Company’sworkforce.  The Company recordedseverance charges of approximately $443,000 and $627,000 in the three-monthperiods ended September 30, 2005 and June 30, 2005, respectively.

 

As mentioned above, theCompany has based its excess facilities accrual, in part, upon estimates offuture sublease income. The Company has used the following factors, amongothers, in making such estimates: opinions of independent real estate experts,current market conditions and rental rates, an assessment of the time periodover which reasonable estimates could be made, the status of negotiations withpotential subtenants, and the location of the respective facilities. TheCompany has recorded the low-end of a range of assumptions modeled forrestructuring charges, in accordance with SFAS 5. Adjustments to the facilitiesaccrual will be required if actual sublease income differs from amountscurrently expected. The Company will review the status of restructuringactivities on a quarterly basis and, if appropriate, record changes to ourrestructuring obligations in current operations based on management’s mostcurrent estimates.

 

20

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**Note 7.Goodwill and Other Intangible Assets**

 

On January 1, 2002, theCompany adopted SFAS 142*.*UnderSFAS 142, goodwill and intangible assets with indefinite lives are no longersubject to amortization but are tested for impairment at least annually using afair value approach, and whenever there is an impairment indicator. Otherintangible assets continue to be valued and amortized over their estimatedlives.

 

Pursuant to SFAS 142, theCompany is required to test its goodwill for impairment upon adoption andannually or more often if events or changes in circumstances indicate that theasset might be impaired.  While there wasno accounting charge to record upon adoption of SFAS 142, the Company concludedthat, at September 30, 2005, based on the existence of impairmentindicators, including a decline in its market value, it would be required totest goodwill for impairment. SFAS No. 142 provides for a two-stepapproach to determining whether and by how much goodwill has beenimpaired.  Since the Company has only onereporting unit for purposes of applying SFAS No. 142, the first steprequires a comparison of the fair value of the Company (reporting unit) to itsnet book value. If the fair value is greater, then no impairment is deemed tohave occurred. If the fair value is less, then the second step must beperformed to determine the amount, if any, of actual impairment. The Companycompleted the first step and has determined that its net book value at September 30,2005 exceeded its fair value on that date, and as a result, the Company hasbegun the process of determining the fair values of its identifiable tangibleand intangible assets and liabilities for purposes of determining the impliedfair value of its goodwill and any resulting goodwill impairment.  As of the date of the filing of this Form 10-Q,the Company has not completed step two of this impairment analysis due to thelimited time period from the first indication of potential impairment to thedate of this filing and the complexities involved in estimating the fair valuesof certain assets and liabilities, in particular, long-lived tangible andintangible assets (including intangible assets that have not previously beenrecorded in the Company’s financial statements).  SFAS 142 provides that in circumstances inwhich step two of the impairment analysis has not been completed, a companyshould recognize an estimated impairment charge to the extent that a Companydetermines that it is probable that an impairment loss has occurred and suchimpairment loss can be reasonably estimated using the guidance provided in SFAS5.  Based on the foregoing, the Companyhas recognized a goodwill impairment charge of $13.2 million at September 30,2005, which represents management’s preliminary estimate of the probablegoodwill impairment based on the fair value analysis completed to date.  The Company has used the quoted market priceof the Company’s common stock (market capitalization) as a basis fordetermining the fair value of the reporting unit.  The Company expects to complete step two ofthe impairment analysis during the fourth quarter of 2005 and, to the extentthat the completed analysis indicates additional goodwill impairment in excessof management’s preliminary estimate, the Company will recognize suchadditional impairment in the fourth quarter. See Note 9. Subsequent Events.

 

The process of evaluatingthe potential impairment of goodwill is highly subjective and requiressignificant judgment. In estimating the fair value of the Company, the Companymade estimates and judgments about future revenues and cash flows. The Company’sforecasts were based on assumptions that are consistent with the plans andestimates the Company is using to manage the business. Changes in theseestimates could change the Company’s conclusion regarding impairment ofgoodwill and potentially result in a future non-cash goodwill impairment chargefor all or a portion of the goodwill balance at September 30, 2005.

 

Upon adoption of SFAS 141and SFAS 142, the Company no longer amortizes its non-technology basedintangible asset, or assembled workforce. As of December 31, 2003,completed technology intangibles had been fully amortized.

 

**Note 8.Warrants**

 

As of September 30,2005, the following warrants to purchase the Company’s common stock wereoutstanding:

 
| **Description**                                                           | ** ** | **Underlying  Shares** | ** ** | **Exercise  Price per Share** | ** ** |
|---------------------------------------------------------------------------|------------|------------------------|------------|-------------------------------|------------|
| Issued to  landlord in real estate buyout transaction in August 2004 |       | 700,000                |       | $                             | 5.00       |   |
| Issued to  convertible notes investors in November 2004              |       | 1,739,130              |       | 3.58                          |       |
| Other issued  in connection with revenue transactions in 1997 and 2000    |       | 9,628                  |       | Various                       |       |
|                                                                           |            |                        |            |                               |            |  |

 

The warrant issued inconnection with the real estate transaction has a term of five years and becameexercisable beginning in August 2005. The warrant issued in connectionwith the convertible notes also has a term of five years and became exercisablebeginning in May 2005.

 

In accordance with EITF 00-19,*Accounting for Derivative FinancialInstruments Indexed to, and Potentially Settled*

 

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*in, aCompany’s Own Stock,*thewarrants have been included as a short-term liability and were originallyvalued at fair value on the date of issuance. The warrants are revalued each period until and unless the warrants areexercised.  For the three months and ninemonths ended September 30, 2005, the Company recorded gains related to therevaluation of warrants to the landlord and note holders of $0.7 and $4.2million, respectively.  These gains areincluded as a component of Restructuring charges and of Other income (expense),net, respectively, in the accompanying Condensed Consolidated Statements ofOperations.  If the warrants areexercised prior to their termination, their carrying value will be transferredto equity.

 

**Note9.  Subsequent Events**

 

As discussed in Note 7 “Goodwilland Other Intangible Assets,” as of September 30, 2005, the Companyrecognized a goodwill impairment charge of $13.2 million in accordance with therequirements of SFAS No. 142.  Subsequent to September 30,2005, the Company has experienced a significant decline in the trading price ofits common stock and hence in the Company’s market capitalization.  Inapplying the accounting requirements for recognizing and measuring animpairment loss under SFAS No. 142, the Company uses thequoted market price of the Company’s stock (market capitalization) as the basisfor determining the fair value of the Company (the reporting unit) and then allocatesthe fair value of the reporting unit to all of the assets and liabilities ofthat unit in order to determine the implied fair value ofgoodwill.  Because of the significant decline in the trading priceand market capitalization of the Company subsequent to September 30,2005, the Company anticipates recording a significant additional non-cashcharge for the impairment of goodwill in the three-month period ending December 31,2005.  The amount of the impairment charge will be determined based upon anumber of factors, including the fair value of the Company’s assets andliabilities at December 31, 2005.

 

In October 2005, theCompany inadvertently did not make timely payment of the third quarter interestpayment due under the Notes of approximately $201,000 that was due on October 1,2005.  Lack of timely payment became anevent of default on October 8, 2005 after non-payment continued for aperiod of over five business days.  TheCompany made the third quarter interest payment promptly after discovery of thenonpayment, on October 14, 2005. The event of default permits each noteholder to require the Company toredeem 120% of all or any portion of the amounts outstanding under theapplicable Note by delivering notice of such redemption to the Company, whichredemption is required under the Notes to be paid within five business daysafter receipt of such redemption notice. If all of the noteholders elect such redemption, the Company will beobligated to pay within five business days after receipt of such electionapproximately $15.5 million in unpaid principal and interest.  The accelerated repayment of all or anysignificant portion of such amount would leave the Company with insufficientworking capital to conduct its business, and the Company does not presentlyhave sufficient cash to meet such an accelerated repayment obligation.

 

OnOctober 25, 2005, the Company entered into an agreement with thenoteholders under which the noteholders agreed not to require redemption of theNotes, including the 20% premium payable thereunder, prior to November 16,2005.

 

OnOctober 29, 2005, Vector informed the Company that Vector Capital III,L.P. (“Vector III”), an entity affiliated with Vector,  had entered into transfer agreements with thenoteholders pursuant to which Vector III agreed to acquire all of the issuedand outstanding Notes.  However, theCompany believes that, under the terms of the July Noteholder Agreement,the noteholders are required to obtain its consent, not to be unreasonablywithheld, prior to any transfer of the Notes. The Company has declined to provide its consent to date and at this timedoes not intend to provide its consent, which it believes is reasonable underthe circumstances. Both Vector and the noteholders have disputed whether theCompany’s consent is required in connection with the purported transfer of theNotes and questioned the reasonableness of the Company’s refusal to consent,and these disputes are unresolved.

 

OnNovember 8, 2005, counsel for the noteholders delivered to the Company aletter purporting to terminate the July Noteholder Agreement based on theCompany’s alleged breaches of material representations, warranties or covenantsby reason of the October 8, 2005 event of default and the Company’srefusal to consent to the transfer of the Notes to Vector III.  Based on such purported termination, thenoteholders assert that the Company’s consent to the transfer of the Notes fromthe noteholders to Vector III is not required and the other provisions of the July NoteholderAgreement are no longer effective. The noteholders’ letter also asserts thatthe Company’s refusal to consent to the transfer is a breach of the October 25,2005 agreement with the noteholders and entitles the noteholders to recoverfrom the Company their attorneys’ fees in connection with the allegedbreaches.  On November 9, 2005,Vector III notified us that it had completed its purchase of the Notes.

 

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OnNovember 9, 2005, the Company’s Chief Executive Officer and largeststockholder, Pehong Chen, advised the Company that he had offered to purchasethe Notes from Vector III for a price equal to its cost plus an amountnecessary to defray its reasonable expenses in connection with the purchase andsale of the Notes. Dr. Chen has also advised the Company’s Board ofDirectors that, if he becomes the owner of the Notes, he will negotiate in goodfaith with the Company to restructure the Notes so as to relieve the Company ofany short-term liquidity threat. Pursuant to the July Noteholder Agreement, the Company’s Board ofDirectors has consented to the acquisition of the Notes by Dr. Chen. Tothe Company’s knowledge, Vector III has not accepted Dr. Chen’s offer topurchase the Notes, and there can be no assurance that Dr. Chen willacquire the Notes or that the Company’s obligations under the Notes will berestructured.

 

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

 

*Thisreport on Form 10-Q contains forward-looking statements within the meaningof Section 27A of the Securities Act of 1933, as amended, and within themeaning of Section 21E of the Securities Exchange Act of 1934, as amended,which are subject to the “safe harbor” created by those sections. Theseforward-looking statements are generally identified by words such as “expect,” “anticipate,”“intend,” “believe,” “hope,” “assume,” “estimate,” “plan,” “will” and othersimilar words and expressions. These forward-looking statements involve risksand uncertainties that could cause our actual results to differ materially fromthose expressed or implied in the forward-looking statements as a result ofcertain factors, including those described herein and in the Company’s mostrecently filed Annual Report on Form 10-K and other documents filed withthe SEC. We undertake no obligation to publicly release any revisions to theforward-looking statements or to reflect events and circumstances after thedate of this document.*

 

**Overview**

 

BroadVision solutions helpcustomers rapidly increase revenues and reduce costs by moving interactions andtransactions to personalized self service via the web. Our integratedself-service application suite—including process, commerce, portal andcontent—offers rich functionality out of the box, and is easily configured foreach customer’s e-business environment.

 

Over 1,000customers—including U.S. Air Force, Lockheed Martin, Netikos, Circuit City,Iberia L.A.E. and Vodafone—have licensed BroadVision solutions to power andpersonalize their mission-critical web initiatives.

 

Worldwide demand forenterprise software has declined significantly over the past several years. Thedecline in venture capital spending has resulted in fewer new companies withfunding to, among other things, build an on-line business. Establishedcompanies have scaled back, delayed or cancelled web-based initiatives. As aresult of these reasons and others, in particular the selling challengescreated by our deteriorating financial condition, we have seen significantdeclines in our revenue over the past four fiscal years.

 

Our objective is to furtherour position as a global supplier of web-based, self-service applications. Thiswill require us to continue to build in new functionality to our applicationsthat offer our customers a compelling value proposition to license our productsrather than design and build custom solutions.

 

We generate revenue fromfees for licenses of our software products, maintenance, consulting servicesand customer training. We generally charge fees for licenses of our softwareproducts either based on the number of persons registered to use the product orbased on the number of CPUs on the machine on which the product is installed.Payment terms are generally thirty days from the date the products aredelivered or the services are provided.

