**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,DC  20549**

 

----

 

**FORM 10-Q**

 

----

 
| **(Mark One)**                           |
|------------------------------------------|
|                                     |   |   |
| **ý**                               |   | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                     |   |   |
| **For the Quarter ended March 31, 2004** |
|                                     |   |   |
| **OR**                                   |
|                                     |   |   |
| **o**                                    |   | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                     |   |   |
| **0-28252**                              |
| **(Commission File Number)**             |

 

----

 

**BROADVISION,INC.**

(Exact name of registrant as specified in itscharter)

 
| **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) has filed all reportsrequired to be filed by Section 13 or 15 (d) of the Securities ExchangeAct of 1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes   ýNo   o

 

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

 

As of May 3, 2004 there were 33,468,632 shares of the Registrant’sCommon Stock issued and outstanding.

 

 

----

 

**BROADVISION, INC. AND SUBSIDIARIESFORM 10-QQuarter Ended March 31, 2004**

 

**TABLEOF CONTENTS**

** **
| **PART I.**    |   | **FINANCIAL INFORMATION**                                                                                                    |   |
|----------------|--------|------------------------------------------------------------------------------------------------------------------------------|--------|
| Item 1.        |   | Financial Statements                                                                                                         |   |
|           |   | Condensed Consolidated Balance Sheets-March  31, 2004 and December 31, 2003                                             |   |
|           |   | Condensed Consolidated Statements of  Operations and Comprehensive Income (Loss)-Three months ended March 31, 2004  and 2003 |   |
|           |   | Condensed Consolidated Statements of Cash  Flows-Three months ended March 31, 2004 and 2003                                  |   |
|           |   | 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

----

 

**PART I. FINANCIAL INFORMATION**

**Item 1. Financial Statements**

 

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

 
|                                                                                                                                                                                       |   | **March 31,2004** | ** ** | **December 31,  2003** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|------------|-----------------------------|------------|
|                                                                                                                                                                                       |   | **(unaudited)**   | ** ** |                        | ** ** |
| **ASSETS**                                                                                                                                                                                 |   |              |       |                        |       |
|                                                                                                                                                                                       |   |              |       |                        |       |
| Cash and cash equivalents                                                                                                                                                                  |   | $                 | 76,480     |                        | $          | 78,776 |   |
| Accounts receivable, less allowance for  doubtful accounts and reserves of   $2,422 as of March 31, 2004 and $3,022 as of December 31, 2003                                           |   | 14,294            |       | 15,380                      |       |
| Prepaids and other                                                                                                                                                                         |   | 4,167             |       | 5,346                       |       |
|                                                                                                                                                                                       |   |              |       |                        |       |
| Total current assets                                                                                                                                                                       |   | 94,941            |       | 99,502                      |       |
|                                                                                                                                                                                       |   |              |       |                        |       |
| Property and equipment, net                                                                                                                                                                |   | 14,037            |       | 15,400                      |       |
| Restricted cash                                                                                                                                                                            |   | 18,784            |       | 19,827                      |       |
| Equity investments                                                                                                                                                                         |   | 1,665             |       | 1,565                       |       |
| Goodwill                                                                                                                                                                                   |   | 53,421            |       | 53,421                      |       |
| Other intangibles, net                                                                                                                                                                     |   | 3,013             |       | 3,013                       |       |
| Other assets                                                                                                                                                                               |   | 2,327             |       | 2,354                       |       |
|                                                                                                                                                                                       |   |              |       |                        |       |
| Total assets                                                                                                                                                                               |   | $                 | 188,188    |                        | $          | 195,082 |   |
|                                                                                                                                                                                       |   |              |       |                        |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                              |   |              |       |                        |       |
|                                                                                                                                                                                       |   |              |       |                        |       |
| Bank borrowings and current portion of  long-term debt                                                                                                                                     |   | $                 | 28,003     |                        | $          | 27,977 |   |
| Accounts payable                                                                                                                                                                           |   | 7,632             |       | 9,186                       |       |
| Accrued expenses                                                                                                                                                                           |   | 33,274            |       | 34,761                      |       |
| Unearned revenue                                                                                                                                                                           |   | 7,258             |       | 7,596                       |       |
| Deferred maintenance                                                                                                                                                                       |   | 19,668            |       | 19,234                      |       |
|                                                                                                                                                                                       |   |              |       |                        |       |
| Total current liabilities                                                                                                                                                                  |   | 95,835            |       | 98,754                      |       |
|                                                                                                                                                                                       |   |              |       |                        |       |
| Long-term debt, net of current portion                                                                                                                                                     |   | 776               |       | 969                         |       |
| Other noncurrent liabilities                                                                                                                                                               |   | 83,675            |       | 87,409                      |       |
|                                                                                                                                                                                       |   |              |       |                        |       |
| Total liabilities                                                                                                                                                                          |   | 180,286           |       | 187,132                     |       |
|                                                                                                                                                                                       |   |              |       |                        |       |
| 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; 33,462 shares issued and outstanding as of March 31, 2004  and 33,198 shares issued and outstanding as of December 31, 2003 |   | 3                 |       | 3                           |       |
| Additional paid-in capital                                                                                                                                                                 |   | 1,213,490         |       | 1,212,671                   |       |
| Accumulated other comprehensive loss, net  of tax                                                                                                                                          |   | (49               | )          | (49                         | )          |
| Accumulated deficit                                                                                                                                                                        |   | (1,205,542        | )          | (1,204,675                  | )          |
| Total stockholders’ equity                                                                                                                                                            |   | 7,902             |       | 7,950                       |       |
|                                                                                                                                                                                       |   |              |       |                        |       |
| Total liabilities and stockholders’ equity                                                                                                                                            |   | $                 | 188,188    |                        | $          | 195,082 |   |

