**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,DC 20549**

 

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**FORM 10-Q**

 

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| **(Mark One)**                                |
|-----------------------------------------------|
|                                          |   |   |
| **ý**                                    | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|                                          |   |   |
| **For the  Quarter ended June 30, 2005** |
|                                          |
| **OR**                                        |
|                                          |   |   |
| **o**                                         | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|                                          |   |   |
| **0-28252**                                   |
| **(Commission  File Number)**                 |
|                                               |  |  |  |  |

 

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**BROADVISION, INC.**

(Exact name of registrant asspecified in its charter)

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

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days. Yes ý No o

 

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

 

As of August 1, 2005 there were 34,320,137shares of the Registrant’s Common Stock issued and outstanding.

 

 

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**BROADVISION,INC. AND SUBSIDIARIESFORM 10-QQuarter Ended June 30, 2005**

 

**TABLE OFCONTENTS**

 
| **PART I.**  | **FINANCIAL  INFORMATION**                                                                                                               | ** ** |
|-------------------|------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Item 1.           | Financial Statements                                                                                                                     |       |
|              | Condensed Consolidated  Balance Sheets-June 30, 2005 and December 31, 2004                                                     |       |
|              | Condensed Consolidated  Statements of Operations and Comprehensive Income (Loss)-Three and six months  ended June 30, 2005 and 2004 |       |
|              | Condensed Consolidated  Statements of Cash Flows-Six months ended June 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.           | Changes in Securities and  Use of Proceeds                                                                                               |       |
| Item 3.           | Defaults Upon Senior  Securities                                                                                                         |       |
| Item 4.           | Submission of Matters to a  Vote of Security Holders                                                                                     |       |
| Item 5.           | Other Information                                                                                                                        |       |
| Item 6.           | Exhibits and Reports on Form 8-K                                                                                                    |       |
|              |                                                                                                                                     |       |
| **SIGNATURES**    |                                                                                                                                     |

 

2

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**PART I. FINANCIAL INFORMATION**

**Item 1. Financial Statements**

 

**BROADVISION, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

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

 
| ** **                                                                                                                                                                                          | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                          | ** ** | **(unaudited)**         | ** ** | ** **                  | ** ** |
| **ASSETS**                                                                                                                                                                                          |       |                    |       |                        |       |
| Current assets:                                                                                                                                                                                     |       |                    |       |                        |       |
| Cash and cash equivalents                                                                                                                                                                           |       | $                       | 26,839     |                        | $          | 41,851 |   |
| Accounts receivable, less receivable  reserves of $1,308 as of June 30, 2005 and $1,409 as of December 31,  2004                                                                     |       | 12,815                  |       | 14,370                      |       |
| Restricted cash, current portion                                                                                                                                                                    |       | 1,912                   |       | 21,933                      |       |
| Prepaids and other                                                                                                                                                                                  |       | 2,167                   |       | 2,232                       |       |
| Total current assets                                                                                                                                                                                |       | 43,733                  |       | 80,386                      |       |
|                                                                                                                                                                                                |       |                    |       |                        |       |
| Property and equipment, net                                                                                                                                                                         |       | 2,940                   |       | 3,566                       |       |
| Restricted cash, net of current portion                                                                                                                                                             |       | 1,997                   |       | 2,323                       |       |
| Equity investments                                                                                                                                                                                  |       | —                  |       | 574                         |       |
| Goodwill                                                                                                                                                                                            |       | 56,434                  |       | 56,434                      |       |
| Other assets                                                                                                                                                                                        |       | 1,279                   |       | 1,370                       |       |
|                                                                                                                                                                                                |       |                    |       |                        |       |
| Total assets                                                                                                                                                                                        |       | $                       | 106,383    |                        | $          | 144,653 |   |
|                                                                                                                                                                                                |       |                    |       |                        |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                      |       |                    |       |                        |       |
| Current liabilities:                                                                                                                                                                                |       |                    |       |                        |       |
| Bank borrowings and current portion of  long-term debt                                                                                                                                              |       | $                       | 27,927     |                        | $          | 25,566 |   |
| Accounts payable                                                                                                                                                                                    |       | 5,461                   |       | 7,470                       |       |
| Accrued expenses                                                                                                                                                                                    |       | 15,793                  |       | 40,745                      |       |
| Warrant liability                                                                                                                                                                                   |       | 1,386                   |       | 4,899                       |       |
| Unearned revenue                                                                                                                                                                                    |       | 3,705                   |       | 3,870                       |       |
| Deferred maintenance                                                                                                                                                                                |       | 13,995                  |       | 15,972                      |       |
| Total current liabilities                                                                                                                                                                           |       | 68,267                  |       | 98,522                      |       |
|                                                                                                                                                                                                |       |                    |       |                        |       |
| Long-term debt, net of current portion                                                                                                                                                              |       | 162                     |       | 7,443                       |       |
| Other non-current liabilities                                                                                                                                                                       |       | 6,995                   |       | 8,278                       |       |
|                                                                                                                                                                                                |       |                    |       |                        |       |
| Total liabilities                                                                                                                                                                                   |       | 75,424                  |       | 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; 34,320 shares issued and outstanding as of June 30,  2005 and 33,951 shares issued and outstanding as of December 31, 2004 |       | 3                       |       | 3                           |       |
| Additional paid-in capital                                                                                                                                                                          |       | 1,215,141               |       | 1,214,619                   |       |
| Accumulated other comprehensive loss                                                                                                                                                                |       | (149                    | )          | (172                        | )          |
| Accumulated deficit                                                                                                                                                                                 |       | (1,184,036              | )          | (1,184,040                  | )          |
| Total stockholders’ equity                                                                                                                                                                     |       | 30,959                  |       | 30,410                      |       |
|                                                                                                                                                                                                |       |                    |       |                        |       |
| Total liabilities and stockholders’ equity                                                                                                                                                     |       | $                       | 106,383    |                        | $          | 144,653 |   |

 

*See Accompanying Notes to CondensedConsolidated Financial Statements*

 

3

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**BROADVISION, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

**AND COMPREHENSIVE INCOME (LOSS)**

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

 
| ** **                                                                                            | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                            | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                                                  |       |                                  |       |                                |       |   |   |   |   |
| **Revenues:**                                                                                         |       |                                  |       |                                |       |   |   |   |   |
| Software licenses                                                                                     |       | $                                     | 3,391      |                                | $          | 7,097 |   | $ | 7,807 |   | $ | 14,937 |   |
| Services                                                                                              |       | 12,123                                |       | 13,031                              |       | 24,074 |   | 26,080 |   |
| Total revenues                                                                                        |       | 15,514                                |       | 20,128                              |       | 31,881 |   | 41,017 |   |
|                                                                                                  |       |                                  |       |                                |       |   |   |   |   |
| **Cost of revenues:**                                                                                 |       |                                  |       |                                |       |   |   |   |   |
|                                                                                                  |       |                                  |       |                                |       |   |   |   |   |
| Cost of software licenses                                                                             |       | (186                                  | )          | 313                                 |       | (243 | ) | 891 |   |
| Cost of services                                                                                      |       | 5,614                                 |       | 6,302                               |       | 11,594 |   | 12,579 |   |
|                                                                                                  |       |                                  |       |                                |       |   |   |   |   |
| Total cost of revenues                                                                                |       | 5,428                                 |       | 6,615                               |       | 11,351 |   | 13,470 |   |
|                                                                                                  |       |                                  |       |                                |       |   |   |   |   |
| Gross profit                                                                                          |       | 10,086                                |       | 13,513                              |       | 20,530 |   | 27,547 |   |
|                                                                                                  |       |                                  |       |                                |       |   |   |   |   |
| **Operating expenses:**                                                                               |       |                                  |       |                                |       |   |   |   |   |
| Research and development                                                                              |       | 3,955                                 |       | 4,509                               |       | 8,242 |   | 9,397 |   |
| Sales and marketing                                                                                   |       | 5,060                                 |       | 7,480                               |       | 10,871 |   | 14,346 |   |
| General and administrative                                                                            |       | 2,829                                 |       | 2,400                               |       | 5,364 |   | 4,817 |   |
| Restructuring charge                                                                                  |       | 309                                   |       | 679                                 |       | (395 | ) | 1,249 |   |
| Total operating expenses                                                                              |       | 12,153                                |       | 15,068                              |       | 24,082 |   | 29,809 |   |
|                                                                                                  |       |                                  |       |                                |       |   |   |   |   |
| Operating loss                                                                                        |       | (2,067                                | )          | (1,555                              | )          | (3,552 | ) | (2,262 | ) |
|                                                                                                  |       |                                  |       |                                |       |   |   |   |   |
| Interest (expense) income, net                                                                        |       | (1,090                                | )          | 102                                 |       | (1,834 | ) | 211 |   |
| Other (expense) income, net                                                                           |       | 313                                   |       | (45                                 | )          | 3,428 |   | (178 | ) |
|                                                                                                  |       |                                  |       |                                |       |   |   |   |   |
| Loss before provision for income taxes                                                                |       | (2,844                                | )          | (1,498                              | )          | (1,958 | ) | (2,229 | ) |
|                                                                                                  |       |                                  |       |                                |       |   |   |   |   |
| Benefit (provision) for income taxes                                                                  |       | (70                                   | )          | 6                                   |       | 1,962 |   | (130 | ) |
|                                                                                                  |       |                                  |       |                                |       |   |   |   |   |
| Net income (loss)                                                                                     |       | $                                     | (2,914     | )                                   | $          | (1,492 | ) | $ | 4 |   | $ | (2,359 | ) |
|                                                                                                  |       |                                  |       |                                |       |   |   |   |   |
| Basic income (loss) per share                                                                         |       | $                                     | (0.09      | )                                   | $          | (0.04 | ) | $ | 0.00 |   | $ | (0.07 | ) |
| Diluted income (loss) per share                                                                       |       | $                                     | (0.09      | )                                   | $          | (0.04 | ) | $ | 0.00 |   | $ | (0.07 | ) |
| **Shares used in computing:**                                                                         |       |                                  |       |                                |       |   |   |   |   |
| Basic income (loss) per share                                                                         |       | 34,181                                |       | 33,476                              |       | 34,077 |   | 33,392 |   |
| Diluted income (loss) per share                                                                       |       | 34,181                                |       | 33,476                              |       | 34,163 |   | 33,392 |   |
|                                                                                                  |       |                                  |       |                                |       |   |   |   |   |
| **Comprehensive income (loss):**                                                                      |       |                                  |       |                                |       |   |   |   |   |
| Net income (loss)                                                                                     |       | $                                     | (2,914     | )                                   | $          | (1,492 | ) | $ | 4 |   | $ | (2,359 | ) |
| Other comprehensive gain (loss), net of  tax:                                                         |       |                                  |       |                                |       |   |   |   |   |
| Unrealized investment gains less  reclassification adjustment for gains included in net income (loss) |       | —                                |       | 49                                  |       | — |   | 49 |   |
| Foreign currency translation adjustment                                                               |       | (22                                   | )          | —                              |       | 23 |   | — |   |
| Total comprehensive income (loss)                                                                     |       | $                                     | (2,936     | )                                   | $          | (1,443 | ) | $ | 27 |   | $ | (2,310 | ) |

 

*See Accompanying Notes to CondensedConsolidated Financial Statements*

 

4

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**BROADVISION, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS**

**(In thousands; unaudited)**

 
| ** **                                                                             | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                             | ** ** | **2005**                           | ** ** | **2004** | ** ** |
| **Cash flows from operating activities:**                                              |       |                               |       |   |   |
| Net income (loss)                                                                      |       | $                                  | 4          |   | $ | (2,359 | ) |
| Adjustments to reconcile net income (loss)  to net cash used for operating activities: |       |                               |       |   |   |
| Depreciation and amortization                                                          |       | 638                                |       | 2,309 |   |
| Stock-based compensation credit                                                        |       | —                             |       | (15 | ) |
| Release of doubtful accounts and reserves                                              |       | (101                               | )          | (562 | ) |
| Amortization of prepaid royalties                                                      |       | —                             |       | 355 |   |
| Unrealized loss on investments                                                         |       | —                             |       | (50 | ) |
| (Gain) loss on cost method investments                                                 |       | (1,117                             | )          | 284 |   |
| Loss (gain) on sale or abandonment of fixed  assets                                    |       | 66                                 |       | (96 | ) |
| Release of income tax accrual                                                          |       | (2,032                             | )          | — |   |
| Gain on revaluation of warrants                                                        |       | (3,513                             | )          | — |   |
| Amortization of discount on convertible  notes                                         |       | 1,556                              |       | — |   |
| Changes in operating assets and  liabilities:                                          |       |                               |       |   |   |
| Accounts receivable                                                                    |       | 1,656                              |       | 3,421 |   |
| Prepaids and other                                                                     |       | 306                                |       | 775 |   |
| Other non-current assets                                                               |       | 91                                 |       | 387 |   |
| Accounts payable and accrued expenses                                                  |       | (3,420                             | )          | (3,068 | ) |
| Restructuring accrual                                                                  |       | (22,152                            | )          | — |   |
| Unearned revenue and deferred maintenance                                              |       | (2,142                             | )          | (2,632 | ) |
| Other noncurrent liabilities                                                           |       | 4                                  |       | (8,540 | ) |
| Net cash used for operating activities                                                 |       | (30,156                            | )          | (9,791 | ) |
|                                                                                   |       |                               |       |   |   |
| **Cash flows from investing activities:**                                              |       |                               |       |   |   |
| Purchase of property and equipment                                                     |       | (108                               | )          | (318 | ) |
| Transfer from restricted cash                                                          |       | 19,702                             |       | (2,432 | ) |
| Purchase of long-term investments                                                      |       | —                             |       | (100 | ) |
| Proceeds from sale of cost method  investments                                         |       | 350                                |       | — |   |
| Proceeds from dividends                                                                |       | 1,101                              |       | — |   |
| Net cash (used in) provided by investing  activities                                   |       | 21,045                             |       | (2,850 | ) |
|                                                                                   |       |                               |       |   |   |
| **Cash flows from financing activities:**                                              |       |                               |       |   |   |
| Proceeds from bank line of credit                                                      |       | 35,000                             |       | 76 |   |
| Repayments of bank line of credit, term  debt, and convertible notes                   |       | (41,476                            | )          | (492 | ) |
| Proceeds from issuance of common stock, net                                            |       | 522                                |       | 1,185 |   |
| Net cash (used in) provided by financing  activities                                   |       | (5,954                             | )          | 769 |   |
| Effect of exchange rates on cash and cash  equivalents                                 |       | 53                                 |       | — |   |
| Net decrease in cash and cash equivalents                                              |       | (15,012                            | )          | (11,872 | ) |
| Cash and cash equivalents at beginning of  period                                      |       | 41,851                             |       | 78,776 |   |
| Cash and cash equivalents at end of period                                             |       | $                                  | 26,839     |   | $ | 66,904 |   |
|                                                                                   |       |                               |       |   |   |
| **Supplemental disclosures of cash flow  information:**                                |       |                               |       |   |   |
| Cash paid for interest                                                                 |       | $                                  | 415        |   | $ | 52 |   |
| Cash paid (refunds received) for income  taxes                                         |       | $                                  | (259       | ) | $ | 194 |   |

 

*See Accompanying Notes to Condensed Consolidated Financial Statements*

 

5

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**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(All quarterlydata herein is unaudited)**

 

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

 

***Nature of Business***

 

BroadVision, Inc. (collectively with itssubsidiaries, the “Company”) was incorporated in the state of Delaware in May 1993and has been a publicly traded corporation since 1996. BroadVision solutionshelp customers rapidly increase revenues and reduce costs by movinginteractions and transactions to personalized self-service via the web. Ourintegrated self-service application suite–including process, commerce, portaland content–offers rich functionality out of the box, and is easily configuredfor each customer’s e-business environment.

 

Over 1,000 customers — including U.S. Air Force,Lockheed Martin, Netikos, Circuit City, Iberia L.A.E. and Vodafone — havelicensed BroadVision solutions to power and personalize their mission-criticalweb initiatives.

 

***Recent Developments***

 

As discussed more fully in Note 9 below, on July 25,2005, the Company entered into a definitive agreement, subject to stockholderapproval and other conditions, to merge with a newly-formed portfolio companyof Vector Capital Corporation (“Vector”) in a transaction in which the Company’sstockholders would receive $0.84 cash per share (the “Merger”). If approved bythe Company’s stockholders, the Merger is presently anticipated to close in thelate third or fourth quarter of 2005. Also as discussed more fully in Note 9 below, representatives ofthe Company have received copies of four complaints relating to purported classaction lawsuits that each names the Company’s directors and the Company asdefendants, and that each alleges that the director defendants violated theirfiduciary duties to the Company’s stockholders by, among other things, failingto maximize the Company’s value and ignoring, or failing to adequately protectagainst, certain purported conflicts of interest.

 

Due to a combination of factors, the Companycurrently anticipates that its available cash resources will likely beinsufficient to meet its payment obligations by some point in the fourthquarter of 2005. The factors contributing to this belief includelower-than-anticipated revenues in 2005, costs associated with the Merger andcash payment requirements under its outstanding convertible notes.  If the Company’s cash resources becomeinsufficient to meet its obligations as they become due, its business andfuture prospects would be seriously harmed and its ability to operate thebusiness as a going concern and complete the merger could be jeopardized. TheMerger is subject to numerous conditions, including the approval of the Company’sstockholders, that could considerably delay or even prevent its completion, andthere is no assurance that the Company will be able to obtain additionalfinancing under its existing bank credit facility or otherwise. Therequirements the Company must meet in order to obtain financing under its bankcredit facility became more stringent as of July 2005, and the Company presentlyanticipates being unable to meet the new requirements for the foreseeablefuture. In order to obtain financing from any other source, the Company wouldbe required to obtain the approval of both the Vector portfolio company withwhich it has agreed to merge and the holders of its outstanding convertiblenotes.