 

From 2001 to date, we haveincurred significant losses and negative cash flows from operations. In fiscalyear 2004, we entered into a series of agreements to terminate significantexcess lease obligations that were contributing to that negative cash flow.Under the terms of these agreements, we have incurred an obligation to pay $45million, and our future cash outflows will be reduced by over $4 million perquarter. We believe that these transactions are an important step towards ourgoal of generating consistent positive cash flows, although we make noassurance about our ability to generate positive cash flows in future periods.

 

We strive to anticipatechanges in the demand for our services and aggressively manage our labor forceappropriately. Through our thorough budgeting process, cross-functionalmanagement participates in the planning, reviewing and managing of our businessplans. This process is intended to allow us to adjust our cost structures tochanging market needs, competitive landscapes and economic factors. Ouremphasis on cost control helps us manage our margins even if revenues generatedfall short of what we anticipated.

 

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**RecentEvents**

 

During the third and fourthquarters of 2004, we reached agreements with certain landlords to extinguishapproximately $155.0 million of future real estate obligations. We made cashpayments of $20.7 million in 2004 and $23.1million in the first nine months of2005.  In addition, we issued to one ofthe landlords a five-year warrant to purchase approximately 700,000 shares ofour common stock at an exercise price of $5.00 per share, which became exercisablein August 2005. As a component of the settlement of one of the previousleases, we have a residual lease obligation beginning in 2007 of approximately$9.1 million. We may make an additional cash payment of $4.5 million if weexercise an option to terminate this residual real estate obligation prior tothe lease term, which commences in January 2007. This option to terminatethe residual lease obligation, discounted to net present value, is accountedfor in accordance with SFAS 146 and is part of the non-current restructuringaccrual as of September 30, 2005.

 

In November 2004, weentered into a definitive agreement for the private placement of up to $20.0million of convertible notes to five institutional investors. Under the termsof the definitive agreement, we issued an initial $16.0 million of notes whichwill be convertible, at the holders’ option, into common stock at a conversionprice of $2.76 per share. The notes bear interest at a rate of six percent perannum, and we were originally obligated to repay the principal amount of theinitial $16.0 million of notes in 15 equal monthly installments of $1.1million, which began in June 2005. Under the terms of the notes, theholders have the right to increase the Company’s monthly principal repaymentobligation to $2.1 million as of December 2005 due to our cash balancesfalling below certain defined levels as of September 30, 2005. Thisincrease, if invoked, would have the effect of requiring us to repay theprincipal amount in eight installments through June 2006.  Certain principal payments that were due inthe quarter ended September 30, 2005, have been deferred at the electionof the investors for a period of eighteen months under the terms of thenotes.  Payments of future principal andinterest may be made in either cash or, upon satisfaction of various conditionsset forth in the notes, shares of our common stock.  However, we currently have not satisfied theconditions required to make payments in stock, and we anticipate having to usecash to satisfy our future payment obligations under the notes.

 

On June 29, 2005, theCompany’s Board of Directors approved a business restructuring plan, primarilyconsisting of headcount reductions, designed to adjust expenses to a level moreconsistent with anticipated revenues. The reduction included approximately 63employees, or 22% of our workforce.  Werecorded severance charges of approximately $443,000 and $627,000 in thethree-month periods ended September 30, 2005 and June 30, 2005,respectively.

 

On July 25, 2005, weentered into an Agreement and Plan of Merger (the “Merger Agreement”) withBravo Holdco (“Bravo Holdco”), a newly formed exempted company with limitedliability incorporated under the laws of the Cayman Islands and wholly ownedsubsidiary of Vector Capital Corporation (“Vector”), and Bravo Merger Sub, LLC,a newly formed Delaware limited liability company and wholly owned subsidiaryof Bravo Holdco.  Under the terms of theMerger Agreement, the holders of shares of our common stock (other thanstockholders who exercise appraisal rights under Delaware law) that areoutstanding immediately prior to the consummation of the merger (the “Merger”)will receive $0.84 in cash for each share of common stock or intrinsic value ofeach stock option at the time of the consummation of the Merger (the “EffectiveTime”). The consummation of the Merger is conditioned upon, among other things,the adoption of the Merger Agreement by the holders of a majority of theoutstanding shares of our common stock and other closing conditions.  As of November 4, 2005, approximately14.0 million shares had been voted in favor of the transaction, which is over92% of the total shares voted but less than the nearly 17.2 million sharesrequired to achieve a quorum to hold the meeting and approve thetransaction.  On November 7, 2005,we announced that in order to extend the period during which stockholders maysubmit proxies, we had adjourned our special stockholder meeting until November 11,2005.  Previously, we had adjourned ourspecial stockholder meeting from October 12, 2005 to October 26, 2005and again from October 26, 2005 to November 4, 2005.

 

There can be no assurancethat a sufficient number of stockholder votes will be received in the timeperiods required under the Merger Agreement in order to approve the transactionor that the transaction otherwise will be completed.  On November 3, 2005, Vector and BravoHoldco filed a second amended statement to their Schedule 13D filed withthe SEC on August 4, 2005, in which Bravo Holdco stated its belief that 1)certain conditions to the closing of the Merger would not and cannot besatisfied, 2) Bravo Holdco has the right to terminate the Merger Agreement, 3)Bravo Holdco would have no obligation under the Merger Agreement to proceedwith the Merger even if the Merger

 

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is approved by the Company’sstockholders and 4) Bravo Holdco does not intend as of the date of such filingto waive any of the conditions to the closing of the Merger.  The Company disagrees that any conditions toclosing would not and cannot be satisfied, and believes that the parties to theMerger Agreement would be obligated to complete the Merger if it is approved bythe Company’s stockholders.  Followingthe October 12, 2005 special stockholder meeting at which a quorum was notpresent, the Company and Vector engaged in negotiations regarding a potentialalternative transaction pursuant to which the Company would file for protectionunder Chapter 11 of the Bankruptcy Code, and Bravo Holdco would acquire certainassets and assume certain liabilities of the Company in a transaction pursuantto Section 363 of the Bankruptcy Code, in which case it would not benecessary to obtain the approval of the Company’s stockholders to complete thetransaction. However, these negotiations did not lead to any agreement, and allproposals for such a transaction made by Vector would have resulted in theCompany’s stockholders receiving an amount, if any, that is significantly lessthan the $0.84 per share in cash provided for in the Merger Agreement.  The Company terminated these discussions on November 9,2005 and continues to believe that the Merger remains the best availableoutcome for all of its stakeholders.  TheCompany also believes that, if the Merger is not completed, the Company willlikely become insolvent unless its obligations under the Notes or othersignificant financial obligations are significantly restructured..

 

On July 25, 2005, weentered into an agreement with certain of the holders of the outstandingconvertible notes which we originally issued in November 2004 under whichall principal and accrued interest on the notes that is outstanding at theeffective date of the Merger, together with certain other amounts payable tothe noteholders, will be repaid within one business day following the EffectiveTime of the Merger and the notes and warrants will be extinguished.

 

On July 28, 2005, ourrepresentatives received copies of four complaints relating to purported classaction lawsuits, each filed by an alleged holder of shares of our common stockand each filed in California Superior Court for the county of San Mateo. Thesecomplaints are captioned *Gary Goberville, etal., vs. Pehong Chen, et al.,*Civ 448490, *Cookie Schwartz, et al., vs. BroadVision, Inc., et al*,Civ 448516, *Leon Kotovich, et al., vs.BroadVision, Inc., et al*, Civ 448518 and *Anthony Noblett, et al., vs. BroadVision, Inc.,et al*, Civ 448519. Each claim names our directors and BroadVision, Inc.as defendants, and each alleges that the director defendants violated theirfiduciary duties to stockholders by, among other things, failing to maximizeour value and ignoring, or failing to adequately protect against, certainpurported conflicts of interest. Each complaint seeks, among other things,injunctive relief and damages in an unspecified amount. On September 21,plaintiff Goberville filed an amended complaint alleging that defendants causedmaterially misleading information regarding a proposed merger to bedisseminated to the Company’s stockholders. On October 20, 2005, the Court ordered consolidation of the fourpending actions pursuant to the parties’ stipulation.  In accordance with the Court’s order,plaintiffs’ consolidated amended complaint must be filed and served no laterthan December 5, 2005.  In addition,defendants must complete by December 5, 2005, their production of relevantdocuments responsive to the first request for production of documents that wereserved on defendants by plaintiff Kotovich on August 9, 2005 and plaintiffGoberville on August 31, 2005.

 

In October 2005, weinadvertently did not make timely payment of the third quarter interest paymentdue under the Notes of approximately $201,000 that was due on October 1,2005.  Lack of timely payment became anevent of default on October 8, 2005 after non-payment continued for aperiod of over five business days.  Wemade the third quarter interest payment promptly after discovery of thenonpayment, on October 14, 2005. The event of default permits each noteholder to require us to redeem120% of all or any portion of the amounts outstanding under the applicable Noteby delivering to us notice of such redemption, which redemption is requiredunder the Notes to be paid within five business days after receipt of suchredemption notice.  If all of thenoteholders elect such redemption, we will be obligated to pay within fivebusiness days after receipt of such election approximately $15.5 million inunpaid principal and interest.  Theaccelerated repayment of all or any significant portion of such amount wouldleave us with insufficient working capital to conduct its business, and we donot presently have sufficient cash to meet such an accelerated repaymentobligation.

 

OnOctober 25, 2005, we entered into an agreement with the noteholders underwhich the noteholders agreed not to require redemption of the Notes, includingthe 20% premium payable thereunder, prior to November 16, 2005.

 

OnOctober 29, 2005, Vector informed the Company that Vector Capital III,L.P. (“Vector III”), an entity affiliated with Vector,  had entered into transfer agreements with thenoteholders pursuant to which Vector III agreed to acquire all of the issuedand outstanding Notes.  However, theCompany believes that, under the terms of the July Noteholder Agreement,the noteholders are required to obtain its consent, not to be unreasonablywithheld, prior to any transfer of the Notes. The Company has declined to provide its consent to date and at this timedoes not intend to provide its consent, which it believes is reasonable underthe circumstances. Both Vector and the noteholders

 

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havedisputed whether the Company’s consent is required in connection with thepurported transfer of the Notes and questioned the reasonableness of theCompany’s refusal to consent, and these disputes are unresolved.

 

OnNovember 8, 2005, counsel for the noteholders delivered to the Company aletter purporting to terminate the July Noteholder Agreement based on theCompany’s alleged breaches of material representations, warranties or covenantsby reason of the October 8, 2005 event of default and the Company’srefusal to consent to the transfer of the Notes to Vector III.  Based on such purported termination, thenoteholders assert that the Company’s consent to the transfer of the Notes fromthe noteholders to Vector III is not required and the other provisions of the July NoteholderAgreement are no longer effective. The noteholders’ letter also asserts thatthe Company’s refusal to consent to the transfer is a breach of the October 25,2005 agreement with the noteholders and entitles the noteholders to recoverfrom the Company their attorneys’ fees in connection with the allegedbreaches.  On November 9, 2005,Vector III notified us that it had completed its purchase of the Notes.

 

OnNovember 9, 2005, the Company’s Chief Executive Officer and largeststockholder, Pehong Chen, advised the Company that he had offered to purchasethe Notes from Vector III for a price equal to its cost plus an amountnecessary to defray its reasonable expenses in connection with the purchase andsale of the Notes. Dr. Chen has also advised the Company’s Board ofDirectors that, if he becomes the owner of the Notes, he will negotiate in goodfaith with the Company to restructure the Notes so as to relieve the Company ofany short-term liquidity threat. Pursuant to the July Noteholder Agreement, the Company’s Board ofDirectors has consented to the acquisition of the Notes by Dr. Chen. Tothe Company’s knowledge, Vector III has not accepted Dr. Chen’s offer topurchase the Notes, and there can be no assurance that Dr. Chen willacquire the Notes or that the Company’s obligations under the Notes will berestructured.

 

We have various creditfacilities with a commercial lender, which include term debt in the form ofnotes payable, a revolving line of credit and an equipment line of credit.  In June 2005, we entered into a renewedand amended loan and security agreement with the lender. The agreement requiresus to maintain certain levels of unrestricted cash and cash equivalents(excluding equity investments), and to maintain certain levels on deposit withthe lender. At December 31, 2004, $20.0 million was outstanding under theline of credit. As of September 30, 2005, there was no outstanding balanceon the line of credit.  Borrowings underthe line of credit are collateralized by all of our assets and bear interest atthe bank’s prime rate. Interest is due monthly and principal is due at theexpiration in February 2006. As of July 1, 2005, under the renewedand amended agreement, the requirements we must meet in order to access thecredit facility became more stringent. We were not in compliance with these new requirements as of September 30,2005, and we expect that we will be unable to meet the new requirements infuture periods.   Further, due to theCompany’s default under its convertible debentures described above, the termdebt is also in default, and there the entire balance of $503,000 at September 30,2005 is classified as currently due.