 

*See Accompanying Notes to CondensedConsolidated Financial Statements*

 

3

----

 

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

 
|                                                                               |   | **Three  Months Ended  March 31,** |   |
|------------------------------------------------------------------------------------|--------|------------------------------------|--------|
|                                                                               |   | **2004**                           |   | **2003** |   |
|                                                                               |   |                               |   |   |   |
| **Revenues:**                                                                      |   |                               |   |   |   |
| Software licenses                                                                  |   | $                                  | 7,840  |   | $ | 7,975 |   |
| Services                                                                           |   | 13,049                             |   | 16,480 |   |
| Total revenues                                                                     |   | 20,889                             |   | 24,455 |   |
|                                                                               |   |                               |   |   |   |
| **Cost of revenues:**                                                              |   |                               |   |   |   |
| Cost of software licenses                                                          |   | 578                                |   | 388 |   |
| Cost of services                                                                   |   | 6,277                              |   | 6,558 |   |
| Total cost of revenues                                                             |   | 6,855                              |   | 6,946 |   |
|                                                                               |   |                               |   |   |   |
| Gross profit                                                                       |   | 14,034                             |   | 17,509 |   |
|                                                                               |   |                               |   |   |   |
| **Operating expenses:**                                                            |   |                               |   |   |   |
| Research and development                                                           |   | 4,888                              |   | 6,151 |   |
| Sales and marketing                                                                |   | 6,866                              |   | 6,832 |   |
| General and administrative                                                         |   | 2,417                              |   | 2,288 |   |
| Other intangible amortization                                                      |   | —                             |   | 887 |   |
| Restructuring charge                                                               |   | 570                                |   | 1,035 |   |
| Total operating expenses                                                           |   | 14,741                             |   | 17,193 |   |
|                                                                               |   |                               |   |   |   |
| Operating income (loss)                                                            |   | (707                               | )      | 316 |   |
|                                                                               |   |                               |   |   |   |
| Interest income, net                                                               |   | 109                                |   | 434 |   |
| Other (expense) income, net                                                        |   | (133                               | )      | 642 |   |
|                                                                               |   |                               |   |   |   |
| Income (loss) before provision for income  taxes                                   |   | (731                               | )      | 1,392 |   |
|                                                                               |   |                               |   |   |   |
| Benefit (provision) for income taxes                                               |   | (136                               | )      | 55 |   |
|                                                                               |   |                               |   |   |   |
| Net income (loss)                                                                  |   | $                                  | (867   | ) | $ | 1,337 |   |
|                                                                               |   |                               |   |   |   |
| Basic income (loss) per share                                                      |   | $                                  | (0.03  | ) | $ | 0.04 |   |
| Diluted income (loss) per share                                                    |   | (0.03                              | )      | 0.04 |   |
| **Shares used in computing:**                                                      |   |                               |   |   |   |
| Basic shares                                                                       |   | 33,300                             |   | 32,447 |   |
| Diluted shares                                                                     |   | 33,300                             |   | 32,727 |   |
|                                                                               |   |                               |   |   |   |
| **Comprehensive income (loss):**                                                   |   |                               |   |   |   |
| Net income (loss)                                                                  |   | $                                  | (867   | ) | $ | 1,337 |   |
| Other comprehensive gain (loss), net of  tax: Unrealized investment gains (losses) |   | —                             |   | (33 | ) |
| Total comprehensive income (loss)                                                  |   | $                                  | (867   | ) | $ | 1,304 |   |

 

*See Accompanying Notes to CondensedConsolidated Financial Statements*

 

4

----

 