 

If the Merger is not consummated, the Company will be required to raiseadditional funds and it may be unable to do so on acceptable terms or at all. Itsability to obtain debt or equity funding would depend on a number of factors,including restrictive covenants contained in its current convertible noteagreement and credit facilities, market conditions, its operating performanceand investor interest.  If adequateadditional funding were not available, the Company would have insufficient workingcapital to continue executing its current business plan.  Even if additional funding were available, theCompany’s indebtedness and debt service obligations could continue to increase itsvulnerability to general adverse economic and industry conditions, limit its flexibilityin planning for, or reacting to, changes in its business and the industry inwhich it competes, and place it at a competitive disadvantage to less leveragedcompetitors and those with better access to capital resources.

 

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

 

The accompanying consolidated financial statementsinclude the accounts of the Company and its wholly-owned subsidiaries. Allsignificant intercompany transactions have been eliminated inconsolidation.  In the Company’s opinion,the consolidated financial statements presented herein include all necessaryadjustments, consisting of normal recurring adjustments, to fairly state theCompany’s financial position, results of operations and cash flows for theperiods indicated.  The preparation ofconsolidated financial statements in conformity with generally acceptedaccounting principles in the United States of America requires management tomake certain assumptions and estimates that affect reported amounts of assetsand liabilities as of the date of the financial statements and the reportedamount of revenues and expenses during the reporting period. Actual resultscould differ from estimates. The financial results and related information asof June 30, 2005

 

6

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and for the three and sixmonths ended June 30, 2005 and 2004 are unaudited. The condensed consolidatedbalance sheet at December 31, 2004 has been derived from the auditedconsolidated financial statements as of that date but does not necessarilyreflect all of the informational disclosures previously reported in accordancewith generally accepted accounting principles in the United States of America.

 

The accompanying condensed consolidated financialstatements should be read in conjunction with the consolidated financialstatements and notes thereto included with the Company’s Form 10-Kand other documents that have been filed with the Securities and ExchangeCommission (“SEC”). The results of the Company’s operations for the interimperiods presented are not necessarily indicative of operating results for thefull fiscal year or any future periods.

 

***Revenue Recognition***

 

*Overview*

 

The Company’s revenue consists of fees for licensesof the Company’s software products, maintenance, consulting services andcustomer training. The Company generally charges fees for licenses of itssoftware products either based on the number of persons registered to use theproduct or based on the number of Central Processing Units (“CPUs”) on themachine on which the product is installed. Licenses for software whereby feescharged are based upon the number of persons registered to use the product aredifferentiated between licenses for development use and licenses for use indeployment of the customer’s website. Licenses for software whereby feescharged are on a per-CPU basis do not differentiate between development anddeployment usage. The Company’s revenue recognition policies are in accordancewith 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 its products through its directsales force and indirectly through resellers. In general, software licenserevenues are recognized when a non-cancelable license agreement has been signedand the customer acknowledges an unconditional obligation to pay, the softwareproduct has been delivered, there are no uncertainties surrounding productacceptance, the fees are fixed and determinable and collection is consideredprobable. Delivery is considered to have occurred when title and risk of losshave been transferred to the customer, which generally occurs when mediacontaining the licensed programs is provided to a common carrier. In case ofelectronic delivery, delivery occurs when the customer is given access to thelicensed programs. For products that cannot be used without a licensing key,the delivery requirement is met when the licensing key is made available to thecustomer. If collectibility is not considered probable, revenue is recognizedwhen the fee is collected. Subscription-based license revenues are recognizedratably over the subscription period. The Company enters into resellerarrangements that typically provide for sublicense fees payable to the Companybased upon a percentage of list price. The Company does not grant its resellersthe right of return.

 

The Company recognizes revenue using the residualmethod pursuant to the requirements of SOP 97-2, as amended by SOP 98-9.Revenues recognized from multiple-element software arrangements are allocatedto each element of the arrangement based on the fair values of the elements,such as licenses for software products, maintenance, consulting services orcustomer training. The determination of fair value is based on objectiveevidence, which is specific to the Company. The Company limits its assessmentof objective evidence for each element to either the price chargedwhen the same element is sold separately or the price established by managementhaving the relevant authority to do so, for an element not yet sold separately.If evidence of fair value of all undelivered elements exists but evidence doesnot exist for one or more delivered elements, then revenue is recognized usingthe residual method. Under the residual method, the fair value of theundelivered elements is deferred and the remaining portion of the arrangementfee is recognized as revenue.

 

The Company records unearned revenue for softwarelicense agreements when cash has been received from the customer and theagreement does not qualify for revenue recognition under the Company’s revenuerecognition policy. The Company records accounts receivable for software licenseagreements when the agreement qualifies for revenue recognition but cash orother consideration has not been received from the customer.

 

*Services Revenue*

 

Consulting services revenues and customer trainingrevenues are recognized as such services are performed. Maintenance revenues,which include revenues bundled with software license agreements that entitlethe customers to technical support and future unspecified enhancements to theCompany’s products, are deferred and recognized ratably over the relatedagreement period, generally twelve months.

 

7

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The Company’s consulting services, which consist ofconsulting, maintenance and training, are delivered through the BroadVisionGlobal Services (“BVGS”) organization. Services that the Company provides arenot essential to the functionality of the software. The Company recordsreimbursement from its customers for out-of-pocket expenses as an increase toservices revenues.

 

***Employee Stock Option and PurchasePlans***

 

The Company accounts for employee stock-basedawards in accordance with the provisions of Accounting Principles Board (“APB”)Opinion 25 (“APB 25”), Financial Accounting Standards Board (“FASB”)Interpretation No. 44 (“FIN 44”), *Accounting for Certain TransactionsInvolving Stock Compensation—an Interpretation of APB Opinion 25*,and related interpretations. As such, compensation expense is recorded on thedate of grant only if the current market price of the underlying stock exceededthe exercise price. Pursuant to Statement of Financial Accounting Standards (“SFAS”)123, the Company discloses the pro forma effects of using the fair value methodof accounting for stock-based compensation arrangements. The Company accountsfor equity instruments issued to non-employees in accordance with theprovisions of SFAS 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 25 and relatedinterpretations when accounting for its stock option and stock purchase plans.In accordance with APB 25, we apply the intrinsic value method in accountingfor employee stock options. Accordingly, the Company generally recognizes nocompensation expense with respect to stock-based awards to employees.

 

During the six months ended June 30, 2004, theCompany recorded a stock-based compensation credit of $15,000. This credit wasrecorded as a result of granting a third party consultant shares of our commonstock.  The credit, which was calculatedusing the Black-Scholes model, was recorded as a reduction of sales andmarketing expense.

 

We have determined pro forma information regardingnet income (loss) and net income (loss) per share as if we had accounted foremployee stock options under the fair value method as required by SFAS 123, *Accounting for Stock Compensation*. Thefair value of these stock-based awards to employees was estimated using theBlack-Scholes option pricing model. Had compensation cost for our stock optionplan and employee stock purchase plan been determined consistent with SFAS 123,our reported net income (loss) and net income (loss) per share would have beenchanged to the amounts indicated below (in thousands except per share data):

 
| ** **                                                                                                                                    | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income (loss) as reported                                                                                                                 |       | $                                     | (2,914     | )                                   | $          | (1,492 | ) | $ | 4 |   | $ | (2,359 | ) |
| 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 |       | (7                                    | )          | (3,487                              | )          | (1,153 | ) | (5,258 | ) |
| Pro forma net loss                                                                                                                            |       | $                                     | (2,921     | )                                   | $          | (4,979 | ) | $ | (1,149 | ) | $ | (7,632 | ) |
|                                                                                                                                          |       |                                  |       |                                |       |   |   |   |   |
| Income (loss) per share:                                                                                                                      |       |                                  |       |                                |       |   |   |   |   |
| Basic—as reported                                                                                                                        |       | $                                     | (0.09      | )                                   | $          | (0.04 | ) | $ | 0.00 |   | $ | (0.07 | ) |
| Basic—pro forma                                                                                                                          |       | $                                     | (0.09      | )                                   | $          | (0.15 | ) | $ | (0.03 | ) | $ | (0.23 | ) |
|                                                                                                                                          |       |                                  |       |                                |       |   |   |   |   |
| Diluted—as reported                                                                                                                      |       | $                                     | (0.09      | )                                   | $          | (0.04 | ) | $ | 0.00 |   | $ | (0.07 | ) |
| Diluted—pro forma                                                                                                                        |       | $                                     | (0.09      | )                                   | $          | (0.15 | ) | $ | (0.03 | ) | $ | (0.23 | ) |

 

***Earnings Per Share Information***

 

Basic income (loss) per share is computed using theweighted-average number of shares of common stock outstanding less sharessubject to repurchase. Diluted income (loss) per share is computed using theweighted-average number of shares of common stock outstanding and, whendilutive, common equivalent shares from outstanding stock

 

8

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options and warrants usingthe treasury stock method, potential common shares from the conversion ofconvertible debt using the as-if converted method, and shares subject torepurchase. The following table sets forth the basic and diluted income (loss)per share computational data for the periods presented.

 

There were 5.4 million and 5.8 millionpotential common shares from the conversion of outstanding convertible notesexcluded in the diluted shares outstanding during the three months and sixmonths ended June 30, 2005, respectively, as the effect of suchshares is anti-dilutive.. Therewere 3,583,252 and 3,112,506 potential common shares excluded from thedetermination of diluted net loss per share for the three and six months ended June 30,2004, respectively, as the effect of such shares is anti-dilutive.

 
| ** **                                                                                    | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                    | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income (loss)                                                                             |       | $                                     | (2,914     | )                                   | $          | (1,492 | ) | $ | 4 |   | $ | (2,359 | ) |
| Weighted average common shares outstanding  utilized for basic net income (loss) per share    |       | 34,181                                |       | 33,476                              |       | 34,077 |   | 33,392 |   |
| Potential common stock issued for options                                                     |       | —                                |       | —                              |       | 86 |   | — |   |
| Weighted average common shares outstanding  utilized for diluted net income (loss) per share: |       | 34,181                                |       | 33,476                              |       | 34,163 |   | 33,392 |   |
| Basic net income (loss) per share                                                             |       | $                                     | (0.09      | )                                   | $          | (0.04 | ) | $ | 0.00 |   | $ | (0.07 | ) |
| Diluted net income (loss) per share                                                           |       | $                                     | (0.09      | )                                   | $          | (0.04 | ) | $ | 0.00 |   | $ | (0.07 | ) |

 

***Allowances and Reserves***

 

Occasionally, the Company’s customers experiencefinancial difficulty after the Company records the revenue but before paymenthas been received. The Company maintains allowances for doubtful accounts forestimated losses resulting from the inability of its customers to make requiredpayments. The Company’s normal payment terms are 30 to 90 days from invoicedate. If the financial condition of the Company’s customers was to deteriorate,resulting in an impairment of their ability to make payments, additionalallowances may be required.

 

***Restructuring***

 

Through June 30, 2005, we have approved certainrestructuring plans to, among other things, reduce our workforce andconsolidate facilities. Restructuring and asset impairment charges were takento align our cost structure with changing market conditions and to create amore efficient organization. Our restructuring charges are comprised primarilyof: (i) severance and benefits termination costs related to the reductionof our workforce; (ii) lease termination costs and/or costs associatedwith permanently vacating our facilities; (iii) other incremental costsincurred 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”)*.*

 

*Severance and Termination Costs*. We account for severance and benefitstermination costs as follows:

 

•                  For exit or disposal activities initiated onor prior to December 31, 2002, we account for costs in accordance withEITF Issue No. 94-3, *LiabilityRecognition for Certain Employee Termination Benefits and Other Costs to Exitan Activity (Including Certain Costs 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

 

•                  For exit or disposal activities initiatedafter December 31, 2002, we account for costs in accordance with SFAS No. 146,*Accounting for Costs Associated with ExitActivities* (“SFAS 146”).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.

 

*Excess Facilities Costs*. We account for excess facilities costs asfollows:

 

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•                  For exit or disposal activities initiated onor prior to December 31, 2002, we account for lease termination and/orabandonment costs in accordance with EITF 88-10, *Costs Associated with Lease Modification orTermination*. Accordingly, we recorded the costs associated withlease termination and/or abandonment when the leased property had nosubstantive future use or benefit to us.

 

•                  For exit or disposal activities initiatedafter December 31, 2002, we account for lease termination and/orabandonment costs in accordance with SFAS 146, which requires that a liabilityfor such costs be recognized and measured initially at fair value on the ceaseuse date of the facility.

 

Severance and termination costs and excessfacilities costs we record under these provisions are not associated with nordo they benefit continuing activities.

 

Inherent in the estimation of the costs related toour restructuring efforts are assessments related to the most likely expectedoutcome of the significant actions to accomplish the restructuring. Indetermining the charges related to the restructurings to date, the majority ofestimates made by management have related to charges for excess facilities. Indetermining the charges for excess facilities, we were required to estimatefuture sublease income, future net operating expenses of the facilities, andbrokerage commissions, among other expenses. The most significant of theseestimates have related to the timing and extent of future sublease income inwhich to reduce our lease obligations. We based our estimates of subleaseincome, in part, on the opinions of independent real estate experts, currentmarket conditions 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 facility, among otherfactors.  The Company has recorded the low-end of a range of assumptions modeledfor restructuring charges, in accordance with SFAS No. 5, *Accounting for Contingencies* (“SFAS 5”). Adjustments to thefacilities accrual will be required if actual lease exit costs or subleaseincome differ from amounts currently expected. We will review the status ofrestructuring activities on a quarterly basis and, if appropriate, recordchanges to our restructuring obligations in current operations based onmanagement’s most current estimates.

 

***Legal Matters***

 

The Company’s current estimated range of liabilityrelated to pending litigation is based on claims for which it is probable thata liability has been incurred and the Company can estimate the amount and rangeof loss. The Company has 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, theCompany is unable to make a reasonable estimate of the liability that couldresult from the remaining pending litigation. As additional information becomesavailable, the Company will assess the potential liability related to itspending litigation and revise its estimates, if necessary. Such revisions inthe Company’s estimates of the potential liability could materially impact theCompany’s results of operations and financial position.

 

On June 10, 2004, Metropolitan Life InsuranceCompany (“MetLife”) filed a complaint in the Superior Court of the State ofCalifornia, County of Los Angeles, naming the Company as a defendant. Thecomplaint alleged that the Company was liable for unlawful detainer of premisesleased from the plaintiff. The plaintiff thereafter filed a First AmendedComplaint alleging that the Company no longer held possession of the premisesbut was in breach of the lease. In February 2005, MetLife and the Companyreached agreement and executed documents regarding a settlement of the pendinglawsuit under which the Company will pay MetLife an aggregate of $1.9 millionin consideration for termination of the lease, dismissal of the lawsuit and infull settlement of approximately $3.1 million of past and future leaseobligations. The first of three installment payments was made in February 2005,  the second was made in May 2005, and thethird is due in September 2005.

 

Informationabout certain recently filed legal proceedings is set forth in Note 9 below.

 

***Concentrations of Credit Risk***

 

Financial assets that potentially subject us tosignificant concentrations of credit risk consist principally of cash,

 

10

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cash equivalents, and tradeaccounts receivable. The Company maintains its cash and cash equivalents withtwo separate financial institutions. The Company markets and sells its productsthroughout the world and performs ongoing credit evaluations of its customers.The Company maintains reserves for potential credit losses. For the three-monthsended June 30, 2005 and June 30, 2004, no one customer accounted formore than 10% of total revenue. As of June 30, 2005 and December 31,2004, no customer individually accounted for more than 10% of accountsreceivable.

 

***Foreign Currency Transactions***

 

During fiscal 2004, the Company changed thefunctional currencies of all foreign subsidiaries from the U.S. dollar to thelocal currency of the respective countries. Assets and liabilities of thesesubsidiaries are translated into U.S. dollars at the balance sheet date. Incomeand expense items are translated at average exchange rates for the period.Foreign exchange gains and losses resulting from the remeasurement of foreigncurrency assets and liabilities are included in other income (expense), net inthe Condensed Consolidated Statements of Operations.

 

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

 

The Company periodically assesses the impairment oflong-lived assets in accordance with the provisions of SFAS No. 144, *Accounting for the Impairment or Disposal of Long-Lived Assets*.The Company assesses the impairment of goodwill and identifiable intangibleassets in accordance with SFAS No. 141, *BusinessCombinations* (“SFAS 141”) and SFAS No. 142, *Goodwill and Other Intangible Assets* (“SFAS 142”). TheCompany adopted the provisions of SFAS 142 as of January 1, 2002.

 

***Reclassification***

 

Certain reclassifications have been made to prioryear balances in order to conform to the current period presentation. Thesereclassifications do not impact BroadVision’s consolidated financial condition,results of operation or cash flows.

 

***Fair Value of Financial Instruments***

 

The Company’s financial instruments consistof cash and cash equivalents, restricted cash, accounts receivable, accountspayable, debt, and at December 31, 2004, equity investments. The Companydoes not have any derivative financial instruments. The Company believes thereported carrying amounts of its financial instruments approximates fair value,based upon the maturities and nature of its cash equivalents, accountsreceivable and payable, and based on the current rates available to it onsimilar debt issues. Additionally, the Company periodically evaluates thecarrying value of all of its investments for other-than-temporary impairmentwhen events and circumstances indicate that the book value of an asset may notbe recoverable. If such assets are considered to be impaired, the impairment tobe recognized is measured by the amounts by which the carrying amount exceedsits fair market value.