 

**CriticalAccounting Policies**

 

This management’s discussionand analysis of our financial condition and results of operations is based uponour condensed consolidated financial statements, which have been prepared inaccordance with generally accepted accounting principles in the United Statesof America. In preparing these financial statements, we are required to makeestimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses, and related disclosures of contingentassets and liabilities. On an ongoing basis, we evaluate our estimates,including those related to doubtful accounts, product returns, investments,goodwill and intangible assets, income taxes and restructuring, as well ascontingencies and litigation. We base our estimates on historical experienceand on various other assumptions that we believe are reasonable, the results ofwhich form the basis for making judgments about the carrying values of assetsand liabilities that are not readily apparent from other sources. Actualresults may differ 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.

 

*Basis of Presentation - GoingConcern Uncertainty*

 

The accompanyingconsolidated financial statements have been prepared on a going concern basis,which contemplates the realization of assets and the settlement of liabilitiesin the normal course of business.  TheCompany is currently experiencing severe liquidity challenges.  At September 30, 2005, the Company’scurrent liabilities exceed its current assets by approximately $30 million(negative working capital) resulting in a working capital ratio of less than0.4 to 1.0.  The Company currently doesnot have any additional financing arrangement in place from which to borrowadditional funds as may be required to meet its near term cashrequirements.  Further, due to the eventof default which occurred on October 8, 2005 relative to the convertiblenotes and the subsequent

 

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agreement entered into on October 25,2005 with the convertible noteholders, the noteholders can demand payment infull on the approximate $15.5 million outstanding note balance and interest onor after November 16, 2005.  If thiswere to occur, and if the Company was not able to obtain financing sufficientto fully repay the notes upon such demand, the Company would be forced to seekprotection under the bankruptcy laws. These matters raise substantial doubt about the ability of the Companyto continue in existence as a going concern. No adjustments to the carrying values or classification of the assetsand liabilities in the accompanying financial statements have been made to takeaccount of this uncertainty.

 

*RevenueRecognition*

 

*Overview*— Our revenue consists of fees for licensesof our software products, maintenance, consulting services and customertraining. We generally charge fees for licenses of our software products eitherbased on the number of persons registered to use the product or based on thenumber of CPUs on the machine on which the product is installed. Licenses forsoftware whereby fees charged are based upon the number of persons registeredto use the product are differentiated between licenses for development use andlicenses for use in deployment of the customer’s website. Licenses for softwarewhereby fees charged are on a per-CPU basis do not differentiate betweendevelopment and deployment usage. Our revenue recognition policies comply withthe provisions of Statement of Position (“SOP”) No. 97-2, *Software Revenue Recognition*, as amended;SOP No. 98-9, *Software RevenueRecognition, With Respect to Certain Transactions*and SAB 101 *.*

 

*SoftwareLicense Revenue*

 

We license our productsthrough our direct sales force and indirectly through resellers. In general,software license revenues are recognized when a non-cancelable licenseagreement has been signed and the customer acknowledges an unconditionalobligation to pay, the software product has been delivered, there are nouncertainties surrounding product acceptance, the fees are fixed anddeterminable and collection is considered probable. Delivery is considered tohave occurred when title and risk of loss have been transferred to thecustomer, which generally occurs when media containing the licensed programs isprovided to a common carrier. In case of electronic delivery, delivery occurswhen the customer is given access to the licensed programs. For products thatcannot be used without a licensing key, the delivery requirement is met whenthe licensing key is made available to the customer. If collectibility is notconsidered probable, revenue is recognized when the fee is collected.Subscription-based license revenues are recognized ratably over thesubscription period. We enter into reseller arrangements that typically providefor sublicense fees payable to the us based upon a percentage of list price. Wedo not grant resellers the right of return.

 

We recognize revenue usingthe residual method pursuant to the requirements of SOP No. 97-2, as amendedby SOP No. 98-9. Revenues recognized from multiple-element softwarearrangements are allocated to each element of the arrangement based on the fairvalues of the elements, such as licenses for software products, maintenance,consulting services or customer training. The determination of fair value isbased on objective evidence, which is specific to us. We limit its assessmentof objective evidence for each element to either the price charged when thesame element is sold separately or the price established by management havingthe relevant authority to do so, for an element not yet sold separately. Ifevidence of fair value of all undelivered elements exists but evidence does notexist for one or more delivered elements, then revenue is recognized using theresidual method. Under the residual method, the fair value of the undeliveredelements is deferred and the remaining portion of the arrangement fee isrecognized as revenue.

 

We record unearned revenuefor software license agreements when cash has been received from the customerand the agreement does not qualify for revenue recognition under our revenuerecognition policy. We record accounts receivable for software licenseagreements when the agreement qualifies for revenue recognition but cash or otherconsideration has not been received from the customer.

 

*ServicesRevenue*

 

Consulting services revenuesand customer training revenues are recognized as such services are performed.Maintenance revenues, which include revenues bundled with software licenseagreements that entitle the customers to technical support and futureunspecified enhancements to our products, are deferred and recognized ratablyover the related agreement period, generally twelve months.

 

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Our consulting services,which consist of consulting, maintenance and training, are delivered throughthe BroadVision Global Services (“BVGS”) organization. Services that we provideare not essential to the functionality of the software. We record reimbursementfrom our customers for out-of-pocket expenses as an increase to servicesrevenues.

 

*Allowancesand Reserves*

 

Occasionally, our customersexperience financial difficulty after we record the revenue but before we arepaid. We maintain allowances for doubtful accounts for estimated lossesresulting from the inability of our customers to make required payments. Ournormal payment terms are 30 to 90 days from invoice date. If the financialcondition of our customers were to deteriorate, resulting in an impairment oftheir ability to make payments, additional allowances may be required.

 

*ImpairmentAssessments*

 

We adopted SFAS 142 on January 1,2002.  Pursuant to SFAS 142, the Companyis required to test its goodwill for impairment upon adoption and annually ormore often if events or changes in circumstances indicate that the asset mightbe impaired.  While there was noaccounting charge to record upon adoption, the Company concluded that, as of September 30,2005, based on the existence of impairment indicators, including a decline inits market value, it would be required to test goodwill for impairment. SFAS No. 142provides for a two-step approach to determining whether and by how muchgoodwill has been impaired.  Since theCompany has only one reporting unit for purposes of applying SFAS No. 142,the first step requires a comparison of the fair value of the Company to itsnet book value. If the fair value is greater, then no impairment is deemed tohave occurred. If the fair value is less, then the second step must becompleted to determine the amount, if any, of actual impairment. The Companycompleted the first step and has determined that its net book value at September 30,2005 exceeded its fair value on that date, and as a result, the Company hasbegun the process of determining the fair values of its identifiable tangibleand intangible assets and liabilities for purposes of determining the impliedfair value of its goodwill and any resulting goodwill impairment.  As of the date of the filing of this Form 10-Q,the Company has not completed step two of this impairment analysis due to thelimited time period from the first indication of potential impairment to thedate of this filing and the complexities involved in estimating the fair valuesof certain assets and liabilities, in particular, long-lived tangible andintangible assets (including intangible assets that have not previously beenrecorded in the Company’s financial statements).  SFAS 142 provides that in circumstances inwhich step two of the impairment analysis has not been completed, a companyshould recognize an estimated impairment charge to the extent that a Companydetermines that it is probable that an impairment loss has occurred and suchimpairment loss can be reasonably estimated using the guidance provided in SFAS5.  Based on the foregoing, the Companyhas recognized a goodwill impairment charge of $13.2 million at September 30,2005, which represents management’s preliminary estimate of the probablegoodwill impairment based on the fair value analysis completed to date.  The Company has used the quoted market priceof the Company’s common stock (market capitalization) as a basis fordetermining the fair value of the reporting unit.  The Company expects to complete step two ofthe impairment analysis during the fourth quarter of 2005 and, to the extentthat the completed analysis indicates additional goodwill impairment in excessof management’s preliminary estimate, the Company will recognize suchadditional impairment in the fourth quarter.

 

Subsequent to September 30,2005, the Company has experienced a significant decline in the trading price ofits common stock and hence in the Company’s market capitalization.  Inapplying the accounting requirements for recognizing and measuring animpairment loss under SFAS No. 142, the Company uses thequoted market price of the Company’s stock (market capitalization) as the basisfor determining the fair value of the Company (the reporting unit) andthen allocates the fair value of the reporting unit to all of the assetsand liabilities of that unit in order to determine the implied fair value ofgoodwill.  Because of the significant decline in the trading priceand market capitalization of the Company subsequent to September 30,2005, the Company anticipates recording a significant additional non-cashcharge for the impairment of goodwill in the three-month period ending December 31,2005.  The amount of the impairment charge will be determined based upon anumber of factors, including the fair value of the Company’s assets andliabilities at December 31, 2005.

 

The process of evaluatingthe potential impairment of goodwill is highly subjective and requiressignificant judgment. In estimating the fair value of the Company, the Companymade estimates and judgments about future revenues and cash flows. The Company’sforecasts were based on assumptions that are consistent with the plans andestimates the Company is using to manage the business. Changes in theseestimates could change the Company’s conclusion regarding impairment ofgoodwill and potentially result in a future non-cash goodwill impairment chargefor all or a portion of the goodwill balance at September 30, 2005.

 

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*DeferredTax Assets*

 

We analyze our deferred taxassets with regard to potential realization. We have established a valuationallowance on our deferred tax assets to the extent that we determined that itis more likely than not that some portion or all of the deferred tax assetswill not be realized based upon the uncertainty of their realization. We haveconsidered estimated future taxable income and ongoing prudent and feasible taxplanning strategies in assessing the amount of the valuation allowance.

 

*Accountingfor Stock-Based Compensation*

 

We apply APB 25 and relatedinterpretations when accounting for our stock option and stock purchase plans.In accordance with APB 25, we apply the intrinsic value method in accountingfor employee stock options. Accordingly, we generally recognize no compensationexpense with respect to stock-based awards to employees.

 

During the three monthsended March 31, 2004, the Company recorded compensation income of $15,000as a result of granting common stock to a third party consultant. These chargeswere calculated based upon the market value of the underlying stock.

 

We have determined pro formainformation regarding net loss and net loss per share as if we had accountedfor employee stock options under the fair value method as required by SFAS 123.The fair value of these stock-based awards to employees was estimated using theBlack-Scholes option pricing model. Had compensation cost for the Company’sstock option plan and employee stock purchase plan been determined consistentwith SFAS 123, the Company’s reported net income (loss) and net income (loss)per share would have been changed to the amounts indicated below (in thousands,except per share data, unaudited):

 
| ** **                                                                                                                                    | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income (loss) as reported                                                                                                                 |       | $                                          | (14,537    | )                                         | $          | 23,380 |   | $ | 14,532 |   | $ | 21,021 |   |
| Add: Stock-based employee compensation  (income) expense included in reported net income (loss), net of related tax  effects                  |       | —                                     |       | —                                    |       | — |   | (15 | ) |
| Deduct: Total stock-based employee  compensation expense determined under fair value based method for all awards,  net of related tax effects |       | (219                                       | )          | (1,256                                    | )          | (1,668 | ) | (6,020 | ) |
| Pro forma net loss                                                                                                                            |       | $                                          | (14,756    | )                                         | $          | 22,124 |   | $ | (16,200 | ) | $ | 14,986 |   |
| Income (loss) per share:                                                                                                                      |       |                                       |       |                                      |       |   |   |   |   |
| Basic—as reported                                                                                                                        |       | $                                          | (0.42      | )                                         | $          | 0.70 |   | $ | (0.43 | ) | $ | 0.63 |   |
| Basic—pro forma                                                                                                                          |       | $                                          | (0.43      | )                                         | $          | 0.66 |   | $ | (0.47 | ) | $ | 0.45 |   |
|                                                                                                                                          |       |                                       |       |                                      |       |   |   |   |   |
| Diluted—as reported                                                                                                                      |       | $                                          | (0.42      | )                                         | $          | 0.69 |   | $ | (0.43 | ) | $ | 0.61 |   |
| Diluted—pro forma                                                                                                                        |       | $                                          | (0.43      | )                                         | $          | 0.65 |   | $ | (0.47 | ) | $ | 0.44 |   |

 

*RestructuringCharges*

 

Through September 30,2005, we have approved restructuring plans to, among other things, reduce ourworkforce and consolidate facilities. Restructuring and asset impairmentcharges were taken to align our cost structure with changing market conditionsand to create a more efficient organization. Our restructuring charges arecomprised primarily of: (i) severance and benefits termination costsrelated to the reduction of our workforce; (ii) lease termination costsand/or costs associated with permanently vacating our facilities; (iii) otherincremental costs incurred as a direct result of the restructuring plan; and (iv) impairmentcosts related to certain long-lived assets abandoned. We account for each ofthese costs in accordance with SAB 100 *.*

 

*Severanceand Termination Costs*. We account for severance and benefits termination costs as follows:

 

• Forexit or disposal activities initiated on or prior to December 31, 2002, weaccount for costs in accordance with EITF 94-3.  Accordingly, we recordthe liability related to these termination costs when the following conditionshave been met: (i) management with the appropriate level of authorityapproves a termination plan that commits us

 

29

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to such plan and establishesthe benefits the employees will receive upon termination; (ii) the benefitarrangement is communicated to the employees in sufficient detail to enable theemployees to determine the termination benefits; (iii) the planspecifically identifies the number of employees to be terminated, theirlocations and their job classifications; and (iv) the period of time toimplement the plan does not indicate changes to the plan are likely.

 

• Forexit or disposal activities initiated after December 31, 2002, we accountfor costs in accordance with SFAS 146.  SFAS 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.

 

*ExcessFacilities Costs*.We account for excess facilities costs as follows:

 

• Forexit or disposal activities initiated on or prior to December 31, 2002, weaccount for lease termination and/or abandonment costs in accordance with EITF88-10, *Costs Associated with LeaseModification or Termination*. Accordingly, we recorded the costsassociated with lease termination and/or abandonment when the leased propertyhad no substantive future use or benefit to us.

 

• Forexit or disposal activities initiated after December 31, 2002, we accountfor lease termination and/or abandonment costs in accordance with SFAS 146,which requires that a liability for such costs be recognized and measuredinitially at fair value on the cease use date of the facility.

 

Severance and terminationcosts and excess facilities costs we record under these provisions are notassociated with nor do they benefit continuing activities.

 

Inherent in the estimationof the costs related to our restructuring efforts are assessments related tothe most likely expected outcome of the significant actions to accomplish therestructuring. In determining the charges related to the restructurings todate, the majority of estimates made by management have related to charges forexcess facilities. In determining the charges for excess facilities, we wererequired to estimate future sublease income, future net operating expenses ofthe facilities, and brokerage commissions, among other expenses. The mostsignificant of these estimates have related to the timing and extent of futuresublease income in which to reduce our lease obligations. We based ourestimates of sublease income, in part, on the opinions of independent realestate experts, current market conditions and rental rates, an assessment ofthe time period over which reasonable estimates could be made, the status ofnegotiations with potential subtenants, and the location of the respectivefacility, among other factors. The Company has recorded the low-end of a rangeof assumptions modeled for restructuring charges, in accordance with SFAS5.  Adjustments to the facilities accrual will be required if actual leaseexit costs or sublease income differ from amounts currently expected. We willreview the status of restructuring activities on a quarterly basis and, ifappropriate, record changes to our restructuring obligations in currentoperations based on management’s most current estimates.

 

As of September 30,2005, the total restructuring accrual of $8.0 million consisted of thefollowing (in millions):

 
| ** **                 | ** ** | **Current** | ** ** | **Non-Current** | ** ** | **Total** | ** ** |
|----------------------------|------------|-------------|------------|-----------------|------------|-----------|------------|
| Severance  and Termination |       | $           | 0.7        |            | $          | —    |       | $ | 0.7 |   |
| Excess  Facilities         |       | 5.4         |       | 1.9             |       | 7.3       |       |
| Total                      |       | $           | 6.1        |            | $          | 1.9       |       | $ | 8.0 |   |

 

The Company estimates thatthe $0.7 million severance and termination accrual will be nearly paid in fullby December 31, 2005. We expect to pay the excess facilities amountsrelated to restructured or abandoned leased space as follows (in millions):

 
| **Years ending December 31,**               | ** ** | **Total future  minimum  payments** | ** ** |
|--------------------------------------------------|------------|-------------------------------------|------------|
| 2005                                             |       | $                                   | 0.4        |   |
| 2006                                             |       | 5.2                                 |       |
| 2007                                             |       | 0.7                                 |       |
| 2008                                             |       | 0.6                                 |       |
| 2009 and  thereafter (through October 2010) |       | 0.4                                 |       |
| Total  minimum facilities payments               |       | $                                   | 7.3        |   |

 

30

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The following tablesummarizes the activity related to the restructuring plans initiated subsequentto December 31, 2002, and accounted for in accordance with FAS 146 (inthousands):

 
| ** **                                           | ** ** | **Accrued  restructuring  costs  beginning** | ** ** | **Amounts  charged to  restructuring  costs  and other** | ** ** | **Amounts paid  or written off** | ** ** | **Accrued  restructuring  costs, ending** | ** ** |
|------------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------|------------|-------------------------------------------|------------|
| **Three Months Ended September 30, 2005**       |       |                                         |       |                                                     |       |                             |       |                                      |       |
| Lease cancellations and commitments                  |       | $                                            | 3,964      |                                                     | $          | (61                              | )          | $                                         | 175        |   | $ | 4,078 |   |
| Termination payments to employees and  related costs |       | 655                                          |       | 443                                                      |       | (775                             | )          | 323                                       |       |
|                                                 |       | $                                            | 4,619      |                                                     | $          | 382                              |       | $                                         | (600       | ) | $ | 4,401 |   |
| **Three Months Ended September 30, 2004**       |       |                                         |       |                                                     |       |                             |       |                                      |       |
| Lease cancellations and commitments                  |       | $                                            | 12,394     |                                                     | $          | 9,643                            |       | $                                         | (340       | ) | $ | 21,697 |   |
| Termination payments to employees and  related costs |       | 164                                          |       | 582                                                      |       | (175                             | )          | 571                                       |       |
| Write-off on disposal of assets and related  costs   |       | 9,289                                        |       | (1,193                                                   | )          | (8,096                           | )          | —                                    |       |
|                                                 |       | $                                            | 21,847     |                                                     | $          | 9,032                            |       | $                                         | (8,611     | ) | $ | 22,268 |   |
| **Nine Months Ended September 30, 2005**        |       |                                         |       |                                                     |       |                             |       |                                      |       |
| Lease cancellations and commitments                  |       | $                                            | 21,824     |                                                     | $          | (838                             | )          | $                                         | (16,908    | ) | $ | 4,078 |   |
| Termination payments to employees and  related costs |       | 365                                          |       | 975                                                      |       | (1,017                           | )          | 323                                       |       |
|                                                 |       | $                                            | 22,189     |                                                     | $          | 137                              |       | $                                         | (17,925    | ) | $ | 4,401 |   |
| **Nine Months Ended September 30, 2004**        |       |                                         |       |                                                     |       |                             |       |                                      |       |
| Lease cancellations and commitments                  |       | $                                            | 11,894     |                                                     | $          | 9,643                            |       | $                                         | 160        |   | $ | 21,697 |   |
| Termination payments to employees and  related costs |       | 242                                          |       | 1,058                                                    |       | (729                             | )          | 571                                       |       |
| Write-off on disposal of assets and related  costs   |       | 9,789                                        |       | (1,193                                                   | )          | (8,596                           | )          | —                                    |       |
|                                                 |       | $                                            | 21,925     |                                                     | $          | 9,508                            |       | $                                         | (9,165     | ) | $ | 22,268 |   |

 

The following tablesummarizes the activity related to the restructuring plans initiated on orprior to December 31, 2002, and accounted for in accordance with EITF 94-3(in thousands):

 
| ** **                                           | ** ** | **Accrued  restructuring  costs,  beginning** | ** ** | **Amounts  charged to  restructuring  costs  and other** | ** ** | **Amounts paid  or written off** | ** ** | **Accrued  restructuring  costs, ending** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------|------------|-------------------------------------------|------------|
| **Three Months Ended September 30, 2005**       |       |                                          |       |                                                     |       |                             |       |                                      |       |
| Lease cancellations and commitments                  |       | $                                             | 6,326      |                                                     | $          | (137                             | )          | $                                         | (2,930     | ) | $ | 3,259 |   |
| Termination payments to employees and  related costs |       | 422                                           |       | —                                                   |       | (70                              | )          | 352                                       |       |
|                                                 |       | $                                             | 6,748      |                                                     | $          | (137                             | )          | $                                         | (3,000     | ) | $ | 3,611 |   |
| **Three Months Ended September 30, 2004**       |       |                                          |       |                                                     |       |                             |       |                                      |       |
| Lease cancellations and commitments                  |       | $                                             | 71,707     |                                                     | $          | (34,477                          | )          | $                                         | (23,629    | ) | $ | 13,601 |   |
| Termination payments to employees and  related costs |       | 429                                           |       | —                                                   |       | —                           |       | 429                                       |       |
| Write-off on disposal of assets and related  costs   |       | 1,486                                         |       | (9                                                       | )          | (115                             | )          | 1,362                                     |       |
|                                                 |       | $                                             | 73,622     |                                                     | $          | (34,486                          | )          | $                                         | (23,744    | ) | $ | 15,392 |   |
| **Nine Months Ended September 30, 2005**        |       |                                          |       |                                                     |       |                             |       |                                      |       |
| Lease cancellations and commitments                  |       | $                                             | 11,515     |                                                     | $          | (287                             | )          | $                                         | (7,969     | ) | $ | 3,259 |   |
| Termination payments to employees and  related costs |       | 459                                           |       | —                                                   |       | (107                             | )          | 352                                       |       |
|                                                 |       | $                                             | 11,974     |                                                     | $          | (287                             | )          | $                                         | (8,076     | ) | $ | 3,611 |   |
| **Nine Months Ended September 30, 2004**        |       |                                          |       |                                                     |       |                             |       |                                      |       |
| Lease cancellations and commitments                  |       | $                                             | 81,143     |                                                     | $          | (33,704                          | )          | $                                         | (33,838    | ) | $ | 13,601 |   |
| Termination payments to employees and  related costs |       | 429                                           |       | —                                                   |       | —                           |       | 429                                       |       |
| Write-off on disposal of assets and related  costs   |       | 1,883                                         |       | (9                                                       | )          | (512                             | )          | 1,362                                     |       |
|                                                 |       | $                                             | 83,455     |                                                     | $          | (33,713                          | )          | $                                         | (34,350    | ) | $ | 15,392 |   |

 

On June 29, 2005, theCompany’s Board of Directors approved a business restructuring plan, primarilyconsisting of headcount reductions, designed to adjust expenses to a level moreconsistent with anticipated revenues. The reduction included approximately 63 employees, or 22% of the Company’sworkforce.  We recorded severance chargesof approximately $443,000 and $627,000 in the three-month periods ended September 30,2005 and June 30, 2005, respectively.

 

31

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As mentioned above, we havebased our excess facilities accrual, in part, upon estimates of future subleaseincome. We have used the following factors, among others, in making suchestimates: opinions of independent real estate experts, current marketconditions and rental rates, an assessment of the time period over whichreasonable estimates could be made, the status of negotiations with potentialsubtenants, and the location of the respective facilities. We recorded thelow-end of a range of assumptions modeled for restructuring charges, inaccordance with SFAS 5. Adjustments to the facilities accrual will be requiredif actual sublease income differs from amounts currently expected. We willreview the status of restructuring activities on a quarterly basis and, ifappropriate, record changes to our restructuring obligations in currentoperations based on management’s most current estimates.

 

***Legal Matters***

 

Our current estimated rangeof liability related to pending litigation is based on claims for which it isprobable that a liability has been incurred and we can estimate the amount andrange of loss. We have recorded the minimum estimated liability related tothose claims, where there is a range of loss. Because of the uncertaintiesrelated to both the determination of the probability of an unfavorable outcomeand the amount and range of loss in the event of an unfavorable outcome, we areunable to make a reasonable estimate of the liability that could result fromthe remaining pending litigation. As additional information becomes available,we will assess the potential liability related to its pending litigation andrevise our estimates, if necessary. Such revisions in our estimates of thepotential liability could materially impact our results of operations andfinancial position.

 

On June 10, 2004,MetLife filed a complaint in the Superior Court of the State of California, Countyof Los Angeles, naming us as a defendant. The complaint alleged that we wereliable for unlawful detainer of premises leased from the plaintiff. Theplaintiff thereafter filed a First Amended Complaint alleging that we no longerheld possession of the premises but was in breach of the lease. In February 2005,MetLife reached agreement with us and executed documents regarding a settlementof the pending lawsuit under which we will pay MetLife an aggregate of $1.9million in consideration for termination of the lease, dismissal of the lawsuitand in full settlement of approximately $3.1 million of past and future leaseobligations. The three installment payments were made in February 2005, May 2005and September 2005.