 

***Comprehensive Income (Loss)***

 

Comprehensive income (loss) includes net income(loss) and other comprehensive income (loss), which consists of unrealizedgains and losses on available-for-sale securities and cumulative translationadjustments. Total accumulated other comprehensive income (loss) is displayedas a separate component of stockholder’s equity in the accompanying Condensed ConsolidatedBalance Sheets. The accumulated balances for each classification ofcomprehensive income (loss) consist of the following, net of taxes (unaudited, inthousands):

 
| ** **                      | ** ** | **Foreign  Currency  Translation** | ** ** | **Accumulated Other  Comprehensive  Loss** | ** ** |
|---------------------------------|------------|------------------------------------|------------|--------------------------------------------|------------|
| Balance, December 31, 2004 |       | $                                  | (172       | )                                          | $          | (172 | ) |
| Net change during period        |       | 23                                 |       | 23                                         |       |
|                            |       |                               |       |                                       |       |
| Balance, June 30, 2005     |       | $                                  | (149       | )                                          | $          | (149 | ) |

 

***New Accounting Pronouncements***

 

In December 2004, the FASB issued SFAS No. 123(revised 2004), *Share-Based Payment*(“SFAS 123R”), which replaces SFAS 123 and supercedes APB 25. SFAS 123Rrequires all share-based payments to employees, including grants of employeestock options, to be recognized in the financial statements based on their fairvalues beginning with the first

 

11

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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, theCompany is required to adopt SFAS 123(R) in the first quarter of fiscal2006, beginning January 2, 2006. The pro forma disclosures previouslypermitted under SFAS 123 no longer will be an alternative to financialstatement recognition. Under SFAS 123R, we must determine the appropriate fairvalue model to be used for valuing share-based payments, the amortizationmethod for compensation cost and the transition method to be used at date ofadoption. The transition methods include prospective and retroactive adoptionoptions. We have not yet determined the method of adoption or the effect ofadopting SFAS 123R. We are assessing the requirements of SFAS 123R and expectthat its adoption will have a material impact on the Company’s results ofoperations and earnings (loss) per share.

 

In December 2004,the FASB issued SFAS No. 153, *Exchanges of NonmonetaryAssets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary 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 itwith an exception for exchanges that do not have commercial substance. SFAS 153specifies that a nonmonetary exchange has commercial substance if the futurecash flows of the entity are expected to change significantly as a result ofthe exchange. SFAS 153 is effective for periods beginning after June 15,2005. We do not expect that adoption of SFAS 153 will have a material effect onour consolidated financial position, consolidated results of operations, orliquidity.

 

**Note 2. Selected Balance Sheet Detail**

 

Property and equipment consisted of the following(in thousands):

 
| ** **                                      | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                      | ** ** | **(unaudited)**         | ** ** | ** **                  | ** ** |
| Furniture and fixtures                          |       | $                       | 3,815      |                        | $          | 4,036 |   |
| Computers and software                          |       | 48,677                  |       | 49,258                      |       |
| Leasehold improvements                          |       | 6,190                   |       | 6,086                       |       |
|                                            |       | 58,682                  |       | 59,380                      |       |
| Less accumulated depreciation and  amortization |       | (55,742                 | )          | (55,814                     | )          |
|                                            |       | $                       | 2,940      |                        | $          | 3,566 |   |

 

Accrued expenses consisted of the following (inthousands):

 
| ** **                 | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|----------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                 | ** ** | **(unaudited)**         | ** ** | ** **                  | ** ** |
| Employee benefits          |       | $                       | 1,632      |                        | $          | 1,253 |   |
| Commissions and bonuses    |       | 691                     |       | 1,334                       |       |
| Sales and other taxes      |       | 4,116                   |       | 5,085                       |       |
| Restructuring (See Note 6) |       | 4,783                   |       | 26,292                      |       |
| Other                      |       | 4,571                   |       | 6,781                       |       |
|                       |       | $                       | 15,793     |                        | $          | 40,745 |   |

 

Other noncurrent liabilities consisted of thefollowing (in thousands):

 
| ** **                 | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|----------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                 | ** ** | **(unaudited)**         | ** ** | ** **                  | ** ** |
| Restructuring (See Note 6) |       | $                       | 6,584      |                        | $          | 7,871 |   |
| Other                      |       | 411                     |       | 407                         |       |
|                       |       | $                       | 6,995      |                        | $          | 8,278 |   |

 

**Note 3.  BankBorrowings, Long-Term Debt and Other Non-Current Liabilities**

 

Bankborrowings and long-term debt consists of the following (in thousands):

 
| ** **                                                                           | ** ** | **June 30, 2005** | ** ** | **December 31, 2004** | ** ** |
|--------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------------|------------|
| ** **                                                                           | ** ** | **(unaudited)**        | ** ** | ** **                 | ** ** |
| Convertible notes, 6% coupon, due in  various maturities beginning in June 2005 | ** ** | $                      | 12,473     | ** **                 | $          | 11,982 | ** ** |
| Bank borrowings                                                                      |       | 15,000                 |       | 20,000                     |       |
| Term debt                                                                            |       | 616                    |       | 1,027                      |       |
|                                                                                 |       |                   |       |                       |       |
|                                                                                 |       | 28,089                 |       | 33,009                     |       |
| Less: Current portion of long-term debt                                              |       | (27,927                | )          | (25,566                    | )          |
|                                                                                 |       |                   |       |                       |       |
| Long-term debt, net of current portion                                               |       | $                      | 162        |                       | $          | 7,443 |   |

 

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In November 2004, the Company enteredinto a definitive agreement for the private placement of up to $20.0 million ofconvertible notes to five institutional investors. The Company issued aninitial $16.0 million of convertible notes which are convertible, at theholders’ option, into common stock at a conversion price of $2.76 per share.The convertible notes bear interest at a rate of six percent per annum, and theCompany was originally obligated to repay the principal amount of the initial$16.0 million of notes in 15 equal monthly installments of $1.1 million, whichbegan in June 2005.  Under the termsof the notes, the monthly principal repayment obligation will increase to $2.1million beginning in September 2005 due to the Company’s cash balancesfalling below certain defined levels as of June 30, 2005.  This increase has the effect of requiring theCompany to repay the principal amount in nine installments through April 2006.  Payments of principal and interest may bemade in either cash or, upon satisfaction of various conditions set forth inthe notes, shares of common stock. However, the Company anticipates having touse cash to satisfy all of its payment obligations under the notes.

 

Investors also received warrants to purchaseapproximately 1.7 million shares of the Company’s common stock at a price of$3.58 per share. The warrants will be exercisable beginning six months afterthe closing date, and have a term of five years.  As of June 30, 2005 and December 31,2004, a total of $14.9 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 June 30, 2005, at the discounted amounts of $12.0million and $12.5 million, respectively.

 

In June 2005, the Company renewed and amendedits revolving credit facility. The amount available under the revolving line ofcredit is up to $20.0 million, subject to certain borrowing limitations basedon the Company’s unrestricted cash balances. Borrowings under the revolvingline of credit are collateralized by all of the Company’s assets and bearinterest at the bank’s prime rate at December 31, 2004 and June 30,2005 and prime rate plus 1.0% thereafter (6.0% as of June 30, 2005 and5.25% as of December 31, 2004). As of June 30, 2005 and December 31,2004, $15.0 million and $20.0 million, respectively, remained outstanding underthe Company’s revolving credit facility. As of July 1, 2005, the requirements the Company must meet in orderto continue to access the credit facility became more stringent under therenewed and amended agreement, and the Company expects that, beginning in thethird quarter of 2005 and for the foreseeable future, it will be unable to meetthe new requirements.

 

As of June 30, 2005 and December 31, 2004,outstanding term debt borrowings were approximately $616,000 and $1.0 million,respectively. Borrowings bear interest at the bank’s prime rate of 5.25% plusup to 1.25% as of December 31, 2004 and the bank’s prime rate of 6.0% plusup to 3.0% as of June 30, 2005. Principal and interest are due in monthlypayments through maturity based on the terms of the facilities. Principal andinterest payments of $227,000 are due for the remainder of 2005, and paymentsof $389,000 are due thereafter.

 

Commitments totaling $3.9 million and $24.3 millionin the form of standby letters of credit were issued on the Company’s behalffrom financial institutions as of June 30, 2005 and December 31,2004, respectively, primarily in favor of the Company’s various landlords tosecure obligations under the Company’s facility leases.  Accordingly, $3.9 million and $24.3 millionhave been presented as restricted cash in the accompanying CondensedConsolidated Balance Sheets as of June 30, 2005 and December 31,2004, respectively.

 

**Note 4. Commitments and Contingencies**

 

*Warranties and Indemnification*

 

The Company provides a warranty to its customersthat its software will perform substantially in accordance with documentationtypically for a period of 90 days following receipt of the software. TheCompany also indemnifies certain customers from third-party claims ofintellectual property infringement relating to the use of its products.  Historically, costs related to theseguarantees have not been significant and the Company is unable to estimate themaximum potential impact of these guarantees on its future results ofoperations.

 

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The Company has agreements whereby it indemnifiesits officers and directors for certain events or occurrences while the officeris, or was, serving in such capacity. The term of the indemnification period isfor so long as such officer or director is subject to an indemnifiable event byreason of the fact that such person was serving in such capacity. The maximumpotential amount of future payments the Company could be required to make underthese indemnification agreements is unlimited; however, the Company has adirector and officer insurance policy that limits its exposure and enables theCompany to recover a portion of any future amounts paid. As a result of theCompany’s insurance policy coverage, the Company believes the estimated fairvalue of these indemnification agreements is insignificant. Accordingly, theCompany has no liabilities recorded for these agreements as of either June 30,2005 or December 31, 2004. The Company assesses the need for an indemnificationreserve on a quarterly basis and there can be no guarantee that anindemnification reserve will not become necessary in the future.

 

*Leases*

 

TheCompany leases its headquarters facility and its other facilities undernon-cancelable operating lease agreements expiring through the year 2010. Underthe terms of the agreements, the Company is required to pay lease costs,property taxes, insurance and normal maintenance costs.

 

A summary of total future minimum lease payments, netof future sublease income, as of June 30, 2005, under noncancelableoperating lease agreements is as follows (in millions):

 
| **Years Ending December 31,** | ** ** | **Operating  Leases** | ** ** |
|------------------------------------|------------|-----------------------|------------|
| 2005                               |       | $                     | 2.4        |   |
| 2006                               |       | 3.1                   |       |
| 2007                               |       | 4.2                   |       |
| 2008                               |       | 2.1                   |       |
| 2009 and thereafter                |       | 6.3                   |       |
|                               |       |                  |       |
| Total minimum lease payments       |       | $                     | 18.1       |   |

 

See Note 6 of Notes to Condensed ConsolidatedFinancial Statements for information about additional payments due underpreviously negotiated lease buyout transactions.

 

*Standby Letter of Credit Commitments*

 

As of June 30, 2005, the Company had $3.9million of outstanding commitments in the form of standby letters of credit,primarily in favor of the Company’s various landlords to secure obligationsunder the Company’s facility leases.

 

*Legal Proceedings*

 

Informationabout certain recently filed legal proceedings is set forth in Note 9 below.

 

The Company is subject to various other claims andlegal actions arising in the ordinary course of business. In the opinion ofmanagement, after consultation with legal counsel, the ultimate disposition ofthese matters is not expected to have a material effect on the Company’sbusiness, financial condition or results of operations. Although managementcurrently believes that the outcome of these outstanding legal proceedings,claims and litigation involving the Company will not have a material adverseeffect on its 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 the Company’sbusiness, results of operations or financial condition.

 

On June 10, 2004, MetLife filed a complaint inthe Superior Court of the State of California, County of Los Angeles, namingthe Company as a defendant. The complaint alleged that the Company was liablefor unlawful detainer of premises leased from the plaintiff. The plaintiffthereafter filed a First Amended Complaint alleging that the Company no longerheld possession of the premises but was in breach of the lease. In February 2005,MetLife and the Company reached agreement and executed documents regarding asettlement of the pending lawsuit under which the Company will pay MetLife anaggregate of $1.9 million in consideration for termination of the lease,dismissal of the lawsuit and in full settlement of approximately $3.1 millionof past and future lease obligations. The first of three installment paymentswas made in February 2005, the second was made in May 2005, and thethird is due in September 2005.

 

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**Note 5. Geographic, Segment and Significant CustomerInformation**

 

The Company operates in one segment, electronicbusiness commerce solutions. The Company’s reportable segment includes theCompany’s facilities in North America (“Americas”), Europe and Asia Pacific andthe Middle East (“Asia/Pacific”). The Company’s Chief Executive Officer (“CEO”)is the Company’s chief operating decision maker. The CEO reviews financialinformation presented on a consolidated basis accompanied by disaggregatedinformation about revenues by geographic region and by product for purposes ofmaking operating decisions and assessing financial performance.

 

The disaggregated revenue information reviewed bythe CEO is as follows (unaudited, in thousands):

 
| ** **           | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **           | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Software  licenses   |       | $                                     | 3,391      |                                | $          | 7,097 |   | $ | 7,807 |   | $ | 14,937 |   |
| Consulting  services |       | 5,156                                 |       | 5,182                               |       | 10,303 |   | 10,094 |   |
| Maintenance          |       | 6,967                                 |       | 7,849                               |       | 13,771 |   | 15,986 |   |
| Total revenues       |       | $                                     | 15,514     |                                | $          | 20,128 |   | $ | 31,881 |   | $ | 41,017 |   |

 

The Company sells its products and provides servicesworldwide through a direct sales force and through a channel of independentdistributors, VARs and ASPs. In addition, the licenses of the Company’sproducts are promoted through independent professional consulting organizationsknown as systems integrators. The Company provides services worldwide throughits BroadVision Global Services Organization and indirectly throughdistributors, VARs, ASPs and systems integrators.

 

Disaggregated financial information regardingthe Company’s geographic revenues and long-lived assets is as follows(unaudited, in thousands):

 
| ** **     | ** ** | **Three months ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **     | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
|           |       |                                  |       |                                |       |   |   |   |   |
| Revenues:      |       |                                  |       |                                |       |   |   |   |   |
| Americas       |       | $                                     | 9,058      |                                | $          | 8,851 |   | $ | 17,696 |   | $ | 18,487 |   |
| Europe         |       | 5,411                                 |       | 8,982                               |       | 11,329 |   | 19,080 |   |
| Asia/Pacific   |       | 1,045                                 |       | 2,295                               |       | 2,856 |   | 3,450 |   |
| Total revenues |       | $                                     | 15,514     |                                | $          | 20,128 |   | $ | 31,881 |   | $ | 41,017 |   |

 
| ** **              | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **              | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Long-Lived Assets:      |       |                    |       |                        |       |
| Americas                |       | $                       | 59,828     |                        | $          | 60,312 |   |
| Europe                  |       | 326                     |       | 531                         |       |
| Asia/Pacific            |       | 499                     |       | 527                         |       |
| Total long-lived assets |       | $                       | 60,653     |                        | $          | 61,370 |   |

 

During the three and six months ended June 30,2005 and 2004, no single customer accounted for more than 10% of the Company’srevenues.

 

15

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**Note 6. Restructuring Charges**

 

Through June 30, 2005, the Company hasapproved certain restructuring plans to, among other things, reduce itsworkforce and consolidate facilities. Restructuring and asset impairmentcharges have been taken to align our cost structure with changing marketconditions and to create a more efficient organization. Our restructuringcharges have been comprised primarily of: (i) severance and benefitstermination 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 presented herein,restructuring charges consist solely of:

 

•                  *Severance and TerminationBenefits*— These costsrepresent severance, payroll taxes and COBRA benefits related to restructuringplans implemented prior to the date recognized.

 

•                  *Excess Facilities*— These costs represent future minimum leasepayments related to excess and abandoned space under lease, net of estimatedsublease income and planned company occupancy.

 

As of June 30, 2005, the total restructuringaccrual of $11.4 million consisted of the following (in millions):

 
| ** **                | ** ** | **Current** | ** ** | **Non-Current** | ** ** | **Total** | ** ** |
|---------------------------|------------|-------------|------------|-----------------|------------|-----------|------------|
| Severance and Termination |       | $           | 1.1        |            | $          | —    |       | $ | 1.1 |   |
| Excess Facilities         |       | 3.7         |       | 6.6             |       | 10.3      |       |
|                      |       |        |       |            |       |      |       |
| Total                     |       | $           | 4.8        |            | $          | 6.6       |       | $ | 11.4 |   |

 

The Company estimates that the $1.1 millionseverance and termination accrual will be nearly paid in full by December 31,2005. We expect to pay the excess facilities amounts related to restructured orabandoned leased space as follows (in millions): 

 
| **Years ending December 31,**              | ** ** | **Total future  minimum  payments** | ** ** |
|-------------------------------------------------|------------|-------------------------------------|------------|
| 2005                                            |       | $                                   | 3.7        |   |
| 2006                                            |       | 4.8                                 |       |
| 2007                                            |       | 0.7                                 |       |
| 2008                                            |       | 0.5                                 |       |
| 2009 and thereafter (through October 2010) |       | 0.6                                 |       |
|                                            |       |                                |       |
| Total minimum facilities payments               |       | $                                   | 10.3       |   |

 

Of this excess facilities accrual, $2.5 millionrelates to payments due in fiscal 2005 under lease termination agreements, and$7.8 million relates to future minimum lease payments, fees and expenses, netof estimated sublease income and planned company occupancy.

 

The following table summarizes the activity relatedto the restructuring plans initiated subsequent to December 31, 2002, andaccounted for in accordance with FAS 146 (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 June 30, 2005**           |       |                                         |       |                                                     |       |                             |       |                                      |       |
| Lease cancellations and commitments                  |       | $                                            | 3,846      |                                                     | $          | (146                             | )          | $                                         | 264        |   | $ | 3,964 |   |
| Termination payments to employees and  related costs |       | 115                                          |       | 627                                                      |       | (87                              | )          | 655                                       |       |
|                                                 |       | $                                            | 3,961      |                                                     | $          | 481                              |       | $                                         | 177        |   | $ | 4,619 |   |
|                                                 |       |                                         |       |                                                     |       |                             |       |                                      |       |
| **Three Months  Ended June 30, 2004**           |       |                                         |       |                                                     |       |                             |       |                                      |       |
| Lease cancellations and commitments                  |       | $                                            | 21,683     |                                                     | $          | —                           |       | $                                         | —     |   | $ | 21,683 |   |
| Termination payments to employees and  related costs |       | 95                                           |       | 158                                                      |       | (89                              | )          | 164                                       |       |
|                                                 |       | $                                            | 21,778     |                                                     | $          | 158                              |       | $                                         | (89        | ) | $ | 21,847 |   |
| **Six  Months Ended June 30, 2005**             |       |                                         |       |                                                     |       |                             |       |                                      |       |
| Lease cancellations and commitments                  |       | $                                            | 21,824     |                                                     | $          | (777                             | )          | $                                         | (17,083    | ) | $ | 3,964 |   |
| Termination payments to employees and  related costs |       | 365                                          |       | 532                                                      |       | (242                             | )          | 655                                       |       |
|                                                 |       | $                                            | 22,189     |                                                     | $          | (245                             | )          | $                                         | (17,325    | ) | $ | 4,619 |   |
|                                                 |       |                                         |       |                                                     |       |                             |       |                                      |       |
| **Six  Months Ended June 30, 2004**             |       |                                         |       |                                                     |       |                             |       |                                      |       |
| Lease cancellations and commitments                  |       | $                                            | 21,683     |                                                     | $          | —                           |       | $                                         | —     |   | $ | 21,683 |   |
| Termination payments to employees and  related costs |       | 242                                          |       | 476                                                      |       | (554                             | )          | 164                                       |       |
|                                                 |       | $                                            | 21,925     |                                                     | $          | 476                              |       | $                                         | (554       | ) | $ | 21,847 |   |

 

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The following table summarizes the activity relatedto the restructuring plans initiated on or prior to December 31, 2002, andaccounted 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 June 30, 2005**            |       |                                          |       |                                                     |       |                             |       |                                      |       |
| Lease cancellations and commitments                  |       | $                                             | 8,871      |                                                     | $          | (172                             | )          | $                                         | (2,373     | ) | $ | 6,326 |   |
| Termination payments to employees and  related costs |       | 445                                           |       | —                                                   |       | (23                              | )          | 422                                       |       |
|                                                 |       | $                                             | 9,316      |                                                     | $          | (172                             | )          | $                                         | (2,396     | ) | $ | 6,748 |   |
| **Three Months Ended June 30, 2004**            |       |                                          |       |                                                     |       |                             |       |                                      |       |
| Lease cancellations and commitments                  |       | $                                             | 78,292     |                                                     | $          | 521                              |       | $                                         | (5,620     | ) | $ | 73,193 |   |
| Termination payments to employees and related  costs |       | 429                                           |       | —                                                   |       | —                           |       | 429                                       |       |
|                                                 |       | $                                             | 78,721     |                                                     | $          | 521                              |       | $                                         | (5,620     | ) | $ | 73,662 |   |
| **Six Months Ended June 30, 2005**              |       |                                          |       |                                                     |       |                             |       |                                      |       |
| Lease cancellations and commitments                  |       | $                                             | 11,515     |                                                     | $          | (150                             | )          | $                                         | (5,039     | ) | $ | 6,326 |   |
| Termination payments to employees and  related costs |       | 459                                           |       | —                                                   |       | (37                              | )          | 422                                       |       |
|                                                 |       | $                                             | 11,974     |                                                     | $          | (150                             | )          | $                                         | (5,076     | ) | $ | 6,748 |   |
| **Six Months Ended June 30, 2004**              |       |                                          |       |                                                     |       |                             |       |                                      |       |
| Lease cancellations and commitments                  |       | $                                             | 83,026     |                                                     | $          | 773                              |       | $                                         | (10,606    | ) | $ | 73,193 |   |
| Termination payments to employees and  related costs |       | 429                                           |       | —                                                   |       | —                           |       | 429                                       |       |
|                                                 |       | $                                             | 83,455     |                                                     | $          | 773                              |       | $                                         | (10,606    | ) | $ | 73,622 |   |

 

On June 29,2005, the Company’s Board of Directors approved a business restructuring plan,primarily consisting of headcount reductions, designed to adjust expenses to alevel more consistent with anticipated revenues.  The reduction by approximately 63 employees,or 22% of the Company’s workforce, is expected to be completed by the end ofthe third quarter of 2005.   It is expectedthat the Company will incur pre-tax severance costs of approximately $1.3 million,of which approximately $665,000 was incurred in the second quarter of 2005 andwas charged to the restructuring accrual. The Company expects to incur additional severance costs of approximately$600,000 in the third quarter of 2005.  

 

As mentioned above, the Company has based its excessfacilities accrual, in part, upon estimates of future sublease income. TheCompany has used the following factors, among others, in making such estimates:opinions 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 facilities. The Company has recorded the low-end ofa range of assumptions modeled for restructuring charges, in accordance withSFAS 5.  Adjustments to the facilitiesaccrual will be required if actual sublease income differs from amountscurrently expected. The Company will review the status of restructuring activitieson a quarterly basis and, if appropriate, record changes to our restructuringobligations in current operations based on management’s most current estimates.

 

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

 

On January 1, 2002, the Company adopted SFAS142*.*Under SFAS 142, goodwill andintangible assets with indefinite lives are no longer subject to amortizationbut are tested for impairment at least annually using a fair value approach,and whenever there is an impairment indicator. Other intangible assets continueto be valued and amortized over their estimated lives.

 

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Pursuant to SFAS 142, the Company is requiredto test its goodwill for impairment upon adoption and annually or more often ifevents or changes in circumstances indicate that the asset might be impaired.

 

The Company concluded that, based upon the market value of its stock inrelation to the Company’s net book value at June 30, 2005 and December 31,2004, there was no additional impairment of goodwill warranted.

 

The process of evaluating the potential impairmentof goodwill is highly subjective and requires significant judgment. Inestimating the fair value of the Company, the Company made estimates andjudgments about future revenues and cash flows. The Company’s forecasts werebased on assumptions that are consistent with the plans and estimates theCompany is using to manage the business. Changes in these estimates couldchange the Company’s conclusion regarding impairment of goodwill andpotentially result in a non-cash goodwill impairment charge for all or aportion of the goodwill balance at June 30, 2005.

 

Additionally, upon adoption of SFAS 141 and SFAS142, the Company no longer amortizes its non-technology based intangible asset,or assembled workforce. As of December 31, 2003, completed technologyintangibles had been fully amortized.

 

**Note 8.  Warrants**

 

As of June 30, 2005, the following warrants to purchase theCompany’s common stock were outstanding:

 
| **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 in connection with thereal estate transaction has a term of five years and is exercisable beginningin August 2005.  The warrant issuedin connection with the convertible notes also has a term of five years andbecame exercisable beginning in May 2005.

 

In accordance with EITF 00-19, *Accounting for Derivative Financial Instruments Indexed to, andPotentially Settled in, a Company’s Own Stock,*the warrants have been included as ashort-term**liability and were originally valued at fair value on the date ofissuance.  The warrants are revalued eachperiod until and unless the warrants are exercised.  For the three-month and six months ended June 30,2005, the Company recorded gains related to the revaluation of warrants to thelandlord and note holders of $1.0 and $3.5 million, respectively.  These gains are included as a component of Restructuring charges and ofOther income (expense), net, respectively, in the accompanying CondensedConsolidated Statements of Operations. If the warrants are exercised prior to their termination, their carryingvalue will be transferred to equity.

 

**Note 9.  SubsequentEvents**

 

On July 25, 2005, the Company entered into anAgreement and Plan of Merger (the “Merger Agreement”) with Bravo Holdco, anexempted company with limited liability incorporated under the laws of the CaymanIslands (“Bravo Holdco”), and Bravo Merger Sub, LLC, a Delaware limitedliability company and wholly owned subsidiary of Bravo Holdco (“Merger Sub”),pursuant to which, subject to satisfaction or waiver of the conditions therein,it is intended that the Company will merge with and into Merger Sub, and theCompany’s separate corporate existence will thereupon cease, but Bravo Holdcomay, at its option, elect to amend the Merger Agreement to provide for (i) themerger of Merger Sub or any other affiliate of Bravo Holdco or Bravo Holdco’smajority stockholder, Vector Capital Corporation, (“Vector”) with and into theCompany, or (ii) the Company’s merger with and into any other affiliate ofBravo Holdco or Vector (the “Merger”).

 

Underthe terms of the Merger Agreement, the holders of shares of the Company’scommon stock (other than stockholders who exercise appraisal rights underDelaware law) that are outstanding immediately prior to the consummation of theMerger will receive $0.84 in cash for each share of common stock at the time ofthe consummation of the Merger (the “Effective Time”).  In addition, at the Effective Time, eachvested stock option that is outstanding immediately prior to the consummationof the Merger will be automatically converted into an amount in cash equal to,for each share of common stock underlying such option, the excess (if any) of$0.84 over the per share exercise price of such option.

 

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Theconsummation of the Merger is conditioned upon, among other things, theadoption of the Merger Agreement by the holders of a majority of theoutstanding shares of the Company’s common stock, customary regulatoryapprovals and other closing conditions. In order to induce Bravo Holdco to enter into the Merger Agreement, Dr. PehongChen, the Company’s Chairman, President and Chief Executive Officer, on behalfof himself and a trust of which he is a Trustee (the “Chen Trust”), has enteredinto a voting agreement with Bravo Holdco pursuant to which Dr. Chen hasagreed, among other things, to vote all shares of the Company’s common stockheld by himself and the Chen Trust in favor of the Merger and the adoption ofthe Merger Agreement. Dr. Chen and the Chen Trust hold an aggregate of5,874,985 shares of common stock (approximately 17% of the outstanding sharesof common stock on July 25, 2005) and options to purchase an additional2,757,551 shares of common stock.

 

TheMerger Agreement contains certain termination rights and expense reimbursementprovisions in favor of both the Company and Bravo Holdco.  Upon termination of the Merger Agreementunder certain specified conditions, the Company may be required to reimburse thedocumented transaction expenses of Bravo Holdco, Merger Sub and Vector, up to amaximum of $980,000.  Upon termination ofthe Merger Agreement under certain other specified conditions, BroadVision maybe required to pay Bravo Holdco the greater of (i) this expensereimbursement or (ii) a termination fee of $862,600.

 

TheMerger is expected to close in the late third or fourth quarter of 2005;however, there can be no assurance that the Merger will be consummated in thattime period or at all.

 

Inconnection with the execution and delivery of the Merger Agreement, Vectorentered into a letter agreement in favor of the Company and Bravo Holdcopursuant to which, among other things, Vector committed to invest funds inBravo Holdco as a source of funding for the Merger.  Vector’s commitment is conditioned only uponthe prior fulfillment or waiver of each and all of the conditions precedent toBravo Holdco’s and Merger Sub’s obligations to consummate the Merger under theMerger Agreement.  Vector has expressedits desire to have Dr. Chen remain involved with the Company after theMerger and has entered into an arrangement with Dr. Chen under which Dr. Chenmay purchase up to 9.5% of the equity securities of Bravo Holdco.

 

OnJuly 25, 2005, the Company entered into an agreement with certain of theholders of its outstanding convertible notes which were originally issuedpursuant to the terms of a Securities Purchase Agreement dated as of November 10,2004 (the “Securities Purchase Agreement”), regarding the treatment inconnection with the Merger of the convertible notes and warrants issued to thenoteholders under the Securities Purchase Agreement (the “Noteholder Agreement”).  Under the terms of the Noteholder Agreement,all principal and accrued interest on the notes that is outstanding at the EffectiveTime of the Merger, together with certain other amounts payable to thenoteholders, will be repaid within one business day following the EffectiveTime of the Merger and the notes and warrants will be extinguished.  Subject to our performance of our obligationsunder the Noteholder Agreement, the noteholders have consented to thecompletion of the Merger.

 

TheCompany’s entry into the Merger Agreement and the Noteholder Agreement is furtherdescribed on the Schedule 14A filed on July 26, 2005 with theSecurities and Exchange Commission and the Current Report on Form 8-K filedwith the Securities and Exchange Commission on July 29, 2005.

 

On July 28, 2005, representatives of theCompany received copies of four complaints relating to purported class actionlawsuits, each filed by an alleged holder of shares of our common stock andeach filed in California Superior Court for the county of San Mateo. Thesecomplaints are captioned *Gary Goberville,et al., vs. Pehong Chen, et al.,* Civ 448490, *Cookie Schwartz, et al., vs. BroadVision, Inc.,et al*, Civ 448516, *LeonKotovich, et al., vs. BroadVision, Inc., et al*,Civ 448518 and *Anthony Noblett,et al., vs. BroadVision, Inc., et al*, Civ 448519. Eachclaim names the Company’s directors and BroadVision, Inc. as defendants,and each alleges that the director defendants violated their fiduciary dutiesto stockholders by, among other things, failing to maximize the Company’s valueand ignoring, or failing to adequately protect against, certain purportedconflicts of interest. Each complaint seeks, among other things, injunctiverelief and damages in an unspecified amount. The Company anticipates thatsimilar actions may be filed in the future against some or all of the samedefendants.

 

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

 

*This report on Form 10-Qcontains forward-looking statements within the meaning of Section 27A ofthe Securities Act of 1933, as amended, and within the meaning of Section 21Eof the Securities Exchange Act of 1934, as amended, which are subject to the “safeharbor” created by those sections. These forward-looking statements aregenerally identified by words such as “expect,” “anticipate,” “intend,” “believe,”“hope,” “assume,” “estimate,” “plan,” “will” and other similar words andexpressions.**These forward-lookingstatements involve risks and uncertainties that could cause our actual resultsto differ materially from those expressed or implied in the forward-lookingstatements as a result of certain factors, including those described herein andin the Company’s most recently filed Annual Report on Form 10-K*

 

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*and otherdocuments filed with the SEC. We undertake no obligation to publicly releaseany revisions to the forward-looking statements or to reflect events andcircumstances after the date of this document.*

 

**Overview**

 

BroadVision solutions help customers rapidlyincrease revenues and reduce costs by moving interactions and transactions topersonalized self 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—havelicensed BroadVision solutions to power and personalize their mission-criticalweb initiatives.

 

Worldwide demand for enterprise software hasdeclined significantly over the past several years. The decline in venturecapital spending has resulted in fewer new companies with funding to, amongother things, build an on-line business. Established companies have scaledback, delayed or cancelled web-based initiatives. As a result of these reasonsand others, we have seen significant declines in our revenue over the past fourfiscal years.

 

Our objective is to further our position as aleading supplier of web-based, self-service applications. This will require usto continue to build in new functionality to our applications that offer ourcustomers a compelling value proposition to license our products rather thandesign and build custom solutions.

 

We generate revenue from fees for licenses of oursoftware products, maintenance, consulting services and customer training. Wegenerally charge fees for licenses of our software products either based on thenumber of persons registered to use the product or based on the number of CPUson the machine on which the product is installed. Payment terms are generallythirty days from the date the products are delivered or the services areprovided.

 

From 2001 to date, we have incurred significantlosses and negative cash flows from operations. In fiscal year 2004, we enteredinto a series of agreements to terminate significant excess lease obligationsthat were contributing to that negative cash flow. Under the terms of theseagreements, we have incurred an obligation to pay $45 million, and our futurecash outflows will be reduced by over $4 million per quarter. We believe thatthese transactions are an important step towards our goal of generatingconsistent positive cash flows, although we make no assurances about ourability to generate positive cash flows in future periods.

 

We strive to anticipate changes in the demand forour services and aggressively manage our labor force appropriately. Through ourthorough budgeting process, cross-functional management participates in theplanning, reviewing and managing of our business plans. This process allows usto adjust our cost structures to changing market needs, competitive landscapesand economic factors. Our emphasis on cost control helps us manage our marginseven if revenues generated fall short of what we anticipated.

 

**Recent Events**

 

During the third and fourth quarters of 2004, wereached agreements with certain landlords to extinguish approximately $155.0million of future real estate obligations. We made cash payments of $20.7million in 2004, and an additional cash payment of $22.5 million in the firsthalf of 2005.  In addition, we issued toone of the landlords a five-year warrant to purchase approximately 700,000shares of our common stock at an exercise price of $5.00 per share, exercisablebeginning in August 2005.  As acomponent of the settlement of one of the previous leases, we have a residuallease obligation beginning in 2007 of approximately $9.1 million. We may makean additional cash payment of $4.5 million if we exercise an option toterminate this residual real estate obligation prior to the lease term, whichcommences in 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 of $6.6million as of June 30, 2005.