 

On July 28, 2005, ourrepresentatives received copies of four complaints relating to purported classaction lawsuits, each filed by an alleged holder of shares of our common stockand each filed in California Superior Court for the county of San Mateo. Thesecomplaints are captioned *Gary Goberville, etal., vs. Pehong Chen, et al.,*Civ 448490, *Cookie Schwartz, et al., vs. BroadVision, Inc., et al*,Civ 448516, *Leon Kotovich, et al., vs.BroadVision, Inc., et al*, Civ 448518 and *Anthony Noblett, et al., vs. BroadVision, Inc.,et al*, Civ 448519. Each claim names our directors and BroadVision, Inc.as defendants, and each alleges that the director defendants violated theirfiduciary duties to stockholders by, among other things, failing to maximizeour value and ignoring, or failing to adequately protect against, certainpurported conflicts of interest. Each complaint seeks, among other things,injunctive relief and damages in an unspecified amount. On September 21,plaintiff Goberville filed an amended complaint alleging that defendants causedmaterially misleading information regarding a proposed merger to bedisseminated to the Company’s stockholders. On October 20, 2005, the Court ordered consolidation of the fourpending actions pursuant to the parties’ stipulation.  In accordance with the Court’s order,plaintiffs’ consolidated amended complaint must be filed and served no laterthan December 5, 2005.  In addition,defendants must complete by December 5, 2005, their production of relevantdocuments responsive to the first request for production of documents that wereserved on defendants by plaintiff Kotovich on August 9, 2005 and plaintiffGoberville on August 31, 2005.

 

32

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***Results of Operations***

 

*Revenues*

 

*Totalrevenues*decreased18% during the three months ended September 30, 2005 to $14.1 million ascompared to $17.2 million for the three months ended September 30,2004.  Total revenues decreased 22%during the nine months ended September 30, 2005 to $46.0 million ascompared to $58.2 million for the nine months ended September 30, 2004. Asummary of our revenues by geographic region is as follows (dollars inthousands, unaudited):

 
| ** **              | ** ** | **Software  Licenses** | ** ** | **%**  | ** ** | **Services** | ** ** | **%**  | ** ** | **Total** | ** ** | **%**  | ** ** |
|-------------------------|------------|------------------------|------------|--------|------------|--------------|------------|--------|------------|-----------|------------|--------|------------|
| Three Months Ended:     |       |                   |       |   |       |         |       |   |       |      |       |   |       |
| September 30, 2005 |       |                   |       |   |       |         |       |   |       |      |       |   |       |
| Americas                |       | $                      | 1,724      |   | 55         | %            | $          | 6,528  |       | 60        | %          | $      | 8,252      |   | 59 | % |
| Europe                  |       | 830                    |       | 26     |       | 3,529        |       | 32     |       | 4,359     |       | 31     |       |
| Asia Pacific            |       | 580                    |       | 19     |       | 886          |       | 8      |       | 1,466     |       | 10     |       |
| Total                   |       | $                      | 3,134      |   | 100        | %            | $          | 10,943 |       | 100       | %          | $      | 14,077     |   | 100 | % |
| September 30, 2004 |       |                   |       |   |       |         |       |   |       |      |       |   |       |
| Americas                |       | $                      | 2,111      |   | 45         | %            | $          | 7,159  |       | 57        | %          | $      | 9,270      |   | 54 | % |
| Europe                  |       | 1,884                  |       | 41     |       | 4,250        |       | 34     |       | 6,134     |       | 36     |       |
| Asia Pacific            |       | 659                    |       | 14     |       | 1,161        |       | 9      |       | 1,820     |       | 10     |       |
| Total                   |       | $                      | 4,654      |   | 100        | %            | $          | 12,570 |       | 100       | %          | $      | 17,224     |   | 100 | % |
| Nine Months Ended:      |       |                   |       |   |       |         |       |   |       |      |       |   |       |
| September 30, 2005 |       |                   |       |   |       |         |       |   |       |      |       |   |       |
| Americas                |       | $                      | 5,430      |   | 50         | %            | $          | 20,518 |       | 59        | %          | $      | 25,948     |   | 57 | % |
| Europe                  |       | 3,814                  |       | 35     |       | 11,874       |       | 34     |       | 15,688    |       | 34     |       |
| Asia Pacific            |       | 1,697                  |       | 15     |       | 2,625        |       | 7      |       | 4,322     |       | 9      |       |
| Total                   |       | $                      | 10,941     |   | 100        | %            | $          | 35,017 |       | 100       | %          | $      | 45,958     |   | 100 | % |
| September 30, 2004 |       |                   |       |   |       |         |       |   |       |      |       |   |       |
| Americas                |       | $                      | 6,711      |   | 34         | %            | $          | 21,061 |       | 54        | %          | $      | 27,772     |   | 48 | % |
| Europe                  |       | 10,598                 |       | 54     |       | 14,612       |       | 38     |       | 25,210    |       | 43     |       |
| Asia Pacific            |       | 2,282                  |       | 12     |       | 2,977        |       | 8      |       | 5,259     |       | 9      |       |
| Total                   |       | $                      | 19,591     |   | 100        | %            | $          | 38,650 |       | 100       | %          | $      | 58,241     |   | 100 | % |

 

The Company operates in acompetitive industry. There have been declines in both the technology industryand in general economic conditions since the beginning of 2001. These declinesmay continue. Financial comparisons discussed herein may not be indicative offuture performance.

 

*Softwarelicense revenues*decreased33% during the three months ended September 30, 2005 to $3.1 million ascompared to $4.7 million for the three months ended September 30, 2004.Software license revenue decreased 44% during the nine months ended September 30,2005 to $10.9 million as compared to $19.6 million for the nine months ended September 30,2004. License revenue in all areas declined due to softening demand forenterprise software applications and to the selling challenges created by ourdeteriorating financial condition.

 

*Servicesrevenues*consistingof consulting revenues, customer training revenues and maintenance revenuesdecreased 13% during the three months ended September 30, 2005 to $10.9million as compared to $12.6 million for the three months ended September 30,2004. Services revenues decreased 9% during the nine months ended September 30,2005 to $35.0 million as compared to $38.7 million for the nine months ended September 30,2004. The decrease in service revenues was primarily attributable to lowermaintenance revenue. Maintenance revenues decreased 14% for the three monthsended September 30, 2005 to $6.5 million as compared to $7.6 million forthe three months ended September 30, 2004. Maintenance revenues decreased 14% for the nine months ended September 30,2005 to $20.3 million as compared to $23.5 million for the nine months ended September 30,2004. Maintenance revenue decreased due to a decline in customer licenses andcertain existing customers declining the renewal of annual maintenanceservices.

 

*Cost ofRevenues*

 

Cost of software licenserevenues includes 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 licensed with, our products. Cost ofservices consists primarily of employee-related costs, third-party consultantfees incurred on consulting projects, post-contract customer support andinstructional training services. A summary of our cost of revenues is asfollows (dollars in thousands, unaudited):

 
| ** **                    | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                    | ** ** | **2005**                                  | ** ** | **%**                                    | ** ** | **2004** | ** ** | **%** | ** ** | **2005** | ** ** | **%** | ** ** | **2004** | ** ** | **%** | ** ** |
| Cost of software licenses (1) |       | $                                         | 106        |                                     | 3          | % | $ | 256 |   | 6 | % | $ | (137 | ) | (1% | ) | $ | 1,147 |   | 6 | % |
| Cost of services (2)          |       | 5,641                                     |       | 52                                       |       | 6,391 |   | 51 |   | 17,235 |   | 49 |   | 18,970 |   | 49 |   |
| Total cost of revenues (3)    |       | $                                         | 5,747      |                                     | 41         | % | $ | 6,647 |   | 39 | % | $ | 17,098 |   | 37 | % | $ | 20,117 |   | 35 | % |

 

----

(1) Percentages arecalculated based on total software license revenues for the period indicated

(2) Percentages arecalculated based on total services revenues for the period indicated

(3) Percentages arecalculated based on total revenues for the period indicated

 

33

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*Cost of(credit for) software licenses*decreased in absolute dollar terms during the three months ended September 30,2005 to $106,000 as compared to $256,000 for the three months ended September 30,2004.  The cost of software licenses decreasedduring the nine months ended September 30, 2005 to $(137,000)  as compared to $1,147,000 for the nine monthsended September 30, 2004.  This decrease was primarily due to thereversal of some royalty costs no longer considered payable.

 

*Cost ofservices*decreased12% in absolute dollar terms during the three months ended September 30,2005 to $5.6 million as compared to $6.4 million for the three months ended September 30,2004. The cost of services decreased 9% during the nine months ended September 30,2005 to $17.2 million as compared to $19.0 million for the nine months ended September 30,2004.  This decline was attributable tolower consulting headcount in Europe and the Middle East regions and lowercustomer support headcount in the Americas. This was partially offset by anincrease in consulting spending in the Americas.

 

*OperatingExpenses and Other Income, net*

 

Operating expenses consistsof the following:

 

•  *Research and development expenses*consist primarily of salaries,employee-related benefit costs and consulting fees incurred in association withthe development of our products. Costs incurred for the research anddevelopment of new software products are expensed as incurred until such timethat technological feasibility, in the form of a working model, is establishedat which time such costs are capitalized and recorded at the lower ofunamortized cost or net realizable value. The costs incurred subsequent to theestablishment of a working model but prior to general release of the producthave not been significant. date, we have not capitalized any costs related tothe development of software for external use.

 

•*Sales and marketing expenses*consist primarily of salaries,employee-related benefit costs, commissions and other incentive compensation,travel and entertainment and marketing program-related expenditures such ascollateral materials, trade shows, public relations, advertising, and creativeservices.

 

•*General and administrative expenses*consist primarily of salaries, employee-relatedbenefit costs, provisions and credits related to uncollectible accountsreceivable and professional service fees.

 

•  *Restructuring charges*represent costs incurred to restructurecompany operations. These charges, including charges for excess facilities,severance and certain non-cash items, were recorded under the provisions ofEITF 94-3, and SFAS 146.

 

A summary of operatingexpenses is set forth in the following table. The percentage of expenses iscalculated based on total revenues (dollars in thousands, unaudited):

 
| ** **                  | ** ** | **Three months ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                  | ** ** | **2005**                                   | ** ** | **% (1)**                                 | ** ** | **2004** | ** ** | **% (1)** | ** ** | **2005** | ** ** | **% (1)** | ** ** | **2004** | ** ** | **% (1)** | ** ** |
| Research and development    |       | $                                          | 3,095      |                                      | 22         | % | $ | 4,600 |   | 27 | % | $ | 11,337 |   | 25 | % | $ | 13,997 |   | 24 | % |
|                        |       |                                       |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Sales and marketing         |       | 2,948                                      |       | 21                                        |       | 6,020 |   | 35 |   | 13,819 |   | 30 |   | 20,365 |   | 35 |   |
| General and administrative  |       | 2,162                                      |       | 15                                        |       | 2,335 |   | 13 |   | 7,526 |   | 16 |   | 7,152 |   | 12 |   |
| Goodwill impairment         |       | 13,198                                     |       | 94                                        |       | — |   | — |   | 13,198 |   | 29 |   | — |   | — |   |
| Restructuring charges       |       | 245                                        |       | 2                                         |       | (25,454 | ) | (142 | ) | (150 | ) | (0 | ) | (24,205 | ) | (42 | ) |
| Business combination charge |       | 977                                        |       | 7                                         |       | — |   | — |   | 977 |   | 2 |   | — |   | — |   |
| Total operating expenses    |       | $                                          | 22,625     |                                      | 161        |   | $ | (12,499 | ) | (73 | )% | $ | 46,707 |   | 102 | % | $ | 17,309 |   | 30 | % |

 

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

 

*Researchand development expenses*decreased 33% during the three months ended September 30, 2005 to$3.1 million as compared to $4.6 million for the three months ended September 30,2004. The decrease in research and development expenses was primarilyattributable to reduced headcount as a result of layoffs, natural attrition andlower overhead allocations.

 

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Research and developmentdecreased 19% during the nine months ended September 30, 2005 to $11.3million as compared to $14.0 million for the nine months ended September 30,2004. The decrease for the nine month period was primarily attributable tolower depreciation costs for fully depreciated assets and headcount reductionsas a result of our cost-cutting efforts.

 

*Sales andmarketing expenses*decreased51% during the three months ended September 30, 2005 to $2.9 million ascompared to $6.0 million for the three months ended September 30,2004.  Sales and marketing decreased 32%during the nine months ended September 30, 2005 to $13.8 million ascompared to $20.4 million for the nine months ended September 30, 2004.The decreases were primarily attributable to turnover in the sales organizationcombined with lower commissions on lower license revenue.