 

In November 2004, we entered into a definitiveagreement for the private placement of up to $20.0 million of convertible notesto five institutional investors. We issued an initial $16.0 million of noteswhich will be 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

 

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notes the monthly principalrepayment obligation will increase to $2.1 million beginning in September 2005due to our cash balances falling below certain defined levels as of June 30,2005.  This increase has the effect ofrequiring us to repay the principal amount in nine installments through April 2006.Payments of principal and interest may be made in either cash or, uponsatisfaction of various conditions set forth in the notes, shares of our commonstock. However, we anticipate having to use cash to satisfy all of our paymentobligations under the notes.

 

On June 29, 2005, the Company’s Board ofDirectors approved a business restructuring plan, primarily consisting ofheadcount reductions, designed to adjust expenses to a level more consistentwith anticipated revenues.  The reduction by approximately 63 employees,or 22% of our workforce, is expected to be completed by the end of the thirdquarter of 2005.  We expect that we willincur pre-tax severance costs of approximately $1.3 million, of whichapproximately $665,000 was incurred in the second quarter of 2005 and wascharged to the restructuring accrual.  Weexpect to incur additional severance costs of approximately $600,000 in thethird quarter of 2005.

 

On July 25, 2005, we entered into an Agreementand Plan of Merger (the “Merger Agreement”) with a newly-formed portfolio company of VectorCapital Corporation (“Vector”).  Underthe terms of the Merger Agreement, the holders of shares of our common stock(other than stockholders who exercise appraisal rights under Delaware law) thatare outstanding 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 Mergeris conditioned upon, among other things, the adoption of the Merger Agreementby the holders of a majority of the outstanding shares of our common stock,customary regulatory approvals and other closing conditions.  The Merger is expected to close in the latethird or fourth quarter of 2005; however, there can be no assurance that theMerger will be consummated in that time period or at all.

 

OnJuly 25, 2005, we entered into an agreement with certain of the holders ofthe outstanding convertible notes which we originally issued in November 2004under which all principal and accrued interest on the notes that is outstandingat the effective date of the Merger, together with certain other amountspayable to the noteholders, will be repaid within one business day followingthe Effective Time of the Merger and the notes and warrants will beextinguished.

 

On July 28, 2005, our representativesreceived copies of four complaints relating to purported class action lawsuits,each filed by an alleged holder of shares of our common stock and each filed inCalifornia Superior Court for the county of San Mateo. These complaints arecaptioned *Gary Goberville, et al., vs.Pehong Chen, et al.,* Civ 448490, *Cookie Schwartz, et al., vs. BroadVision, Inc.,et al*, Civ 448516, *LeonKotovich, 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, andeach alleges that the director defendants violated their fiduciary duties tostockholders by, among other things, failing to maximize our value andignoring, or failing to adequately protect against, certain purported conflictsof interest. Each complaint seeks, among other things, injunctive relief anddamages in an unspecified amount. We anticipate that similar actions may befiled in the future against some or all of the same defendants.

 

Wehave various credit facilities with a commercial lender, which include termdebt in the form of notes payable, a revolving line of credit and an equipmentline of credit. In June 2005, we entered into a renewed and amended loanand security agreement with the lender. The agreement requires us to maintaincertain levels of unrestricted cash and cash equivalents (excluding equityinvestments), and to maintain certain levels on deposit with the lender. At June 30,2005 and December 31, 2004, $15.0 million and $20.0 million, respectively,was outstanding under the line of credit. Borrowings under the line of creditare collateralized by all of our assets and bear interest at the bank’s primerate. Interest is due monthly and principal is due at the expiration in February 2006.  As of July 1, 2005, the requirements we mustmeet in order to continue to access the credit facility became more stringentunder the renewed and amended agreement, and we expect that, beginning in thethird quarter of 2005 and for the foreseeable future, we will be unable to meetthe new requirements.

 

**Critical Accounting Policies**

 

This management’s discussion and analysis of ourfinancial condition and results of operations is based upon our condensedconsolidated financial statements, which have been prepared in accordance withgenerally accepted accounting principles in the United States of America. Inpreparing these financial statements, we are required to make estimates andjudgments that affect the reported amounts of assets, liabilities, revenues andexpenses, and related disclosures of contingent assets and liabilities. On anongoing basis, we evaluate our estimates, including those related to doubtfulaccounts, product returns, investments, goodwill and intangible assets, incometaxes and restructuring, as well as contingencies and litigation. We base ourestimates on historical experience and on various other assumptions that webelieve are reasonable, the results of which form the basis for makingjudgments about the carrying values of assets and liabilities that are notreadily apparent from other sources. Actualresults may differ from these estimates usingdifferent

 

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assumptions or conditions.We believe the following critical accounting policies reflect the moresignificant judgments and estimates used in the preparation of our consolidatedfinancial statements.

 

*Revenue Recognition*

 

*Overview*—Our revenue consists of fees for licenses of our software products,maintenance, consulting services and customer training. We generally chargefees for licenses of our software products either based on the number ofpersons registered to use the product or based on the number of CPUs on themachine on which the product is installed. Licenses for software whereby feescharged are based upon the number of persons registered to use the product aredifferentiated between licenses for development use and licenses for use indeployment of the customer’s website. Licenses for software whereby feescharged are on a per-CPU basis do not differentiate between development anddeployment usage. Our revenue recognition policies comply with the provisionsof 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*.*

 

*Software License Revenue*

 

We license our products through our direct salesforce and indirectly through resellers. In general, software license revenuesare recognized when a non-cancelable license agreement has been signed and thecustomer acknowledges an unconditional obligation to pay, the software producthas been delivered, there are no uncertainties surrounding product acceptance,the fees are fixed and determinable and collection is considered probable.Delivery is considered to have occurred when title and risk of loss have beentransferred to the customer, which generally occurs when media containing thelicensed programs is provided to a common carrier. In case of electronicdelivery, delivery occurs when the customer is given access to the licensedprograms.  For products that cannot be used without a licensing key, thedelivery requirement is met when the licensing key is made available to thecustomer. If collectibility is not considered probable, revenue is recognizedwhen the fee is collected. Subscription-based license revenues are recognizedratably over the subscription period. We enter into reseller arrangements thattypically provide for sublicense fees payable to the us based upon a percentageof list price. We do not grant resellers the right of return.

 

We recognize revenue using the residual methodpursuant to the requirements of SOP No. 97-2, as amended by SOP No. 98-9.Revenues recognized from multiple-element software arrangements are allocatedto each element of the arrangement based on the fair values of the elements,such as licenses for software products, maintenance, consulting services orcustomer training. The determination of fair value is based on objectiveevidence, which is specific to us. We limit its assessment of objectiveevidence for each element to either the price charged when the same element issold separately or the price established by management having the relevantauthority to do so, for an element not yet sold separately. If evidence of fairvalue of all undelivered elements exists but evidence does not exist for one ormore delivered elements, then revenue is recognized using the residual method.Under the residual method, the fair value of the undelivered elements isdeferred and the remaining portion of the arrangement fee is recognized asrevenue.

 

We record unearned revenue for software licenseagreements when cash has been received from the customer and the agreement doesnot qualify for revenue recognition under our revenue recognition policy. We recordaccounts receivable for software license agreements when the agreementqualifies for revenue recognition but cash or other consideration has not beenreceived from the customer.

 

*Services Revenue*

 

Consulting services revenues and customer training revenuesare recognized as such services are performed. Maintenance revenues, whichinclude revenues bundled with software license agreements that entitle thecustomers to technical support and future unspecified enhancements to ourproducts, are deferred and recognized ratably over the related agreementperiod, generally twelve months.

 

Our consulting services, which consist ofconsulting, maintenance and training, are delivered through the BroadVisionGlobal Services (“BVGS”) organization. Services that we provide are notessential to the functionality of the software. We record reimbursement fromour customers for out-of-pocket expenses as an increase to services revenues.

 

*Allowances and Reserves*

 

Occasionally, our customers experience financialdifficulty after we record the revenue but before we are paid. We maintainallowances for doubtful accounts for estimated losses resulting from theinability of our customers to make required payments. Our normal payment termsare 30 to 90 days from invoice date. If the financial condition of our

 

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customers were todeteriorate, resulting in an impairment of their ability to make payments,additional allowances may be required.

 

*Impairment Assessments*

 

We adopted SFAS 142 on January 1, 2002. Thisstandard requires that goodwill no longer be amortized, and instead, be testedfor impairment on a periodic basis.

 

Pursuant to SFAS 142, we are required to testgoodwill for impairment upon adoption and annually or more often if events orchanges in circumstances indicate that the asset might be impaired. While therewas no accounting charge to record upon adoption, at September 30, 2002,we concluded that, based on the existence of impairment indicators, including adecline in our market value, we would be required to test goodwill forimpairment. SFAS 142 provides for a two-stage approach to determining whetherand by how much goodwill has been impaired. Since we have only one reportingunit for purposes of applying SFAS 142, the first stage requires a comparisonof the fair value of the Company to its net book value. If the fair value isgreater, then no impairment is deemed to have occurred. If the fair value isless, then the second stage must be completed to determine the amount, if any,of actual impairment. We completed the first stage and determined that our fairvalue at September 30, 2002 exceeded our net book value on that date and,as a result, no impairment of goodwill was recorded in the consolidatedfinancial statements. We obtained an independent appraisal of fair value tosupport our conclusion. We also determined that our fair value exceeded our netbook value as of June 30, 2005 and December 31, 2004 and, therefore,no additional impairment was warranted.

 

The process of evaluating the potential impairmentof goodwill is highly subjective and requires significant judgment. Inestimating our fair value, we made estimates and judgments about futurerevenues and cash flows. Our forecasts were based on assumptions that areconsistent with the plans and estimates we are using to manage our business.Changes in these estimates could change our conclusion regarding impairment ofgoodwill and potentially result in a non-cash goodwill impairment charge, forall or a portion of the goodwill balance at June 30, 2005. For long-livedassets, accounting standards dictate that assets become impaired when theundiscounted future cash flows expected to be generated by them are less thantheir carrying amounts. When that occurs, the affected assets are written downto their estimated fair value.

 

*Deferred Tax Assets*

 

We analyze our deferred tax assets with regard topotential realization. We have established a valuation allowance on ourdeferred tax assets to the extent that we determined that it is more likelythan not that some portion or all of the deferred tax assets will not berealized based upon the uncertainty of their realization. We have consideredestimated future taxable income and ongoing prudent and feasible tax planningstrategies in assessing the amount of the valuation allowance.

 

*Accounting for Stock-Based Compensation*

 

We apply APB 25 and related interpretations whenaccounting for our stock option and stock purchase plans. In accordance withAPB 25, we apply the intrinsic value method in accounting for employee stockoptions. Accordingly, we generally recognize no compensation expense withrespect to stock-based awards to employees.

 

During the three months ended March 31,2004, the Company recorded compensation income of $15,000 as a result ofgranting common stock to a third party consultant. These charges werecalculated based upon the market value of the underlying stock.

 

We have determined pro forma information regardingnet loss and net loss per share as if we had accounted for employee stockoptions under the fair value method as required by SFAS 123.  The fair value of these stock-based awards toemployees was estimated using the Black-Scholes option pricing model. Hadcompensation cost for the Company’s stock option plan and employee stockpurchase plan been determined consistent with SFAS 123, the Company’s reportednet income (loss) and net income (loss) per share would have been changed tothe amounts indicated below (in thousands, except per share data, unaudited):

 

23

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| ** **                                                                                                                                    | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income (loss) as reported                                                                                                                 |       | $                                     | (2,914     | )                                   | $          | (1,492 | ) | $ | 4 |   | $ | (2,359 | ) |
| 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 |       | (7                                    | )          | (3,487                              | )          | (1,153 | ) | (5,258 | ) |
| Pro forma net loss                                                                                                                            |       | $                                     | (2,921     | )                                   | $          | (4,979 | ) | $ | (1,149 | ) | $ | (7,632 | ) |
|                                                                                                                                          |       |                                  |       |                                |       |   |   |   |   |
| Income (loss) per share:                                                                                                                      |       |                                  |       |                                |       |   |   |   |   |
| Basic—as reported                                                                                                                        |       | $                                     | (0.09      | )                                   | $          | (0.04 | ) | $ | 0.00 |   | $ | (0.07 | ) |
| Basic—pro forma                                                                                                                          |       | $                                     | (0.09      | )                                   | $          | (0.15 | ) | $ | (0.03 | ) | $ | (0.23 | ) |
|                                                                                                                                          |       |                                  |       |                                |       |   |   |   |   |
| Diluted—as reported                                                                                                                      |       | $                                     | (0.09      | )                                   | $          | (0.04 | ) | $ | 0.00 |   | $ | (0.07 | ) |
| Diluted—pro forma                                                                                                                        |       | $                                     | (0.09      | )                                   | $          | (0.15 | ) | $ | (0.03 | ) | $ | (0.23 | ) |

 

*Restructuring Charges*

 

Through June 30, 2005, we have approvedrestructuring plans to, among other things, reduce our workforce andconsolidate facilities. Restructuring and asset impairment charges were takento align our cost structure with changing market conditions and to create amore efficient organization. Our restructuring charges are comprised primarily of:(i) severance and benefits termination costs related to the reduction ofour workforce; (ii) lease termination costs and/or costs associated withpermanently vacating our facilities; (iii) other incremental costsincurred 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*.*

 

*Severance and Termination Costs*. We account for severance and benefitstermination costs as follows:

 

•                  For exit or disposal activities initiated onor prior to December 31, 2002, we account for costs in accordance withEITF 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 to such plan and establishes thebenefits 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.

 

•                  For exit or disposal activities initiatedafter December 31, 2002, we account for costs in accordance with SFAS146.  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.

 

*Excess Facilities Costs*. We account for excess facilities costs asfollows:

 

•                  For exit or disposal activities initiated onor prior to December 31, 2002, we account for lease termination and/orabandonment costs in accordance with EITF 88-10, *Costs Associated with Lease Modification orTermination*. Accordingly, we recorded the costs associated withlease termination and/or abandonment when the leased property had no substantivefuture use or benefit to us.

 

•                  For exit or disposal activities initiatedafter December 31, 2002, we account for lease termination and/orabandonment costs in accordance with SFAS 146, which requires that a liabilityfor such costs be recognized and measured initially at fair value on the ceaseuse date of the facility.

 

Severance and termination costs and excessfacilities costs we record under these provisions are not associated with nordo they benefit continuing activities.

 

Inherent in the estimation of the costs related toour restructuring efforts are assessments related to the most likely expectedoutcome of the significant actions to accomplish the restructuring. Indetermining the charges related to the restructurings to date, the majority ofestimates made by management have related to charges for excess facilities. Indetermining the charges for excess facilities, we were required to estimatefuture sublease income, future net operating

 

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expenses of the facilities,and brokerage commissions, among other expenses. The most significant of theseestimates have related to the timing and extent of future sublease income inwhich to reduce our lease obligations. We based our estimates of sublease income,in part, on the 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 facility, among other factors.The Company has recorded the low-end of a range of assumptions modeled forrestructuring charges, in accordance with SFAS 5.  Adjustments to the facilities accrual will berequired if actual lease exit costs or sublease income differ from amountscurrently expected. We will review the status of restructuring activities on aquarterly basis and, if appropriate, record changes to our restructuringobligations in current operations based on management’s most current estimates.

 

As of June 30, 2005, the total restructuringaccrual of $11.4 million consisted of the following (in millions):

 
| ** **                | ** ** | **Current** | ** ** | **Non-Current** | ** ** | **Total** | ** ** |
|---------------------------|------------|-------------|------------|-----------------|------------|-----------|------------|
| Severance and Termination |       | $           | 1.1        |            | $          | —    |       | $ | 1.1 |   |
| Excess Facilities         |       | 3.7         |       | 6.6             |       | 10.3      |       |
|                      |       |        |       |            |       |      |       |
| Total                     |       | $           | 4.8        |            | $          | 6.6       |       | $ | 11.4 |   |

 

The Company estimates that the $1.1 millionseverance and termination accrual will be paid in full by December 31,2005. We expect to pay the excess facilities amounts related to restructured orabandoned leased space as follows (in millions):

 
| **Years ending December 31,**              | ** ** | **Total future  minimum  payments** | ** ** |
|-------------------------------------------------|------------|-------------------------------------|------------|
| 2005                                            |       | $                                   | 3.7        |   |
| 2006                                            |       | 4.8                                 |       |
| 2007                                            |       | 0.7                                 |       |
| 2008                                            |       | 0.5                                 |       |
| 2009 and thereafter (through October 2010) |       | 0.6                                 |       |
|                                            |       |                                |       |
| Total minimum facilities payments               |       | $                                   | 10.3       |   |

 

Of this excess facilities accrual, $2.5 millionrelates to payments due in fiscal 2005 under lease termination agreements, and$7.8 million relates to future minimum lease payments, fees and expenses, netof estimated sublease income and planned company occupancy.