 

*Generaland administrative expenses*decreased 7% during the three months ended September 30, 2005 to$2.2 million as compared to $2.3 million for the three months ended September 30,2004. General and administrative expenses increased 5% during the nine monthsended September 30, 2005 to $7.5 million as compared to $7.2 million forthe nine months ended September 30, 2004. The increase was primarilyattributable to a $676,000 reduction of sales reserves in the three months September 30,2004 compared to a reduction of $218,000 recorded in the same period in 2005

 

*Restructuringcharges.*Through September 30,2005, the Company has approved restructuring plans to, among other things,reduce its workforce and consolidate facilities. Restructuring and assetimpairment charges were taken to align the Company’s cost structure withchanging market conditions and to create a more efficient organization. Ourrestructuring charges are comprised primarily of: (i) severance andbenefits termination costs related to the reduction of our workforce; (ii) leasetermination costs and/or costs associated with permanently vacating ourfacilities; (iii) other incremental costs incurred as a direct result ofthe restructuring plan; and (iv) impairment costs related to certainlong-lived assets abandoned. We account for each of these costs in accordancewith SAB 100 *.*

 

Restructuring charges(credits) consisted of the following (in thousands, unaudited):

 
| ** **           | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **           | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Facilities           |       | $                                          | (198       | )                                         | $          | (26,036 | ) | $ | (1,125 | ) | $ | (25,263 | ) |
| Severance  and other |       | 443                                        |       | 582                                       |       | 975 |   | 1,058 |   |
| Total                |       | $                                          | 245        |                                      | $          | (25,454 | ) | $ | (150 | ) | $ | (24,205 | ) |

 

The excess facilities creditfor the three and nine months ended September 30, 2005 related primarilyto an adjustment of $175,000 and $1.2 million, respectively, to fair value ofthe warrant issued to a previous landlord as part of a lease settlement in2004. The excess facilities charge for the three months ended September 30,2004, primarily related to the settlements reached between the Company andcertain landlords for elimination of future lease obligations (see Note 6 ofthe Notes to Condensed Consolidated Financial Statements). The severance andtermination costs for both periods reflect adjusted severance, payroll taxesand COBRA benefits related to restructuring plans implemented prior to the endof the period. The Company recorded these charges at the low-end of a range ofassumptions modeled for the restructuring charges, in accordance with SFAS 5.Adjustments to the restructuring accruals will be made in future periods, ifnecessary, based upon the then current actual events and circumstances.

 

*Interest(expense) income, net*forthe three months ended September 30, 2005 was an expense of $1.0 millionas compared to income of $77,000 for the three months ended September 30,2004. Interest (expense) income, net for the nine months ended September 30,2005 was an expense of $2.8 million as compared to income of $288,000 for thenine months ended September 30, 2004. Interest expense increased in thethree and nine months ended September 30, 2005 due to the outstandingconvertible notes issued in November 2004. Interest income has declined year-over-year due to lower cash balancesand lower interest rates being earned on invested funds.

 

*Other(expense) income, net,*forthe three months ended September 30, 2005 was a net income of $220,000 ascompared to income of $238,000 for the three months ended September 30,2004. Other (expense) income, net for the nine months ended September 30,2005 was an income of $3.6 million as compared to income of $59,000 for thenine months ended September 30, 2004. The increase in income in the threeand nine months ended September 30, 2005 was primarily due to recognitionof a gain of $523,000 and $3.0 million, respectively, on the revaluing ofcommon stock warrants for warrants issued in connection with the convertiblenote offering in November 2004 to fair value as of September 30,2005, partially offset by $320,000 and $800,000 of convertible note filingpenalties

 

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incurred in the three andnine months ended September 30, 2005, respectively, due to delays inachieving effectiveness of a registration statement related to the common stockunderlying the notes.

 

*IncomeTaxes*. During thethree months ended September 30, 2005, we recorded a tax benefit of$540,000 as compared to a tax provision of $11,000 for three months ended September 30,2004. During the nine months ended September 30, 2005, we recorded a taxbenefit of $2.5 million as compared to a provision of $141,000 during the ninemonths ended September 30, 2004. The tax benefit for the three and ninemonths ended September 30, 2005 was primarily due to the settlement of oradjustment to income tax accruals, mostly related to foreign jurisdictions. Forthe three and nine months ended September 30, 2004, the tax provisionsrelated to estimates for income taxes to be paid in our foreign jurisdictions.

 

***Liquidity and Capital Resources***

 

**Overview**

 

The accompanyingconsolidated financial statements have been prepared on a going concern basis,which contemplates the realization of assets and the settlement of liabilitiesin the normal course of business.  TheCompany is currently experiencing severe liquidity challenges.  At September 30, 2005, the Company’scurrent liabilities exceed its current assets by approximately $30 million(negative working capital) resulting in a working capital ratio of less than0.4 to 1.0.  The Company currently doesnot have any additional financing arrangement in place from which to borrowadditional funds as may be required to meet its near term cash requirements.  Further, due to the event of default whichoccurred on October 8, 2005 relative to the convertible notes and thesubsequent agreement entered into on October 25, 2005 with the convertiblenoteholders, the noteholders can demand payment in full on the approximate$15.5 million outstanding note balance and interest on or after November 16,2005.  If this were to occur, and if theCompany was not able to obtain financing sufficient to fully repay the notesupon such demand, the Company would be forced to seek protection under thebankruptcy laws.  These matters raisesubstantial doubt about the ability of the Company to continue in existence asa going concern.  No adjustments to thecarrying values or classification of the assets and liabilities in theaccompanying financial statements have been made to take account of thisuncertainty.

 

Due to a combination offactors, we currently believe that our available cash resources will beinsufficient to meet our payment obligations in the fourth quarter of 2005unless its obligations under the Notes discussed above or other significantfinancial obligations are significantly restructured.  The factors contributing to this beliefinclude lower-than-anticipated revenues in 2005, costs associated with theMerger and cash payment requirements under the Notes, which will be subject topotential demand for payment in full by the holder(s) thereof on and after November 16,2005. If our cash resources become insufficient to meet our obligations as theybecome due, which they will if repayment of any significant portion of theNotes is demanded and may even in the absence of such a demand, our businessand future prospects would be seriously harmed and our ability to operate thebusiness and complete the merger would be seriously jeopardized. The Merger issubject to numerous conditions, including the approval of our stockholders,that could considerably delay or even prevent its completion, and there is noassurance that we will be able to obtain additional financing under ourexisting bank credit facility or otherwise. The requirements we must meet inorder to obtain financing under our bank credit facility became more stringentin July 2005, and we presently anticipate being unable to meet the newrequirements for the foreseeable future. In order to obtain financing from anyother source, we would be required to obtain the approval of both the VectorCapital portfolio company with which we have agreed to merge (provided that theMerger Agreement remains in full force and effect) and the holder(s) of theNotes.  There can be no assurance thatour obligations under the Notes or other significant financial obligations willbe restructured.

 

If the Merger is notconsummated, we will be required to raise additional funds, and we may beunable to do so on terms acceptable to us or at all. Our ability to obtain debtor equity funding would depend on a number of factors, including restrictivecovenants contained in our current convertible note agreement and creditfacilities, market conditions, our operating performance and investor interest.If adequate additional funding were not available to us, we would haveinsufficient working capital to continue executing our current business plan.Even if additional funding were available to us, our indebtedness and debtservice obligations could continue to increase our vulnerability to generaladverse economic and industry conditions, limit our flexibility in planningfor, or reacting to, changes in our business and the industry in which wecompete, and place us at a competitive disadvantage to less leveragedcompetitors and those with better access to capital resources.

 

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As of September 30,2005, cash, cash equivalents, and restricted cash and investments totaled $8.1million, which represents a decrease of $58.0 million as compared to a balanceof $66.1 million on December 31, 2004. This decrease was primarilyattributable to net cash used for operations, payment of lease settlementobligations and payments of debt related obligations during the nine monthsended September 30, 2005.

 
| ** **                 | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|----------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                 | ** ** | **(unaudited)**              | ** ** | ** **                  | ** ** |
| Cash and  cash equivalents |       | $                            | 6,066      |                        | $          | 41,851 |   |
| Restricted  cash           |       | $                            | 1,997      |                        | $          | 24,256 |   |
| Working  capital (deficit) |       | $                            | (30,160    | )                           | $          | (18,136 | ) |
| Working  capital ratio     |       | 0.38                         |       | 0.82                        |       |

 

During the third and fourthquarters of 2004, we reached agreements with certain landlords to extinguishapproximately $155.0 million of future real estate obligations. We made relatedcash payments of $20.7 million in 2004 and $23.1 million in the first ninemonths of 2005. In addition, we issued to one of the landlords a five-yearwarrant to purchase approximately 700,000 shares of our common stock at anexercise price of $5.00 per share, exercisable beginning in August 2005.As a component of the settlement of one of the previous leases, we have aresidual lease obligation beginning in 2007 of approximately $9.1 million. Wemay make an additional cash payment of $4.5 million if we exercise an option toterminate this residual real estate obligation prior to the commencement of thelease term (January 2007). This option to terminate the residual leaseobligation, discounted to net present value, is accounted for in accordancewith SFAS 146 and is part of the non-current restructuring accrual as of September 30,2005.

 

In November 2004, weentered into a definitive agreement for the private placement of up to $20.0million of convertible notes to five institutional investors. Under the termsof the definitive agreement, we issued an initial $16.0 million of convertiblenotes which are convertible, at the holders’ option, into common stock at aconversion price of $2.76 per share. The notes bear interest at a rate of sixpercent per annum, and we were originally obligated to repay the principalamount of the initial $16.0 million of notes in 15 equal monthly installmentsof $1.1 million, which began in June 2005. Under the terms of the notes,the holders have the right to increase the Company’s monthly principalrepayment obligation to $2.1 million as of December 2005 due to our cashbalances falling below certain defined levels as of September 30, 2005.This increase, if invoked, would have the effect of requiring us to repay theprincipal amount in nine installments through June 2006. Certain principalpayments that were due in the quarter ended September 30, 2005, have beendeferred at the election of the investors for a period of eighteen months underthe terms of the notes.  Payments offuture principal and interest may be made in either cash or, upon satisfactionof various conditions set forth in the notes, shares of our common stock.However, we currently have not satisfied the conditions required to makepayments in stock, and we anticipate having to use cash to satisfy our futurepayment obligations under the notes.

 

On May 9, 2005, byagreement between us and the holders of a majority of the notes, one of theagreements governing the notes was amended to extend by 120 days the timewithin which we are required to obtain effectiveness of a registrationstatement covering the resale of the shares of our common stock that may beissued in respect of the notes. Unexpected delays in obtaining effectiveness ofthe SEC registration statement relating to the notes caused us to incuradditional penalty payments to the note holders at a rate of $160,000 per monththrough August 2005 and to make principal, interest and penalty paymentsin cash rather than common stock.

 

In October 2005, weinadvertently did not make timely payment of the third quarter interest paymentdue under the Notes of approximately $201,000 that was due on October 1,2005.  Lack of timely payment became anevent of default on October 8, 2005 after non-payment continued for aperiod of over five business days.  Wemade the third quarter interest payment promptly after discovery of thenonpayment, on October 14, 2005. The event of default permits each noteholder to require us to redeem120% of all or any portion of the amounts outstanding under the applicable Noteby delivering to us notice of such redemption, which redemption is requiredunder the Notes to be paid within five business days after receipt of suchredemption notice.  If all of thenoteholders elect such redemption, we will be obligated to pay within fivebusiness days after receipt of such election approximately $15.5 million inunpaid principal and interest.  Theaccelerated repayment of all or any significant portion of such amount wouldleave us with insufficient working capital to conduct its business, and we donot presently have sufficient cash to meet such an accelerated repaymentobligation.

 

OnOctober 25, 2005, we entered into an agreement with the noteholders underwhich the noteholders agreed not to require redemption of the Notes, includingthe 20% premium payable thereunder, prior to November 16, 2005.

 

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On June 29, 2005, ourBoard of Directors approved a business restructuring plan, primarily consistingof headcount reductions, designed to adjust expenses to a level more consistentwith anticipated revenues. The reduction included approximately 63 employees,or 22% of our workforce. We recorded severance charges of approximately$443,000 and $627,000 in the three-month periods ended September 30, 2005and June 30, 2005, respectively.

 

We have various creditfacilities with a commercial lender which include term debt in the form ofnotes payable, a revolving line of credit and an equipment line of credit. In June 2005,we entered into a renewed and amended loan and security agreement with thelender. The agreement requires us to maintain certain levels of unrestrictedcash and cash equivalents (excluding equity investments), and to maintaincertain levels on deposit with the lender. At December 31, 2004, $20.0million, was outstanding under the line of credit. As of September 30,2005, there was no outstanding balance on the line of credit.  Borrowings under the line of credit arecollateralized by all of our assets and bear interest at the bank’s prime rate.Interest is due monthly and principal is due at the expiration in February 2006.  Interest is due monthly and principal is dueat the expiration in February 2006. As of July 1, 2005, under the renewed and amended agreement, therequirements we must meet in order to continue to access the credit facilitybecame more stringent.  We were not incompliance with these new requirements as of September 30, 2005, and weexpect that we will be unable to meet the new requirements in future periods.