 

The following table summarizes the activity relatedto the restructuring plans initiated subsequent to December 31, 2002, andaccounted for in accordance with FAS 146 (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 June 30, 2005**           |       |                                         |       |                                                     |       |                             |       |                                      |       |
| Lease cancellations and commitments                  |       | $                                            | 3,846      |                                                     | $          | (146                             | )          | $                                         | 264        |   | $ | 3,964 |   |
| Termination payments to employees and related  costs |       | 115                                          |       | 627                                                      |       | (87                              | )          | 655                                       |       |
|                                                 |       | $                                            | 3,961      |                                                     | $          | 481                              |       | $                                         | 177        |   | $ | 4,619 |   |
|                                                 |       |                                         |       |                                                     |       |                             |       |                                      |       |
| **Three  Months Ended June 30, 2004**           |       |                                         |       |                                                     |       |                             |       |                                      |       |
| Lease cancellations and commitments                  |       | $                                            | 21,683     |                                                     | $          | —                           |       | $                                         | —     |   | $ | 21,683 |   |
| Termination payments to employees and  related costs |       | 95                                           |       | 158                                                      |       | (89                              | )          | 164                                       |       |
|                                                 |       | $                                            | 21,778     |                                                     | $          | 158                              |       | $                                         | (89        | ) | $ | 21,847 |   |
| **Six  Months Ended June 30, 2005**             |       |                                         |       |                                                     |       |                             |       |                                      |       |
| Lease cancellations and commitments                  |       | $                                            | 21,824     |                                                     | $          | (777                             | )          | $                                         | (17,083    | ) | $ | 3,964 |   |
| Termination payments to employees and  related costs |       | 365                                          |       | 532                                                      |       | (242                             | )          | 655                                       |       |
|                                                 |       | $                                            | 22,189     |                                                     | $          | (245                             | )          | $                                         | (17,325    | ) | $ | 4,619 |   |
|                                                 |       |                                         |       |                                                     |       |                             |       |                                      |       |
| **Six  Months Ended June 30, 2004**             |       |                                         |       |                                                     |       |                             |       |                                      |       |
| Lease cancellations and commitments                  |       | $                                            | 21,683     |                                                     | $          | —                           |       | $                                         | —     |   | $ | 21,683 |   |
| Termination payments to employees and  related costs |       | 242                                          |       | 476                                                      |       | (554                             | )          | 164                                       |       |
|                                                 |       | $                                            | 21,925     |                                                     | $          | 476                              |       | $                                         | (554       | ) | $ | 21,847 |   |

 

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The following table summarizes the activity relatedto the restructuring plans initiated on or prior to December 31, 2002, andaccounted 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 June 30, 2005**            |       |                                          |       |                                                     |       |                             |       |                                      |       |
| Lease cancellations and commitments                  |       | $                                             | 8,871      |                                                     | $          | (172                             | )          | $                                         | (2,373     | ) | $ | 6,326 |   |
| Termination payments to employees and  related costs |       | 445                                           |       | —                                                   |       | (23                              | )          | 422                                       |       |
|                                                 |       | $                                             | 9,316      |                                                     | $          | (172                             | )          | $                                         | (2,396     | ) | $ | 6,748 |   |
| **Three Months Ended June 30, 2004**            |       |                                          |       |                                                     |       |                             |       |                                      |       |
| Lease cancellations and commitments                  |       | $                                             | 78,292     |                                                     | $          | 521                              |       | $                                         | (5,620     | ) | $ | 73,193 |   |
| Termination payments to employees and  related costs |       | 429                                           |       | —                                                   |       | —                           |       | 429                                       |       |
|                                                 |       | $                                             | 78,721     |                                                     | $          | 521                              |       | $                                         | (5,620     | ) | $ | 73,662 |   |
|                                                 |       |                                          |       |                                                     |       |                             |       |                                      |       |
| **Six Months Ended June 30, 2005**              |       |                                          |       |                                                     |       |                             |       |                                      |       |
| Lease cancellations and commitments                  |       | $                                             | 11,515     |                                                     | $          | (150                             | )          | $                                         | (5,039     | ) | $ | 6,326 |   |
| Termination payments to employees and  related costs |       | 459                                           |       | —                                                   |       | (37                              | )          | 422                                       |       |
|                                                 |       | $                                             | 11,974     |                                                     | $          | (150                             | )          | $                                         | (5,076     | ) | $ | 6,748 |   |
| **Six Months Ended June 30, 2004**              |       |                                          |       |                                                     |       |                             |       |                                      |       |
| Lease cancellations and commitments                  |       | $                                             | 83,026     |                                                     | $          | 773                              |       | $                                         | (10,606    | ) | $ | 73,193 |   |
| Termination payments to employees and  related costs |       | 429                                           |       | —                                                   |       | —                           |       | 429                                       |       |
|                                                 |       | $                                             | 83,455     |                                                     | $          | 773                              |       | $                                         | (10,606    | ) | $ | 73,622 |   |

 

As mentioned above, we have based our excessfacilities accrual, in part, upon estimates of future sublease income. We haveused the following factors, among others, in making such estimates: opinions ofindependent real estate experts, current market conditions and rental rates, anassessment of the time period over which reasonable estimates could be made,the status of negotiations with potential subtenants, and the location of therespective facilities. We recorded the low-end of a range of assumptionsmodeled for restructuring charges, in accordance with SFAS 5.  Adjustments to the facilities accrual will berequired if actual sublease income differs from amounts currently expected. Wewill review 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 range of liability related topending litigation is based on claims for which it is probable that a liabilityhas been incurred and we can estimate the amount and range of loss. We haverecorded the minimum estimated liability related to those claims, where thereis a range of loss. Because of the uncertainties related to both thedetermination of the probability of an unfavorable outcome and the amount andrange of loss in the event of an unfavorable outcome, we are unable to make areasonable estimate of the liability that could result from the remainingpending litigation. As additional information becomes available, we will assessthe potential liability related to its pending litigation and revise ourestimates, if necessary. Such revisions in our estimates of the potentialliability could materially impact our results of operations and financialposition.

 

On June 10, 2004, MetLife filed acomplaint in the Superior Court of the State of California, County of LosAngeles, naming us as a defendant. The complaint alleged that we were liablefor unlawful detainer of premises leased from the plaintiff. The plaintiffthereafter filed a First Amended Complaint alleging that we no longer heldpossession of the

 

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premises butwas in breach of the lease. In February 2005, MetLife reached agreementwith us and executed documents regarding a settlement of the pending lawsuitunder which we will pay MetLife an aggregate of $1.9 million in considerationfor termination of the lease, dismissal of the lawsuit and in full settlementof approximately $3.1 million of past and future lease obligations. The firstof three installment payments was made in February 2005, with the secondmade in May 2005 and the third due in September 2005.

 

On July 28, 2005, representatives of theCompany received copies of four complaints relating to purported class actionlawsuits, each filed by an alleged holder of shares of our common stock andeach filed in California Superior Court for the county of San Mateo. Thesecomplaints are captioned *Gary Goberville,et al., vs. Pehong Chen, et al.,* Civ 448490, *Cookie Schwartz, et al., vs. BroadVision, Inc.,et al*, Civ 448516, *LeonKotovich, 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 and BroadVision, Inc. asdefendants, and each alleges that the director defendants violated theirfiduciary duties to stockholders by, among other things, failing to maximizethe Company’s value and ignoring, or failing to adequately protect against,certain purported conflicts of interest. Each complaint seeks, among otherthings, injunctive relief and damages in an unspecified amount. The Companyanticipates that similar actions may be filed in the future against some or allof the same defendants.

 

***Results of Operations***

 

*Revenues*

 

*Total revenues* decreased 23% during the three months ended June 30,2005 to $15.5 million as compared to $20.1 million for the three months ended June 30,2004.  Total revenues decreased 22% during the six months ended June 30,2005 to $31.9 million as compared to $41.0 million for the six months ended June 30,2004.  A summary of our revenues by geographic region is as follows (dollarsin thousands, unaudited):

 
| ** **          | ** ** | **Software  Licenses** | ** ** | **%**  | ** ** | **Services** | ** ** | **%**  | ** ** | **Total** | ** ** | **%**  | ** ** |
|---------------------|------------|------------------------|------------|--------|------------|--------------|------------|--------|------------|-----------|------------|--------|------------|
| Three Months Ended: |       |                   |       |   |       |         |       |   |       |      |       |   |       |
|                |       |                   |       |   |       |         |       |   |       |      |       |   |       |
| June 30, 2005  |       |                   |       |   |       |         |       |   |       |      |       |   |       |
| Americas            |       | $                      | 1,792      |   | 53         | %            | $          | 7,266  |       | 60        | %          | $      | 9,058      |   | 58 | % |
| Europe              |       | 1,278                  |       | 38     |       | 4,133        |       | 34     |       | 5,411     |       | 35     |       |
| Asia Pacific        |       | 321                    |       | 9      |       | 724          |       | 6      |       | 1,045     |       | 7      |       |
| Total               |       | $                      | 3,391      |   | 100        | %            | $          | 12,123 |       | 100       | %          | $      | 15,514     |   | 100 | % |
|                |       |                   |       |   |       |         |       |   |       |      |       |   |       |
| June 30, 2004  |       |                   |       |   |       |         |       |   |       |      |       |   |       |
| Americas            |       | $                      | 2,011      |   | 28         | %            | $          | 6,840  |       | 52        | %          | $      | 8,851      |   | 44 | % |
| Europe              |       | 3,817                  |       | 54     |       | 5,165        |       | 40     |       | 8,982     |       | 45     |       |
| Asia Pacific        |       | 1,269                  |       | 18     |       | 1,026        |       | 8      |       | 2,295     |       | 11     |       |
| Total               |       | $                      | 7,097      |   | 100        | %            | $          | 13,031 |       | 100       | %          | $      | 20,128     |   | 100 | % |
|                |       |                   |       |   |       |         |       |   |       |      |       |   |       |
| Six Months Ended:   |       |                   |       |   |       |         |       |   |       |      |       |   |       |
|                |       |                   |       |   |       |         |       |   |       |      |       |   |       |
| June 30, 2005  |       |                   |       |   |       |         |       |   |       |      |       |   |       |
| Americas            |       | $                      | 3,706      |   | 48         | %            | $          | 13,990 |       | 58        | %          | $      | 17,696     |   | 55 | % |
| Europe              |       | 2,984                  |       | 38     |       | 8,345        |       | 35     |       | 11,329    |       | 36     |       |
| Asia Pacific        |       | 1,117                  |       | 14     |       | 1,739        |       | 7      |       | 2,856     |       | 9      |       |
| Total               |       | $                      | 7,807      |   | 100        | %            | $          | 24,074 |       | 100       | %          | $      | 31,881     |   | 100 | % |
|                |       |                   |       |   |       |         |       |   |       |      |       |   |       |
| June 30, 2004  |       |                   |       |   |       |         |       |   |       |      |       |   |       |
| Americas            |       | $                      | 4,601      |   | 31         | %            | $          | 13,886 |       | 53        | %          | $      | 18,487     |   | 45 | % |
| Europe              |       | 8,710                  |       | 58     |       | 10,370       |       | 40     |       | 19,080    |       | 47     |       |
| Asia Pacific        |       | 1,626                  |       | 11     |       | 1,824        |       | 7      |       | 3,450     |       | 8      |       |
| Total               |       | $                      | 14,937     |   | 100        | %            | $          | 26,080 |       | 100       | %          | $      | 41,017     |   | 100 | % |

 

The Company operates in a competitive industry.There have been declines in both the technology industry and in generaleconomic conditions since the beginning of 2001. These declines may continue.Financial comparisons discussed herein may not be indicative of futureperformance.

 

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*Software license revenues* decreased 52% during the three months ended June 30,2005 to $3.4 million as compared to $7.1 million for the three months ended June 30,2004.  Software license revenuedecreased 48% during the six months ended June 30, 2005 to $7.8 million ascompared to $14.9 million for the six months ended June 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.

 

*Services revenues*consisting of consulting revenues, customer training revenues and maintenancerevenues decreased 7% during the three months ended June 30, 2005 to $12.1million as compared to $13.0 million for the three months ended June 30,2004.  Services revenues decreased 8%during the six months ended June 30, 2005 to $24.1 million as compared to$26.1 million for the six months ended June 30, 2004.  Thedecrease in service revenues was primarily attributable to lower maintenancerevenue.  Maintenance revenues decreased11% for the three months ended June 30, 2005 to $7.0 million as comparedto $7.8 million for the three months ended June 30, 2004.  Maintenance revenues decreased 14% forthe six months ended June 30, 2005to $13.8 million as compared to $16.0 million for the six months ended June 30, 2004. Maintenance revenue decreased due to adecline in customer licenses and certain existing customers declining therenewal of annual maintenance services.

 

*Cost of Revenues*

 

Cost of software license revenues includes the costsof product media, duplication, packaging and other manufacturing costs, as wellas royalties payable to third parties for software that is either embedded in,or bundled and licensed with, our products.

 

Cost of services consists primarily ofemployee-related costs, third-party consultant fees incurred on consultingprojects, post-contract customer support and instructional training services. Asummary of our cost of revenues is as follows (dollars in thousands,unaudited):

 
| ** **                    | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                    | ** ** | **2005**                             | ** ** | **%**                              | ** ** | **2004** | ** ** | **%** | ** ** | **2005** | ** ** | **%** | ** ** | **2004** | ** ** | **%** | ** ** |
| Cost of software licenses (1) |       | $                                    | (186       | )                                  | (5         | )% | $ | 313 |   | 4 | % | $ | (243 | ) | (3 | )% | $ | 891 |   | 6 | % |
| Cost of services (2)          |       | 5,614                                |       | 46                                 |       | 6,302 |   | 48 |   | 11,594 |   | 48 |   | 12,579 |   | 48 |   |
| Total cost of revenues (3)    |       | $                                    | 5,428      |                               | 35         | % | $ | 6,615 |   | 33 | % | $ | 11,351 |   | 36 | % | $ | 13,470 |   | 33 | % |

 

----

(1) Percentages are calculated based on totalsoftware license revenues for the period indicated

(2) Percentages are calculated based on totalservices revenues for the period indicated

(3) Percentagesare calculated based on total revenues for the period indicated

 

*Cost of (credit for) softwarelicenses* decreased inabsolute dollar terms during the three months ended June 30, 2005 to$(186,000) as compared to $313,000 for the three months ended June 30,2004.  The cost of softwarelicenses decreased during the six months ended June 30, 2005 to $(243,000)as compared to $891,000 for the six months ended June 30, 2004.  Thisdecrease was primarily due to the reversal of some royalty costs no longerconsidered payable.

 

*Cost of services* decreased 11% in absolute dollar terms duringthe three months ended June 30, 2005 to $5.6 million as compared to $6.3million for the three months ended June 30, 2004.  The cost of services decreased 9%during the six months ended June 30, 2005 to $11.6 million as compared to$12.6 million for the six months ended June 30, 2004.  Thisdecline was attributable to lower consulting headcount in Europe and the MiddleEast regions and lower customer support headcount in the Americas.  This was partially offset by an increase inconsulting spending in the Americas.

 

*Operating Expenses and Other Income, net*

 

Operating expenses consists of the following:

 

•                  *Research and developmentexpenses* consist primarilyof salaries, employee-related benefit costs and consulting fees incurred inassociation with the development of our products. Costs incurred for theresearch and development of new software products are expensed as incurreduntil such time that technological feasibility, in the form of a working model,is established at which time such costs are capitalized and recorded at thelower of unamortized cost or net realizable value. The costs incurredsubsequent to the establishment of a working model but prior to general releaseof the product have not been significant. To

 

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date, we have notcapitalized any costs related to the development of software for external use.

 

•                  *Sales and marketingexpenses* consist primarilyof salaries, employee-related benefit costs, commissions and other incentivecompensation, travel and entertainment and marketing program-relatedexpenditures such as collateral materials, trade shows, public relations,advertising, and creative services.

 

•                  *General and administrativeexpenses* consist primarilyof salaries, employee-related benefit costs, provisions and credits related touncollectible accounts receivable 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 operating expenses is set forth in thefollowing table. The percentage of expenses is calculated based on totalrevenues (dollars in thousands, unaudited):

 
| ** **                 | ** ** | **Three months ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                 | ** ** | **2005**                              | ** ** | **%****(1)**                        | ** ** | **2004** | ** ** | **%****(1)** | ** ** | **2005** | ** ** | **%****(1)** | ** ** | **2004** | ** ** | **%****(1)** | ** ** |
| Research and development   |       | $                                     | 3,955      |                                | 25         | % | $ | 4,509 |   | 22 | % | $ | 8,242 |   | 26 | % | $ | 9,397 |   | 23 | % |
| Sales and marketing        |       | 5,060                                 |       | 33                                  |       | 7,480 |   | 37 |   | 10,871 |   | 34 |   | 14,346 |   | 35 |   |
| General and administrative |       | 2,829                                 |       | 18                                  |       | 2,400 |   | 12 |   | 5,364 |   | 17 |   | 4,817 |   | 12 |   |
| Restructuring charges      |       | 309                                   |       | 2                                   |       | 679 |   | 3 |   | (395 | ) | (1 | ) | 1,249 |   | 3 |   |
| Total operating expenses   |       | $                                     | 12,153     |                                | 78         | % | $ | 15,068 |   | 75 | % | $ | 24,082 |   | 76 | % | $ | 29,809 |   | 73 | % |

 

----

(1)           Expressedas a percent of total revenues for the period indicated

 

*Research anddevelopment expenses* decreased 12% during the threemonths ended June 30, 2005 to $4.0 million as compared to $4.5 million forthe three months ended June 30, 2004. The decrease in research and development expenses was primarilyattributable to reduced headcount as a result of natural attrition and loweroverhead allocations.

 

Research and development decreased 12% duringthe six months ended June 30, 2005 to $8.2 million as compared to $9.4million for the six months ended June 30, 2004.  The decrease for the six month period wasprimarily attributable to lower depreciation costs for fully depreciated assetsand headcount reductions as a result of our cost-cutting efforts.

 

*Sales and marketing expenses* decreased 32% during the three months ended June 30,2005 to $5.1 million as compared to $7.5 million for the three months ended June 30,2004.  Sales and marketing decreased24% during the six months ended June 30, 2005 to $10.9 million as comparedto $14.3 million for the six months ended June 30, 2004. The decreases were primarily attributable toturnover in the sales organization combined with lower commissions on lowerlicense revenue.

 

*General and administrativeexpenses* increased18% during the three months ended June 30, 2005 to $2.8 million ascompared to $2.4 million for the three months ended June 30, 2004.  General and administrative expenses increased11% during the six months ended June 30, 2005 to $5.4 million as comparedto $4.8 million for the six months ended June 30, 2004.  Theincrease was primarily attributable to a $562,000 reduction of accountsreceivable and sales reserves in the three months ended June 30, 2004compared to a reduction of $100,000 recorded in the same period in 2005

 

*Restructuring charges.*****Through June 30, 2005, the Company hasapproved restructuring plans to, among other things, reduce its workforce andconsolidate facilities. Restructuring and asset impairment charges were takento align the Company’s cost structure with changing market conditions and tocreate a more efficient organization. Our restructuring charges are comprisedprimarily of: (i) severance and benefits termination costs related to thereduction of our workforce; (ii) lease termination costs and/or costsassociated 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*.*

 

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

 
| ** **          | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **          | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Facilities          |       | $                                     | (318       | )                                   | $          | 521 |   | $ | (927 | ) | $ | 773 |   |
| Severance and other |       | 627                                   |       | 158                                 |       | 532 |   | 476 |   |
| Total               |       | $                                     | 309        |                                | $          | 679 |   | $ | (395 | ) | $ | 1,249 |   |

 

The excess facilities credit for the three andsix-months ended June 30, 2005 related primarily to an adjustment of$264,000 and $ 1.0 million, respectively, to fair value of the warrant issuedto a previous landlord as part of a lease settlement in 2004.  The excess facilities charge for thethree-months ended June 30, 2004, primarily related to the adjustment ofaccrued interest on excess facilities obligations that were discounted underSFAS 146.  The severance and terminationcosts for both periods reflect adjusted severance, payroll taxes and COBRAbenefits related to restructuring plans implemented prior to the end of theperiod. The Company recorded these charges at the low-end of a range ofassumptions modeled for the restructuring charges, in accordance with SFAS5.  Adjustments to the restructuringaccruals will be made in future periods, if necessary, based upon the thencurrent actual events and circumstances.

 

*Interest (expense) income, net*for the three months ended June 30, 2005was an expense of $1.1 million as compared to income of $102,000 for the threemonths ended June 30, 2004. Interest (expense) income, net for the six months ended June 30,2005 was an expense of $1.8 million as compared to income of $211,000 for thesix months ended June 30, 2004. Interest expense increased in the three and six months ended June 30,2005 due to the outstanding convertible notes issued in November 2004.  Interest income has declined year-over-yeardue to lower cash balances and lower interest rates being earned on investedfunds.

 

*Other (expense) income, net,*for the three months ended June 30, 2005was a net income of $313,000 as compared to expenses of $45,000 for the threemonths ended June 30, 2004. Other (expense) income, net for the six monthsended June 30, 2005 was an income of $3.4 million as compared to expenseof $178,000 for the six months ended June 30, 2004.  The increase in income in the three and sixmonths ended June 30, 2005 was primarily due to recognition of a gain of$732,000 and $2.5 million, respectively, on the revaluing of common stockwarrants for warrants issued in connection with the convertible note offeringin November 2004 to fair value as of June 30, 2005, partially offsetby $480,000 of convertible note filing penalties incurred in the three monthsended June 30, 2005

 

*Income Taxes*. During the three months ended June 30,2005, we recorded a tax provision of $70,000 as compared to a tax benefit of$6,000 for three months ended June 30, 2004.  During the six months ended June 30,2005, we recorded a tax benefit of $2.0 million as compared to a provision of$130,000 during the six months ended June 30, 2004.  The tax provision for the three months ended June 30,2005 was primarily due to estimates for income taxes to be paid in our foreignjurisdictions. For the three months ended June 30, 2004, the tax benefitof $6,000 related to reversal of income tax accruals.  The benefit in the six months ended June 30,2005 related to reversal of amounts previously accrued for expected incometaxes.

 

***Liquidity and Capital Resources***

 

**Overview**

 

Due to a combination of factors, we currentlyanticipate that our available cash resources will likely be insufficient tomeet our payment obligations by some point in the fourth quarter of 2005. Thefactors contributing to this belief include lower-than-anticipated revenues in 2005,costs associated with the Merger and cash payment requirements under ouroutstanding convertible notes. If our cash resources become insufficient tomeet our obligations as they become due, our business and future prospectswould be seriously harmed and our ability to operate the business and completethe merger could be jeopardized. The Merger is subject to numerous conditions,including the approval of our stockholders, that could considerably delay oreven prevent its completion, and there is no assurance that we will be able toobtain additional financing under our existing bank credit facility orotherwise. The requirements we must meet in order to obtain financing under ourbank credit facility became more stringent in July 2005, and we presentlyanticipate being unable to meet the new requirements for the foreseeablefuture. In order to obtain financing from any other source, we would berequired to obtain the approval of both the Vector Capital portfolio companywith which we have agreed to merge and the holders of our outstandingconvertible notes.

 

If the Merger is not consummated, we will be required to raiseadditional funds and we may be unable to do so on terms acceptable to us or atall. Our ability to obtain debt or equity funding would depend on a number offactors, including restrictive covenants contained in our current convertiblenote agreement and credit facilities, market conditions, our operatingperformance and investor interest. If adequate additional funding were notavailable to us, we would have insufficient working capital to continueexecuting our current business plan. Even if additional funding were availableto us, our indebtedness and debt service obligations could continue to increaseour vulnerability to general adverse economic and industry conditions, limit

 

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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.

 

As of June 30, 2005, cash, cash equivalents,and restricted cash and investments totaled $30.7 million, which represents adecrease of $35.4 million as compared to a balance of $66.1 million on December 31,2004. This decrease was primarily attributable to net cash used for operations,payment of lease settlement obligations and payments of debt relatedobligations during the six months ended June 30, 2005.

 
| ** **                | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|---------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                | ** ** | **(unaudited)**         | ** ** | ** **                  | ** ** |
| Cash and cash equivalents |       | $                       | 26,839     |                        | $          | 41,851 |   |
| Restricted cash           |       | $                       | 3,909      |                        | $          | 24,256 |   |
| Working capital (deficit) |       | $                       | (24,534    | )                           | $          | (18,136 | ) |
| Working capital ratio     |       | 0.64                    |       | 0.82                        |       |

 

During the third and fourth quarters of 2004, wereached agreements with certain landlords to extinguish approximately $155.0million of future real estate obligations. We made related cash payments of$20.7 million in 2004 and additional cash payments of $22.8 million in thefirst half of 2005.  In addition, weissued to one of the landlords a five-year warrant to purchase approximately700,000 shares of our common stock at an exercise price of $5.00 per share,exercisable beginning in August 2005. As a component of the settlement of one of the previous leases, we havea residual 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 of $6.6million as of June 30, 2005.

 

In November 2004, we entered into adefinitive agreement for the private placement of up to $20.0 million ofconvertible notes to five institutional investors.  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 monthly principal repayment obligationwill increase to $2.1 million beginning in September 2005 due to our cashbalances falling below certain defined levels as of June 30, 2005.  This increase has the effect of requiring usto repay the principal amount in nine installments through April 2006.  Payments of principal and interest may bemade in either cash or, upon satisfaction of various conditions set forth inthe notes, shares of our common stock. However, we anticipate having to usecash to satisfy all of our payment obligations under the notes.

 

On May 9, 2005, by agreement between us and the holders of amajority of the notes, one of the agreements governing the notes was amended toextend by 120 days the time within which we are required to obtaineffectiveness of a registration statement covering the resale of the shares ofour common stock that may be issued in respect of the notes.  Unexpected delays in obtaining effectivenessof the SEC registration statement relating to the notes are causing us to incuradditional penalty payments to the note holders at a rate of $160,000 per monthand to make principal, interest and penalty payments in cash rather than commonstock.

 

The convertible notes allow the noteholders to require redemption ofthe notes upon the occurrence of various events of default, such as : 1) thetermination of trading of our common stock on the Nasdaq National Market, 2)specified change of control transactions, or 3) the failure of the registrationstatement required to be filed pursuant to the Registration Rights Agreement tobe declared effective by the SEC on or before May 9, 2005.  On May 9, 2005, we and the noteholdersamended the Registration Rights Agreement to extend the deadline to September 6,2005 although as described above, we are making penalty payments to thenoteholders at a rate of $160,000 per month, which payments will continue untilsuch time as the required registration statement is declared effective by theSEC.  Some of the events of defaultsinclude matters over which we may have some, little or no control.  Many other events of default are described inthe agreements we executed when we issued the convertible notes.  In such a situation, if an event of defaultoccurs, we may be required to redeem all or part of the convertible notesincluding payment of applicable interest and penalties. These payments must bemade within 5 business days of receipt of a notice of redemption. We may haveinsufficient funds to redeem the convertible notes when and if required, andany such redemption, if made, could leave us with little or no working capitalfor our business. We have not established a sinking fund for payment of ouroutstanding convertible notes, nor do we anticipate doing so. Under anagreement we entered into with certain of the noteholders on July 25,2005, the noteholders have consented to the completion of the Merger, subjectto our performance of our payment and other obligations under the agreement.

 

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On June 29, 2005, our Board of Directorsapproved a business restructuring plan, primarily consisting of headcountreductions, designed to adjust expenses to a level more consistent withanticipated revenues.  The reduction of approximately 63 employees, or 22%of our workforce, is expected to be completed by the end of the third quarterof 2005.  We expect that it will incurpre-tax severance costs of approximately $1.3 million, of which approximately$665,000 was incurred in the second quarter of 2005 and $600,000 is expected tobe incurred in the third quarter of 2005.

 

We have various credit facilities with a commerciallender which include term debt in the form of notes payable, a revolving lineof credit and an equipment line of credit. In June 2005, we entered into arenewed and amended loan and security agreement with the lender. The agreementrequires us to maintain certain levels of unrestricted cash and cashequivalents (excluding equity investments), and to maintain certain levels ondeposit with the lender. At June 30, 2005 and December 31, 2004,$15.0 million and $20.0 million, respectively, was outstanding under the lineof credit. Borrowings under the line of credit are collateralized by all of ourassets and bear interest at the bank’s prime rate. Interest is due monthly andprincipal is due at the expiration in February 2006.  The requirements we must meet in order tocontinue to access the credit facility became more stringent under the renewedand amended agreement, and we expect that, beginning in the third quarter of2005 and for the foreseeable future, we will be unable to meet the newrequirements.

 

Commitments totaling $3.9 million and $24.3 millionin the form of standby letters of credit were issued on our behalf fromfinancial institutions as of June 30, 2005 and December 31, 2004,respectively, primarily infavorof our various landlords to secure obligations under our facility leases. Accordingly, $3.9 million and $24.3 million have been presented asrestricted cash in the accompanying Condensed Consolidated Balance Sheets at June 30,2005 and December 31, 2004, respectively.

 

Our exposure to market risk for changes in interestrates relates primarily to our investment portfolio. We had no derivativefinancial instruments as of June 30, 2005 and December 31, 2004. Weplace our investments in instruments that meet high credit quality standardsand the amount of credit exposure to any one issue, issuer and type ofinstrument 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 six months ended June 30,2005 and 2004.

 

*Cash Provided By (Used For) Operating Activities*

 

Cash used for operating activities was $30.2 millionfor the six months ended June 30, 2005. The primary reason for the net cash used by operating activities was dueto the payment of accrued liabilities related to restructuring of $22.2million.  Other significant adjustmentsto reconcile net income to cash used for operating activities included thenon-cash gain on sale of cost method investments of $1.1 million, the non-cashrelease of income tax reserves of $2.0 million, and the gain on revaluation ofwarrants to fair value of $3.5 million. Cash used for operating activities was $9.8 million for the six monthsended June 30, 2004. This use of cash was primarily due to the net loss of$2.4 million and decreases in accrued expenses and non-current liabilities,primarily related to excess facilities costs.  Partially offsetting theseuses of cash were $2.3 million of non-cash depreciation and amortizationexpense and a decrease in accounts receivable of $3.4 million due to reducedrevenue.

 

*Cash Provided By (Used For) Investing Activities*

 

Cash provided by investing activities was$21.0 million for the six months ended June 30, 2005 and wasprimarily due to transfers from restricted cash of $19.7 million and proceedsfrom dividends of $1.1 million. Cash used by investing activities was$2.9 million for the six months ended June 30, 2004 and was primarilydue to transfers to restricted cash.  Capital expenditures were $108,000and $318,000 during the six months ended June 30, 2005 and 2004,respectively.  Our capital expenditures consisted of purchases ofoperating resources to manage our operations and consisted primarily ofcomputer hardware and software.

 

*Cash Provided By (Used For) Financing Activities*

 

Cash used for financing activities was $6.0 millionfor the six months ended June 30, 2005, consisting of $6.5 million usedfor repayment of borrowings, net of new borrowings, offset by $522,000 fundsreceived for the issuance of common stock.  Cash provided by financing activitieswas $769,000 for the six months ended June 30, 2004, consisting of $1.2million in proceeds from the issuance of common stock and $416,000 forrepayment of borrowings, net of new borrowings.

 

*Leases and Other Contractual Obligations*

 

We lease our headquarters facility and our otherfacilities under non-cancelable operating lease agreements

 

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expiring through the year2010. Under the terms of the agreements, we are required to pay lease costs,property taxes, insurance and normal maintenance costs.

 

We expect to incur significant operating expensesfor the foreseeable future in order to execute our business plan. A summary oftotal future minimum lease payments as of June 30, 2005, undernoncancelable operating lease agreements, is as follows (in millions):

 
| **Years Ending December 31,** | ** ** | **Total future  minimum  payments** | ** ** |
|------------------------------------|------------|-------------------------------------|------------|
| 2005                               |       | $                                   | 2.4        |   |
| 2006                               |       | 3.1                                 |       |
| 2007                               |       | 4.2                                 |       |
| 2008                               |       | 2.1                                 |       |
| 2009 and thereafter                |       | 6.3                                 |       |
|                               |       |                                |       |
| Total minimum lease payments       |       | $                                   | 18.1       |   |

 

See Note 6 of Notes to Condensed ConsolidatedFinancial Statements for information about additional payments due underpreviously negotiated lease buyout transactions.

 

The following table summarizes our letters of creditand the effect such letters of credit could have on our liquidity and cashflows in future periods if the letters of credit were drawn upon (in millions):

 
| Less than 1 year |   | $      | 1.9    |   |
|------------------|--------|--------|--------|--------|
| 1-3 years        |   | 1.0    |   |
| 4-5 years        |   | — |   |
| Over 5 years     |   | 1.0    |   |
| Total            |   | $      | 3.9    |   |

 

Restricted cash represents collateral for theseletters of credit.

 

## *FactorsThat May Affect Future Operating Results*

## * *

Due to a combination of factors, we currentlyanticipate that our available cash resources will likely be insufficient tomeet our payment obligations by some point in the fourth quarter of 2005. Thefactors contributing to this belief include lower-than-anticipated revenues in2005, costs associated with the Merger and cash payment requirements under ouroutstanding convertible notes. If our cash resources become insufficient to meetour obligations as they become due, our business and future prospects would beseriously harmed and our ability to operate the business and complete themerger could be jeopardized. The Merger is subject to numerous conditions,including the approval of our stockholders, that could considerably delay oreven prevent its completion, and there is no assurance that we will be able toobtain additional financing under our existing bank credit facility orotherwise. The requirements we must meet in order to obtain financing under ourbank credit facility became more stringent in July 2005, and we presentlyanticipate being unable to meet the new requirements for the foreseeablefuture. In order to obtain financing from any other source, we would berequired to obtain the approval of both the Vector Capital portfolio companywith which we have agreed to merge and the holders of our outstandingconvertible notes.

 

If the Merger is not consummated, we will be required to raiseadditional funds and we may be unable to do so on terms acceptable to us or atall. Our ability to obtain debt or equity funding would depend on a number offactors, including restrictive covenants contained in our current convertiblenote agreement and credit facilities, market conditions, our operatingperformance and investor interest. If adequate additional funding were notavailable to us, we would have insufficient working capital to continueexecuting our current business plan. Even if additional funding were availableto us, 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.

 

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The convertible notes allow the noteholders to require redemption ofthe notes upon the occurrence of various events of default, such as : 1) thetermination of trading of our common stock on the Nasdaq National Market, 2)specified change of control transactions, or 3) the failure of the registrationstatement required to be filed pursuant to the Registration Rights Agreement tobe declared effective by the SEC on or before May 9, 2005.  On May 9, 2005, we and the noteholdersamended the Registration Rights Agreement to extend the deadline to September 6,2005 although as described above, we are making penalty payments to thenoteholders at a rate of $160,000 per month, which payments will continue untilsuch time as the required registration statement is declared effective by theSEC.  Some of the events of defaultsinclude matters over which we may have some, little or no control.  Many other events of default are described inthe agreements we executed when we issued the convertible notes.  In such a situation, if an event of defaultoccurs, we may be required to redeem all or part of the convertible notesincluding payment of applicable interest and penalties. These payments must bemade within 5 business days of receipt of a notice of redemption. We may haveinsufficient funds to redeem the convertible notes when and if required, and anysuch redemption, if made, could leave us with little or no working capital forour business. We have not established a sinking fund for payment of ouroutstanding convertible notes, nor do we anticipate doing so. Under anagreement we entered into with certain of the noteholders on July 25,2005, the noteholders have consented to the completion of the Merger, subjectto our performance of our payment and other obligations under the agreement.

 

Our net future cash flows will depend heavily on thelevel of future revenues, the amount of cash we are required to use for paymentunder the notes, our ability to restructure operations successfully and ourability to manage infrastructure costs.