 

Commitments totaling $2.0million and $24.3 million in the form of standby letters of credit were issuedon our behalf from financial institutions as of September 30, 2005 and December 31,2004, respectively, primarily in favor of our various landlords to secureobligations under our facility leases. Accordingly, $2.0 million and $24.3million have been presented as restricted cash in the accompanying CondensedConsolidated Balance Sheets at September 30, 2005 and December 31,2004, respectively.

 

Our exposure to market riskfor changes in interest rates relates primarily to our investment portfolio. Wehad no derivative financial instruments as of September 30, 2005 and December 31,2004. We place our investments in instruments that meet high credit qualitystandards and the amount of credit exposure to any one issue, issuer and typeof instrument is limited. Our interest rate risk related to borrowingshistorically has been minimal as interest expense related to adjustable rateborrowings has been immaterial for the three and nine months ended September 30,2005 and 2004.

 

*CashProvided By (Used For) Operating Activities*

 

Cash used for operatingactivities was $34.7 million for the nine months ended September 30, 2005.The primary reason for the net cash used by operating activities was due to thenet loss for the period as well as the payment of accrued liabilities relatedto restructuring of $24.2 million. Other significant adjustments to reconcilenet income to cash used for operating activities included the non-cashimpairment of goodwill of $13.2 million, the gain on sale of cost methodinvestments of $1.1 million, the non-cash release of income tax reserves of$2.0 million, and the gain on revaluation of warrants to fair value of $4.2million.

 

Net cash used for operatingactivities was $38.8 million for the nine months ended September 30, 2004.Net cash used for operating activities for the nine month period ended September 30,2004 was primarily attributable to the net loss of $3.5 million (before extraordinarygains related to real estate transactions) and changes in balance sheetaccounts related to the settlement of long term lease obligations. The accruedliabilities related to restructuring costs for excess leased facilitiesdecreased from $104.7 million at December 31, 2003 to $36.7 million as of September 30,2004. As a result of the settlement of future lease obligations during thethird quarter, we recorded a $26.0 million gain and paid $19.1 million in cashto extinguish future real estate obligations, and agreed to pay a further $18.1million in January 2005, and were granted an option to terminate theremaining lease obligations for $4.5 million. Offsetting these activitiesrelated to the lease settlements during the period were several non-cash items,including non-cash depreciation and amortization expense of $3.1 million, andchanges to balance sheet accounts, including a decrease in accounts receivableof $5.0 million due to reduced revenues, offset by a decrease in unearnedrevenue and deferred maintenance of $6.1 million.

 

*CashProvided By (Used For) Investing Activities*

 

Cash provided by investingactivities was $21.9 million for the nine months ended September 30, 2005and was primarily due to transfers from restricted cash of $20.3 million andproceeds from dividends of $1.1 million. Cash used for investing activities was$0.9 million for the nine months ended September 30, 2004 and wasprimarily due to transfers to restricted cash. Capital expenditures were$132,000 and $489,000 during the nine months ended September 30, 2005 and2004, respectively. Our capital expenditures consisted of purchases ofoperating resources to manage our operations and consisted primarily ofcomputer hardware and software.

 

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*CashProvided By (Used For) Financing Activities*

 

Cash used for financingactivities was $23.0 million for the nine months ended September 30, 2005,consisting of $20.5 million used for repayment of borrowings, net of newborrowings, offset by $598,000 funds received for the issuance of common stock.Net cash used in financing activities was $11.1 million for the nine monthsended September 30, 2004, consisting of $1.6 million in proceeds from theissuance of common stock and $12.7 million used for repayment of borrowings,net of new borrowings

 

*Leases andOther Contractual Obligations*

 

We lease our headquartersfacility and our other facilities under non-cancelable operating leaseagreements expiring through the year 2010. Under the terms of the agreements,we are required to pay lease costs, property taxes, insurance and normalmaintenance costs.

 

We expect to incursignificant operating expenses for the foreseeable future in order to executeour business plan. A summary of total future minimum lease payments as of September 30,2005, under noncancelable operating lease agreements, is as follows (inmillions):

 
| **Years Ending December 31,** | ** ** | **Operating  Leases** | ** ** |
|------------------------------------|------------|-----------------------|------------|
| 2005                               |       | $                     | 1.2        |   |
| 2006                               |       | 3.2                   |       |
| 2007                               |       | 4.2                   |       |
| 2008                               |       | 2.1                   |       |
| 2009 and  thereafter               |       | 6.2                   |       |
| Total  minimum lease payments      |       | $                     | 16.9       |   |
|                                    |            |                       |            |  |  |

 

See Note 6 of Notes toCondensed Consolidated Financial Statements for information about additionalpayments due under previously negotiated lease buyout transactions.

 

Restricted cash representscollateral for letters of credit, all of which are due to mature within oneyear.

 

***Factors That May Affect Future Operating Results***

 

Due to a combination offactors, we currently believe that our available cash resources will beinsufficient to meet our payment obligations in the fourth quarter of 2005unless our obligations under the Notes discussed above or other significantfinancial obligations are significantly restructured. The factors contributingto this belief include lower-than-anticipated revenues in 2005, costs associatedwith the Merger and cash payment requirements under the Notes, which will besubject to potential demand for payment in full by the holder(s) thereof on andafter November 16, 2005. If our cash resources become insufficient to meetour obligations as they become due, which they will if repayment of anysignificant portion of the Notes is demanded and may even in the absence ofsuch a demand, our business and future prospects would be seriously harmed andour ability to operate the business and complete the merger could bejeopardized. The Merger is subject to numerous conditions, including theapproval of our stockholders, that could considerably delay or even prevent itscompletion, and there is no assurance that we will be able to obtain additionalfinancing under our existing bank credit facility or otherwise. Therequirements we must meet in order to obtain financing under our bank creditfacility became more stringent in July 2005, and we presently anticipatebeing unable to meet the new requirements for the foreseeable future. In orderto obtain financing from any other source, we would be required to obtain theapproval of both the Vector Capital portfolio company with which we have agreedto merge (provided that the Merger Agreement remains in full force and effect)and the holder(s) of the Notes.  Therecan be no assurance that our obligations under the Notes or other significantfinancial obligations will be restructured.

 

If the Merger is notconsummated, we will be required to raise additional funds, and we may beunable to do so on terms acceptable to us or at all. Our ability to obtain debtor equity funding would depend on a number of factors, including restrictivecovenants contained in our current convertible note agreement and credit facilities,market conditions, our operating performance and investor interest. If adequateadditional funding were not available to us, we would have insufficient workingcapital to continue executing our current business plan. Even if additional

 

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funding were available tous, our indebtedness and debt service obligations could continue to increaseour vulnerability to general adverse economic and industry conditions, limitour flexibility in planning for, or reacting to, changes in our business andthe industry in which we compete, and place us at a competitive disadvantage toless leveraged competitors and those with better access to capital resources.

 

In October 2005, weinadvertently did not make timely payment of the third quarter interest paymentdue under the Notes of approximately $201,000 that was due on October 1,2005.  Lack of timely payment became anevent of default on October 8, 2005 after non-payment continued for aperiod of over five business days.  Wemade the third quarter interest payment promptly after discovery of thenonpayment, on October 14, 2005. The event of default permits each noteholder to require us to redeem120% of all or any portion of the amounts outstanding under the applicable Noteby delivering to us notice of such redemption, which redemption is requiredunder the Notes to be paid within five business days after receipt of suchredemption notice.  If all of thenoteholders elect such redemption, we will be obligated to pay within fivebusiness days after receipt of such election approximately $15.5 million inunpaid principal and interest.  Theaccelerated repayment of all or any significant portion of such amount wouldleave us with insufficient working capital to conduct its business, and we donot presently have sufficient cash to meet such an accelerated repaymentobligation.

 

OnOctober 25, 2005, we entered into an agreement with the noteholders underwhich the noteholders agreed not to require redemption of the Notes, includingthe 20% premium payable thereunder, prior to November 16, 2005.

 

On July 28, 2005, ourrepresentatives received copies of four complaints relating to purported classaction lawsuits, each filed by an alleged holder of shares of our common stockand each filed in California Superior Court for the county of San Mateo. Thesecomplaints are captioned *Gary Goberville, etal., vs. Pehong Chen, et al.,*Civ 448490, *Cookie Schwartz, et al., vs. BroadVision, Inc., et al*,Civ 448516, *Leon Kotovich, et al., vs.BroadVision, Inc., et al*, Civ 448518 and *Anthony Noblett, et al., vs. BroadVision, Inc.,et al*, Civ 448519. Each claim names our directors and BroadVision, Inc.as defendants, and each alleges that the director defendants violated theirfiduciary duties to stockholders by, among other things, failing to maximizeour value and ignoring, or failing to adequately protect against, certainpurported conflicts of interest. Each complaint seeks, among other things,injunctive relief and damages in an unspecified amount. We anticipate thatsimilar actions may be filed in the future against some or all of the samedefendants.

 

Our net future cash flowswill depend heavily on the level of future revenues, the amount of cash we arerequired to use for payment under the notes, our ability to restructureoperations successfully and our ability to manage infrastructure costs.

 

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 theyear ended December 31, 2004 and elsewhere therein and as disclosed inother documents 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 maintenanceagreements, product life cycles, changes in strategy, seasonal trends, the mixof distribution channels through which our products are sold, the mix ofinternational and domestic sales, the rate at which new sales people becomeproductive, changes in the level of operating expenses to support projectedgrowth and general economic conditions. We anticipate that a significantportion of our revenues will be derived from a limited number of orders, andthe timing of receipt and fulfillment of any such orders is expected to causematerial fluctuations in our operating results, particularly on a quarterlybasis. Due to the foregoing factors, quarterly revenues and operating resultsare difficult to forecast, and we believe that period-to-period comparisons ofour operating results will not necessarily be meaningful and should not berelied upon as any indication of future performance. It is likely that ourfuture quarterly operating results from time to time will not meet theexpectations of market analysts or investors, which may have an adverse effecton the price of our common stock.

 

We are continuing efforts toreduce and control our expense structure. We believe strict cost containmentand expense reductions are essential to achieving positive cash flow andprofitability. A number of factors could preclude us from successfully bringingcosts and expenses in line with our revenues, including unplanned uses of

 

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cash, the inability toaccurately forecast business activities and further deterioration of ourrevenues. If we are not able to effectively reduce our costs and achieve anexpense structure commensurate with our business activities and revenues, wemay have inadequate levels of cash for operations or for capital requirements,which could significantly harm our ability to operate our business.

 

We renewed and amended ourrevolving credit facility during the June 2005. The facility is secured bysubstantially all of our owned assets. The primary financial covenant under thefacility obligates us to maintain certain levels of available cash, cashequivalents, short-term investments and long-term investments (excluding equityinvestments). Falling below such levels would be an event of default for whichthe bank may, among other things, accelerate the payment of the facility. As ofJuly 1, 2005, under the renewed and amended agreement, the requirements wemust meet in order to continue to access the credit facility became morestringent.   We were not in compliancewith these new requirements as of September 30, 2005, and we expect thatwe will be unable to meet the new requirements in future periods.

 

Our success depends largelyon the skills, experience and performance of key personnel. If we lose one ormore key personnel, our business could be harmed. Our future success depends onour ability to continue attracting and retaining highly skilled personnel. Wemay not be successful in attracting, assimilating and retaining qualifiedpersonnel in the future. Furthermore, the significant downturn in our businessenvironment had a negative impact on our operations. We are currentlyrestructuring our operations and have taken actions to reduce our workforce andimplement other cost containment activities. These actions could lead todisruptions in our business, reduced employee morale and productivity,increased attrition and problems with retaining existing employees andrecruiting future employees and increased financial costs.

 

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 the developmentof the Internet and its related infrastructure, the uncertainty pertaining towidespread adoption of online commerce and the risk of government regulation ofthe Internet. Other risks and uncertainties relate to our ability to, amongother things, successfully implement our marketing strategies, respond tocompetitive developments, continue to develop and upgrade our products andtechnologies more rapidly than our competitors, and commercialize our productsand services by incorporating these enhanced technologies. There can be noassurance that we will succeed in addressing any or all of these risks.

 

Dueto our restructuring efforts and other significant recent events, we haveexperienced difficulties in retaining our staff. Specifically, in the quarterended September 30, 2005, the Company’s General Counsel and Director ofAccounting resigned, and neither position has subsequently been filled.  These or other staffing changes may impactour ability to prevent or detect material misstatements in or omissions fromour financial statements or to perform the work necessary to obtain theauditors’ attestation report on our management’s assessment of our internalcontrol over financial reporting required by SEC regulations issued pursuant toSection 404 of the Sarbanes-Oxley Act of 2002. If we are unable to obtainthe auditors’ attestation report that is required to be included in our AnnualReport on Form 10-K for the year ended December 31, 2005, we will beunable to file a 10-K that conforms to SEC requirements, which would be a basisfor delisting from Nasdaq in addition to potential adverse consequences underSEC regulations.

 

**Item 3. Quantitative and Qualitative Disclosures About MarketRisk**

 

Our exposure to market riskfor changes in interest rates relates primarily to our investment portfolio. Wehad no derivative financial instruments as of September 30, 2005 and December 31,2004. We place our investments in instruments that meet high credit qualitystandards and the amount of credit exposure to any one issue, issuer and typeof instrument is limited. Our interest rate risk related to borrowingshistorically has been minimal as interest expense related to adjustable rateborrowings has been immaterial for the three months ended September 30,2005 and 2004.

 

During the three monthsended September 30, 2005 we did not borrow any funds on our revolving lineof credit.  Interest is payable monthly at the bank’s prime rate with afloor minimum of 4.25% (6.75% annually as of September  30, 2005) andany outstanding principal is due in full in February 2006. Additionally, we have two outstanding term loans and an equipment line ofcredit as of September 30, 2005. Interest on those loans are at the bank’sprime rate (6.75% as of September 30, 2005) and prime rate plus 1.25%.

 

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***Cash and Cash Equivalents***

 

We consider all debt andequity securities with maturities of three months or less at the date ofpurchase to be cash equivalents. Our short-term investments consist of debt andequity securities that are classified as available-for-sale. Our debtsecurities are carried at fair value with related unrealized gains or lossesreported as other comprehensive income (loss), net of tax.

 

Our cash, and cash equivalents,at cost, which approximates fair value, consisted of the following as of September 30,2005 (in thousands, unaudited)

 
| ** **                         | ** ** | **Fair value** | ** ** |
|------------------------------------|------------|----------------|------------|
| Cash and  certificates of deposits |       | $              | 6,556      |   |
| Money market                       |       | 1,507          |       |
| Total cash  and equivalents        |       | $              | 8,063      |   |

 

Included in the table abovein cash and cash equivalents are $2.0 million of non-current restrictedcash.

 

Our cash and cashequivalents, at cost, which approximates fair value, consisted of the followingas of December 31, 2004 (in thousands):

 
| ** **                         | ** ** | **Fair value** | ** ** |
|------------------------------------|------------|----------------|------------|
| Cash and  certificates of deposits |       | $              | 55,240     |   |
| Money market                       |       | 10,867         |       |
| Total cash  and equivalents        |       | $              | 66,107     |   |

 

Included in the table abovein cash and cash equivalents are non-current restricted cash of$2.3 million.

 

***Concentrations of Credit Risk***

 

Financial assets thatpotentially subject us to significant concentrations of credit risk consistprincipally of cash, cash equivalents, and trade accounts receivable. Wemaintain our cash and cash equivalents with two separate financialinstitutions. We market and sell our products throughout the world and performongoing credit evaluations of our customers. We maintain reserves for potentialcredit losses. For the three and six months ended September 30, 2005, noone customer accounted for more than 10% of total revenue or accountsreceivable.

 

***Fair Value of Financial Instruments***

 

Our financial instrumentsconsist of cash equivalents, accounts receivable, accounts payable and debt. Wedo not have any derivative financial instruments. We believe the reported carryingamounts of its financial instruments approximates fair value, based upon theshort maturity of cash equivalents, accounts receivable and payable, and basedon the current rates available to it on similar debt issues.

 

***Foreign Currency***

 

We license our products andmaintain significant operations in foreign countries. Fluctuations in the valueof foreign currencies, principally the Euro, relative to the United Statesdollar have impacted our operating results in the past and may do so in thefuture. We expect that international license, maintenance and consultingrevenues will continue to account for a significant portion of our totalrevenues in the future. We pay the expenses of our international operations inlocal currencies and do not currently engage in hedging transactions withrespect to such obligations.

 

***Equity Investments***

 

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

 

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We had no long-term equityinvestments in public and non-public companies as of September 30, 2005.There were not any “other than temporary write-down” during the three and sixmonths ended September 30, 2005 related to long-term equity investments.

 

**Item 4.  Controls and Procedures**

 

Our Chief Executive Officerand our Chief Financial Officer are responsible for establishing andmaintaining “disclosure controls and procedures” (as defined in the rules promulgatedunder the Securities Exchange Act of 1934, as amended) for our company. Basedon their evaluation of our disclosure controls and procedures (as defined inthe rules promulgated under the Securities Exchange Act of 1934), ourChief Executive Officer and our Chief Financial Officer concluded that ourdisclosure controls and procedures were effective as of September 30,2005, the end of the period covered by this report.

 

***Changes in Internal Control over Financial Reporting***

 

We reported three materialweaknesses as of December 31, 2004 in our annual report on Form 10-K. During the nine months ended September 30, 2005, in part to remediatethose weaknesses, we implemented the following changes in our internal controlover financial reporting that have materially affected, or are reasonablylikely to materially affect, our internal control over financial reporting. We:

 

•  reviewedwith senior management and the audit committee of its board of directors theissues which led to the three material weaknesses;

 

•  madesignificant enhancements to account reconciliations to provide more thoroughaccount analyses;

 

•  establishedclear responsibilities among our accounting personnel and increased theirformal interaction and coordination;

 

•  increased our chief financial officer’sresponsibilities for overseeing more routine accounting matters until all openpositions are filled;

 

•  developeda detailed database of worldwide maintenance revenues by contract and developedkey reports from that data. The reports have been designed to detect errors oromissions related to key maintenance data. Further, we have trained the revenueaccounting team on how to carefully analyze the reports to ensure thatinaccuracies are detected and corrected.

 

We believe that thecorrective steps taken above have sufficiently remediated these materialweaknesses.  However, the market for skilled accounting personnel iscompetitive, and due to the restructuring efforts and other significant recentevents, we have experienced difficulties in retaining our staff. Specifically,in the quarter ended September 30, 2005, the Company’s General Counsel andDirector of Accounting resigned, and neither position has subsequently beenfilled.  Although we believepreviously-identified material weaknesses have been remediated, these or otherstaffing changes may impact our ability to prevent or detect materialmisstatements or omissions or to perform the work necessary to obtain theauditors’ attestation report on our management’s assessment of our internalcontrol over financial reporting required by SEC regulations issued pursuant toSection 404 of the Sarbanes-Oxley Act of 2002. If we are unable to obtainthe auditors’ attestation report that is required to be included in our AnnualReport on Form 10-K for the year ended December 31, 2005, we will beunable to file a 10-K that conforms to SEC requirements, which would be a basisfor delisting from Nasdaq in addition to potential adverse consequences underSEC regulations.

 

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

 

Our management, includingour Chief Executive Officer and Chief Financial Officer, does not expect thatour disclosure controls and procedures or our internal controls will preventall error and fraud. A control system, no matter how well conceived andoperated, can provide only reasonable, not absolute, assurance that theobjectives of the control system are met. Further, the design of a control systemmust reflect the fact that there are resource constraints, and the benefits ofcontrols must be considered relative to their costs. Because of the inherentlimitations in all control systems, no evaluation of controls can provideabsolute assurance that all control issues and instances of fraud, if any,within the company have been detected. These inherent limitations include therealities that

 

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judgments in decision-makingcan be faulty, and that breakdowns can occur because of simple error ormistake. Additionally, controls can be circumvented by the individual acts ofsome persons, by collusion of two or more people, or by management override ofthe controls. The design of any system of controls also is based in part uponcertain assumptions about the likelihood of future events, and there can be noassurance that any design will succeed in achieving its stated goals under allpotential future conditions; over time, controls may become inadequate becauseof changes in conditions, or the degree of compliance with the policies orprocedures may deteriorate. Because of the inherent limitations in acost-effective control system, misstatements due to error or fraud may occurand not be detected. Our disclosure controls and procedures are designed toprovide reasonable assurance of achieving their objectives, and our ChiefExecutive Officer and the Chief Financial Officer have concluded that thesecontrols and procedures are effective at the “reasonable assurance” level.

 

**PART II. OTHER INFORMATION**

 

**Item 1.Legal Proceedings**

 

On June 10, 2004,MetLife filed a complaint in the Superior Court of the State of California,County of Los Angeles, naming the Company as a defendant. The complaint allegedthat the Company was liable for unlawful detainer of premises leased from theplaintiff. The plaintiff thereafter filed a First Amended Complaint allegingthat the Company no longer held possession of the premises but was in breach ofthe lease. In February 2005, MetLife and the Company reached agreement andexecuted documents regarding a settlement of the pending lawsuit under whichthe Company will pay MetLife an aggregate of $1.9 million in consideration fortermination of the lease, dismissal of the lawsuit and in full settlement ofapproximately $3.1 million of past and future lease obligations. The threeinstallment payments were made in February 2005, May 2005 and September 2005.

 

On July 28, 2005, ourrepresentatives received copies of four complaints relating to purported classaction lawsuits, each filed by an alleged holder of shares of our common stockand each filed in California Superior Court for the county of San Mateo. Thesecomplaints are captioned *Gary Goberville, etal., vs. Pehong Chen, et al.,*Civ 448490, *Cookie Schwartz, et al., vs. BroadVision, Inc., et al*,Civ 448516, *Leon Kotovich, et al., vs.BroadVision, Inc., et al*, Civ 448518 and *Anthony Noblett, et al., vs. BroadVision, Inc.,et al*, Civ 448519. Each claim names our directors and BroadVision, Inc.as defendants, and each alleges that the director defendants violated theirfiduciary duties to stockholders by, among other things, failing to maximizeour value and ignoring, or failing to adequately protect against, certainpurported conflicts of interest. Each complaint seeks, among other things,injunctive relief and damages in an unspecified amount. On September 21,plaintiff Goberville filed an amended complaint alleging that defendants causedmaterially misleading information regarding a proposed merger to bedisseminated to the Company’s stockholders. On October 20, 2005, the Court ordered consolidation of the fourpending actions pursuant to the parties’ stipulation.  In accordance with the Court’s order,plaintiffs’ consolidated amended complaint must be filed and served no laterthan December 5, 2005.  In addition,defendants must complete by December 5, 2005, their production of relevantdocuments responsive to the first request for production of documents that wereserved on defendants by plaintiff Kotovich on August 9, 2005 and plaintiffGoberville on August 31, 2005.

 

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

 

**Item 2. Unregistered Sales of Equity Securities and Use ofProceeds**

 

Not applicable.

 

**Item 3. Defaults Upon Senior Securities**

 

Not applicable.

 

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

 

None

 

**Item 5.Other Information**

 

(a)           The information provided in Note 1, “Organization andSummary of Significant Accounting Policies—Convertible Note Agreements,” of theNotes to Condensed Consolidated Financial Statements is hereby incorporated byreference.

 

**Item 6.Exhibits**

 

**(a) Exhibits**

 
| **Exhibits** | ** ** | **Description**                                                                                                                                          |
|--------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1 (1)      |       | Amended and Restated  Certificate of Incorporation.                                                                                                      |
| 3.2 (2)      |       | Certificate of Amendment  of Certificate of Incorporation.                                                                                               |
| 3.3 (3)      |       | Amended and Restated  Bylaws.                                                                                                                            |
| 4.1 (1)      |       | References are hereby made  to Exhibits 3.1 to 3.2                                                                                                       |
| 31.1         |       | Certification of the Chief  Executive Officer of BroadVision.                                                                                            |
| 31.2         |       | Certification of the Chief  Financial Officer of BroadVision.                                                                                            |
| 32.1         |       | Certification of the Chief  Executive Officer and Chief Financial Officer of BroadVision pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 |

 

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(1) Incorporated byreference to the Company’s Registration Statement on Form S-1 filed on April 19,1996 as amended by Amendment No. 1 filed on May 9, 1996, Amendment No. 2filed on May 29, 1996 and Amendment No. 3 filed on June 17,1996.

 

(2) Incorporated byreference to the Company’s Proxy Statement filed on May 14, 2002.

 

(3) Incorporated byreference to the Company’s Form 10-Q for the quarter ended March 31,2004 filed on May 10, 2004.

 

 

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**SIGNATURES**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 
| ** **                    | ** ** | **BROADVISION,  INC.**                                                                       |
|-------------------------------|------------|----------------------------------------------------------------------------------------------|
| ** **                    | ** ** | ** **                                                                                   |
| Date: November 14,  2005 | By:        | /s/ Pehong Chen                                                                              |   |
|                          |       | Pehong Chen                                                                                  |
|                          |       | Chairman of the Board,  President and Chief Executive Officer (Principal  Executive Officer) |
|                          |       |                                                                                         |
| Date: November 14,  2005 | By:        | /s/ William E. Meyer                                                                         |   |
|                          |       | William E. Meyer                                                                             |
|                          |       | Executive Vice President and  Chief Financial Officer (Principal Financial Officer)          |

 

 

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