 

On July 28,2005, representatives of ours 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 our directors andBroadVision, Inc. as defendants, and each alleges that the directordefendants violated their fiduciary duties to our stockholders by, among otherthings, failing to maximize our value and ignoring, or failing to adequatelyprotect against, certain purported conflicts of interest. Each complaint seeks,among other things, injunctive relief and damages in an unspecified amount. Weanticipate that similar actions may be filed in the future against some or allof the same defendants. This litigation, as well as any other securitiesclass-action litigation that might be initiated against us, could result insubstantial costs and a diversion of management’s attention and resources.

 

We may experience significant fluctuations inquarterly operating results that may be caused by many factors including, butnot limited to, those discussed below and herein, as set out in Items 7 and 7Ain our annual report on Form 10-K for the year ended December 31,2004 and elsewhere therein and as disclosed in other documents filed with theSecurities and Exchange Commission.

 

Significant fluctuations in future quarterlyoperating results may be caused by many factors including, among others, thetiming of introductions or enhancements of products and services by us or ourcompetitors, market acceptance of new products, the mix of our products sold,changes in pricing policies by us or our competitors, our ability to retaincustomers, changes in our sales incentive plans, budgeting cycles of ourcustomers, customer order deferrals in anticipation of new products orenhancements by us or our competitors, nonrenewal of maintenance agreements,product life cycles, changes in strategy, seasonal trends, the mix ofdistribution channels through which our products are sold, the mix of internationaland domestic sales, the rate at which new sales people become productive,changes in the level of operating expenses to support projected growth andgeneral economic conditions. We anticipate that a significant portion of ourrevenues will be derived from a limited number of orders, and the timing ofreceipt and fulfillment of any such orders is expected to cause materialfluctuations in our operating results, particularly on a quarterly basis. Dueto the foregoing factors, quarterly revenues and operating results aredifficult to forecast, and we believe that period-to-period comparisons of ouroperating results will not necessarily be meaningful and should not be reliedupon as any indication of future performance. It is likely that our futurequarterly operating results from time to time will not meet the expectations ofmarket analysts or investors, which may have an adverse effect on the price ofour common stock.

 

We are continuing efforts to reduce and control ourexpense structure. We believe strict cost containment and expense reductionsare essential to achieving positive cash flow and profitability. A number offactors could preclude us from successfully bringing costs and expenses in linewith our revenues, including unplanned uses of 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 our revolving credit facilityduring the June 2005. The facility is secured by substantially all of ourowned assets. The primary financial covenant under the facility obligates us tomaintain certain levels of available cash, cash equivalents, short-terminvestments and long-term investments (excluding equity investments). Fallingbelow such levels would be an event of default for which the bank may, amongother things, accelerate the payment of the facility.  As of July 1, 2005, the requirements wemust meet in order to continue to access the credit facility became morestringent under the renewed and amended agreement, and we expect that,beginning in the third

 

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quarter of 2005 and for theforeseeable future, we will be unable to meet the new requirements.

 

Our success depends largely on the skills,experience and performance of key personnel. If we lose one or more keypersonnel, our business could be harmed. Our future success depends on ourability to continue attracting and retaining highly skilled personnel. We maynot be successful in attracting, assimilating and retaining qualified personnelin 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 and uncertainties relate to therapidly evolving nature of the markets in which we operate. These relatedmarket risks include, among other things, the evolution of the online commercemarket, the dependence of online commerce on the development of the Internetand its related infrastructure, the uncertainty pertaining to widespreadadoption of online commerce and the risk of government regulation of theInternet. Other risks and uncertainties relate to our ability to, among otherthings, successfully implement our marketing strategies, respond to competitivedevelopments, continue to develop and upgrade our products and technologiesmore rapidly than our competitors, and commercialize our products and servicesby incorporating these enhanced technologies. There can be no assurance that wewill succeed in addressing any or all of these risks.

 

There has been a general downturn in the UnitesStates of America and global economy.  If the economic environmentcontinues to decline or if the current global slowdown worsens or becomesprolonged, our future results may be significantly impacted. We believe thatthe current economic decline has increased the average length of our salescycle and our operating results could suffer and our stock price could declineif we do not achieve the level of revenues we expect.  Financialcomparisons discussed herein may not be indicative of future performance.

 

**Item 3.  Quantitative and Qualitative Disclosures AboutMarket Risk**

 

Our exposure to market risk for changes in interestrates relates primarily to our investment portfolio. We had no derivativefinancial instruments as of June 30, 2005 and December 31, 2004. Weplace our investments in instruments that meet high credit quality standardsand the amount of credit exposure to any one issue, issuer and type ofinstrument 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 June 30, 2005and 2004.

 

During the three months ended June 30,2005 we drew down $15.0 million on our revolving line of credit.  Interestis payable monthly at the bank’s prime rate with a floor minimum of 4.25% (6.0%annually as of June 30, 2005) and principal is due in full in February 2006. Additionally, we have two outstanding term loans and an equipment line ofcredit as of June 30, 2005.  Interest on those loans are at the bank’sprime rate (6.0% as of June 30, 2005) and prime rate plus 1.25%.

 

***Cash and Cash Equivalents***

 

We consider all debt and equity securities withmaturities of three months or less at the date of purchase to be cashequivalents. Our short-term investments consist of debt and equity securitiesthat are classified as available-for-sale. Our debt securities are carried atfair value with related unrealized gains or losses reported as othercomprehensive income (loss), net of tax.

 

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

 
| ** **                        | ** ** | **Fair value** | ** ** |
|-----------------------------------|------------|----------------|------------|
| Cash and certificates of deposits |       | $              | 27,263     |   |
| Money market                      |       | 3,485          |       |
| Total cash and equivalents        |       | $              | 30,748     |   |

 

Included in the table above in cash and cash equivalentsare $2.0 million of non-current restricted cash.

 

Our cash and cash equivalents, at cost, whichapproximates fair value, consisted of the following as of December 31,2004 (in thousands):

 

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

 

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

 

***Concentrations of Credit Risk***

 

Financial assets that potentially subject us tosignificant concentrations of credit risk consist principally of cash, cashequivalents, and trade accounts receivable. We maintain our cash and cashequivalents with two separate financial institutions. We market and sell ourproducts throughout the world and perform ongoing credit evaluations of ourcustomers. We maintain reserves for potential credit losses. For the three andsix months ended June 30, 2005, no one customer accounted for more than10% of total revenue or accounts receivable.

 

***Fair Value of Financial Instruments***

 

Our financial instruments consist of cashequivalents, accounts receivable, accounts payable and debt. We do not have anyderivative financial instruments. We believe the reported carrying amounts ofits financial instruments approximates fair value, based upon the shortmaturity of cash equivalents, accounts receivable and payable, and based on thecurrent rates available to it on similar debt issues.

 

***Foreign Currency***

 

We license our products and maintainsignificant operations in foreign countries. Fluctuations in the value offoreign currencies, principally the Euro, relative to the United States dollarhave impacted our operating results in the past and may do so in the future. Weexpect that international license, maintenance and consulting revenues willcontinue to account for a significant portion of our total revenues in thefuture. We pay the expenses of our international operations in local currenciesand do not currently engage in hedging transactions with respect to suchobligations.

 

***Equity Investments***

 

Our equity investments consist of investments inpublic and non-public companies that are accounted for under the cost method ofaccounting. Equity investments are accounted for under the cost method ofaccounting when we have a minority interest and do not have the ability toexercise significant influence. These investments are classified as availablefor sale and are carried at fair value when readily determinable market valuesexist or at cost when such market values do not exist. Adjustments to fairvalue are recorded as a component of other comprehensive income unless theinvestments are considered permanently impaired in which case the adjustment isrecorded as a component of other income (expense), net in the condensedconsolidated statement of operations.

 

We had no long-term equity investments in public andnon-public companies as of June 30, 2005. There were not any “other thantemporary write-down” during the three and six months ended June 30, 2005related to long-term equity investments.

 

**ITEM 4.  Controls and Procedures**

 

Our Chief Executive Officer and our Chief FinancialOfficer are responsible for establishing and maintaining “disclosure controlsand procedures” (as defined in the rules promulgated under the SecuritiesExchange Act of 1934, as amended) for our company. Based on their evaluation ofour disclosure controls and procedures (as defined in the rules promulgatedunder the Securities Exchange Act of 1934), our Chief Executive Officer and ourChief Financial Officer concluded that our disclosure controls and procedureswere effective as of June 30, 2005, the end of the period covered by thisreport.

 

***Changes in Internal Control overFinancial Reporting***

 

Wereported three material weaknesses as of December 31, 2004 in our annualreport on Form 10-K.  Duringthe six months ended June 2005, in part to remediate those weaknesses, weimplemented the following changes in our internal control over financial reportingthat have materially affected, or are reasonably likely to materially affect,our internal control over financial reporting. We:

 

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•                  reviewed with senior management and the auditcommittee of its board of directors the issues which led to the three materialweaknesses;

 

•                  made significant enhancements to accountreconciliations to provide more thorough account analyses;

 

•                  established clear responsibilities among ouraccounting personnel and increased their formal interaction and coordination;

 

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

 

•                  developed a detailed database of worldwidemaintenance revenues by contract and developed key reports from that data. Thereports have been designed to detect errors or omissions related to keymaintenance data. Further, we have trained the revenue accounting team on howto carefully analyze the reports to ensure that inaccuracies are detected andcorrected.

 

Webelieve that the corrective steps taken above have sufficiently remediated thesematerial weaknesses.  However, the marketfor skilled accounting personnel is competitive, and due to the restructuringefforts as of June 30, 2005 and the significant recent events, we may havedifficulty in retaining our staff.  Ourinability to staff the department with competent personnel with sufficienttraining may affect our internal controls over financial reporting to the extentthat we may not be able to prevent or detect material misstatements.

 

***Limitations on the Effectiveness ofControls***

 

Our management, including our Chief ExecutiveOfficer and Chief Financial Officer, does not expect that our disclosurecontrols and procedures or our internal controls will prevent all error andfraud. A control system, no matter how well conceived and operated, can provideonly reasonable, not absolute, assurance that the objectives of the controlsystem are met. Further, the design of a control system must reflect the factthat there are resource constraints, and the benefits of controls must beconsidered relative to their costs. Because of the inherent limitations in allcontrol systems, no evaluation of controls can provide absolute assurance thatall control issues and instances of fraud, if any, within the company have beendetected. These inherent limitations include the realities that judgments indecision-making can be faulty, and that breakdowns can occur because of simpleerror or mistake. Additionally, controls can be circumvented by the individualacts of some persons, by collusion of two or more people, or by managementoverride of the controls. The design of any system of controls also is based inpart upon certain assumptions about the likelihood of future events, and therecan be no assurance that any design will succeed in achieving its stated goalsunder all potential future conditions; over time, controls may becomeinadequate because of changes in conditions, or the degree of compliance withthe policies or procedures may deteriorate. Because of the inherent limitationsin a cost-effective control system, misstatements due to error or fraud mayoccur and not be detected. Our disclosure controls and procedures are designedto provide 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 inthe Superior Court of the State of California, County of Los Angeles, namingthe Company as a defendant. The complaint alleged that the Company was liablefor unlawful detainer of premises leased from the plaintiff. The plaintiffthereafter filed a First Amended Complaint alleging that the Company no longerheld possession of the premises but was in breach of the lease. In February 2005,MetLife and the Company reached agreement and executed documents regarding asettlement of the pending lawsuit under which the Company will pay MetLife anaggregate of $1.9 million in consideration for termination of the lease,dismissal of the lawsuit and in full settlement of approximately $3.1 millionof past and future lease obligations. The first of three installment paymentswas made in February 2005, the second was made in May 2005 and thethird is due in September 2005.

 

On July 28, 2005, representatives of theCompany received copies of four complaints relating to purported class actionlawsuits, each filed by an alleged holder of shares of our common stock andeach filed in California Superior Court for the county of San Mateo. Thesecomplaints are captioned *Gary Goberville,et al., vs. Pehong Chen, et al.,* Civ 448490, *Cookie Schwartz, et al., vs. BroadVision, Inc.,et al*, Civ 448516, *LeonKotovich, 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 and

 

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BroadVision, Inc.as defendants, and each alleges that the director defendants violated theirfiduciary duties to stockholders by, among other things, failing to maximizethe Company’s value and ignoring, or failing to adequately protect against,certain purported conflicts of interest. Each complaint seeks, among otherthings, injunctive relief and damages in an unspecified amount. The Companyanticipates that similar actions may be filed in the future against some or allof the same defendants.

 

The Company is subject to various other claims andlegal actions arising in the ordinary course of business. In the opinion ofmanagement, after consultation with legal counsel, the Company has adequatedefenses for each of the claims and actions, and believes that their ultimatedisposition is not expected to have a material effect on our business,financial condition or results of operations. Although management currentlybelieves that the outcome of other outstanding legal proceedings, claims andlitigation involving us will not have a material adverse effect on ourbusiness, results of operations or financial condition, litigation isinherently uncertain, and there can be no assurance that existing or futurelitigation will not have a material adverse effect on our business, results ofoperations or financial condition.

 

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

Not applicable.

 

**Item 3. Defaults Upon Senior Securities**

Not applicable.

 

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

 

(a)           The Annual Meeting of Stockholders of theCompany was held on May 24, 2005.

(b)           Pehong Chen, David L. Anderson, James D.Dixon, Robert Lee, Roderick C. McGeary,  and T. Michael Nevens wereelected as Directors.

(c)           The matters voted upon and the voting ofstockholders with respect thereto are as follows:

 

i.  Election of Directors

 
| ** **           | ** ** | **For**    | ** ** | **Withheld** | ** ** |
|----------------------|------------|------------|------------|--------------|------------|
| Pehong  Chen         |       | 18,073,844 |       | 500,957      |       |
| David  L. Anderson   |       | 18,100,129 |       | 474,672      |       |
| James  D. Dixon      |       | 18,130,047 |       | 444,754      |       |
| Robert  Lee          |       | 18,104,607 |       | 470,194      |       |
| Roderick  C. McGeary |       | 18,123,388 |       | 451,413      |       |
| T.  Michael Nevens   |       | 18,130,531 |       | 444,270      |       |

 

ii.                                       To approve the issuance of shares of commonstock (i) upon the conversion of convertible notes and the exercise ofwarrants issued and issuable pursuant to a private financing completed in November 2004and (ii) in satisfaction of certain principal and interest paymentobligations under such convertible notes. 

 
| For:     |   | 10,009,779 |   | Against:    |   | 541,103   |
|----------|--------|------------|--------|-------------|--------|-----------|
|     |   |       |   |        |   |      |
| Abstain: |   | 144,441    |   | Not  Voted: |   | 7,879,479 |

 

iii.                                    To approve an amendment to the Company’sAmended and Restated Certificate of Incorporation to reduce (i) the totalauthorized number of shares from 2,010,000,000 to 223,333,334 shares, (ii) theauthorized number of shares of common stock from 2,000,000,000 to 222,222,223and (iii) the authorized number of shares of preferred stock from10,000,000 to 1,111,112.

 
| For:     |   | 10,102,068 |   | Against:    |   | 484,308   |
|----------|--------|------------|--------|-------------|--------|-----------|
|     |   |       |   |        |   |      |
| Abstain: |   | 108,947    |   | Not  Voted: |   | 7,879,479 |

 

This proposal required theapproval by stockholders holding a majority of the outstanding shares of CommonStock.  Shares indicated as Not Voted represent shares held in street nameby banks and brokerage firms that were not voted by the firms because they hadnot received direction from the beneficial holders on how to vote theshares.  On this matter, brokerage firms do not have discretion to votethe shares absent direction for the beneficial owners.  As a result of theshares not voted, the proposal failed.

 

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iv.  To ratify theselection by the Audit Committee of the Board of Directors of BDO Seidman, LLPas independent auditors of the Company for its fiscal year ending December 31,2005.

 
| For:     |   | 18,127,244 |   | Against: |   | 316,316 |
|----------|--------|------------|--------|----------|--------|---------|
|     |   |       |   |     |   |    |
| Abstain: |   | 131,242    |   |     |   |    |

 

**Item 5. Other Information**

Not applicable.

 

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**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                                                                                                                                                                 |
| 10.1 (4) |       | Ninth  Amendment to the Amended and Restated Loan and Security Agreement between the  Company and Silicon Valley Bank, dated June 28, 2005.                                                                   |
| 10.2          |       | Form of  Participation Agreement executed pursuant to the BroadVision, Inc.  Change in Control Severance Benefit Plan by Eligible Employees, including  Pehong Chen, William Meyer, and Alex Kormushoff. |
| 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 by reference to the Company’s Registration Statement on Form S-1filed on April 19, 1996 as amended by Amendment No. 1 filed on May 9,1996, Amendment No. 2 filed on May 29, 1996 and Amendment No. 3filed on June 17, 1996.

 

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

 

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

 

(4)          Incorporatedby reference to the Company’s current report on Form 8-K filed on July 5,2005.

 

**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 
|                       |   | **BROADVISION, INC.**                                                                        |
|----------------------------|--------|----------------------------------------------------------------------------------------------|
|                       |   |                                                                                         |
| Date:  August 9, 2005 | By:    | /s/  Pehong Chen                                                                             |   |
|                       |   | Pehong  Chen                                                                                 |
|                       |   | Chairman  of the Board, President and Chief Executive Officer (Principal  Executive Officer) |
|                       |   |
| Date:  August 9, 2005 | By:    | /s/  William E. Meyer                                                                        |   |
|                       |   | William  E. Meyer                                                                            |
|                            |        |                                                                                              |  |  |

 

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