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

 
|                                                                                                 |   | **Three  Months Ended March 31,** |    |
|------------------------------------------------------------------------------------------------------|--------|-----------------------------------|---------|
|                                                                                                 |   | **2004**                          |    | **2003** | ** ** |
| **Cash flows from operating activities:**                                                            |   |                              |    |   |   |
| Net income (loss)                                                                                    |   | $                                 | (867    | ) | $ | 1,337 |   |
| Adjustments to reconcile net income (loss)  to net cash provided by (used for) operating activities: |   |                              |    |   |   |
| Depreciation and amortization                                                                        |   | 1,409                             |    | 3,444 |   |
| Credit for doubtful accounts and reserves                                                            |   | (600                              | )       | (488 | ) |
| Amortization of prepaid royalties                                                                    |   | 176                               |    | 358 |   |
| Loss on cost method investments                                                                      |   | 58                                |    | — |   |
| Amortization of other intangible assets                                                              |   | —                            |    | 887 |   |
| Stock-based compensation charge                                                                      |   | 15                                |    | 49 |   |
| Changes in operating assets and  liabilities:                                                        |   |                              |    |   |   |
| Accounts receivable                                                                                  |   | 1,686                             |    | 8,615 |   |
| Prepaids and other                                                                                   |   | 1,003                             |    | 3,100 |   |
| Accounts payable and accrued expenses                                                                |   | (3,040                            | )       | (8,709 | ) |
| Unearned revenue and deferred maintenance                                                            |   | 96                                |    | (7,200 | ) |
| Other noncurrent assets                                                                              |   | 68                                |    | 586 |   |
| Other noncurrent liabilities                                                                         |   | (3,735                            |  ) | (1,678 | ) |
| Net cash provided by (used for) operating  activities                                                |   | (3,731                            | )       | 301 |   |
|                                                                                                 |   |                              |    |   |   |
| **Cash flows from investing activities:**                                                            |   |                              |    |   |   |
| Purchase of property and equipment                                                                   |   | (144                              | )       | (132 | ) |
| Transfer from (to) restricted cash                                                                   |   | 1,042                             |    | (55 | ) |
| Purchase of long-term investments                                                                    |   | (100                              | )       | (2,729 | ) |
| Sales/maturity of long-term investments                                                              |   | —                            |    | 3,403 |   |
| Purchase of short-term investments                                                                   |   | —                            |    | (2,917 | ) |
| Sales/maturity of short-term investments                                                             |   | —                            |    | 23,698 |   |
| Net cash provided by investing activities                                                            |   | 798                               |    | 21,268 |   |
|                                                                                                 |   |                              |    |   |   |
| **Cash flows from financing activities:**                                                            |   |                              |    |   |   |
| Proceeds from issuance of common stock, net                                                          |   | 803                               |    | 264 |   |
| Proceeds from borrowings, net                                                                        |   | 78                                |    | — |   |
| Repayments of borrowings                                                                             |   | (244                              | )       | (244 | ) |
| Net cash provided by financing activities                                                            |   | 637                               |    | 20 |   |
|                                                                                                 |   |                              |    |   |   |
| Net increase (decrease) in cash and cash  equivalents                                                |   | (2,296)                           |    | 21,589 |   |
| Cash and cash equivalents at beginning of  period                                                    |   | 78,776                            |    | 77,386 |   |
| Cash and cash equivalents at end of period                                                           |   | $                                 | 76,480  |   | $ | 98,975 |   |
|                                                                                                 |   |                              |    |   |   |
| **Supplemental disclosures of cash flow  information:**                                              |   |                              |    |   |   |
| Cash paid for interest                                                                               |   | $                                 | 33      |   | $ | 19 |   |
| Cash paid for income taxes                                                                           |   | $                                 | 119     |   | $ | 87 |   |

 

*See Accompanying Notes to Condensed Consolidated Financial Statements*

 

5

----

 

**BROADVISION, INC. AND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

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

 

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

 

***Nature of Business***

 

BroadVision, Inc. (collectively with its subsidiaries, the“Company”) was incorporated in the state of Delaware on May 13, 1993 andhas been a publicly traded corporation since 1996. BroadVision develops,markets and supports self-service web applications that enable companies tounify their e-business infrastructure and conduct both interactions andtransactions with employees, partners and customers through a personalizedself-service model that increases revenues, reduces costs and improvesproductivity.

 

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

 

Theaccompanying consolidated financial statements include the accounts of theCompany and its whollyowned subsidiaries. All significant intercompanytransactions have been eliminated in consolidation.  In the Company’sopinion, the consolidated financial statements presented herein include allnecessary adjustments, consisting of normal recurring adjustments, to fairlystate the Company’s financial position, results of operations and cashflows for the periods indicated.  The preparation of consolidatedfinancial statements in conformity with generally accepted accountingprinciples in the United States of America requires management to make certainassumptions and estimates that affect reported amounts of assets andliabilities as of the date of the financial statements and the reported amountof revenues and expenses during the reporting period.  Actual resultscould differ from estimates.  The financial results and relatedinformation as of March 31, 2004 and for the three months ended March 31, 2004and 2003 are unaudited. The consolidated balance sheet at December 31, 2003 hasbeen derived from the audited consolidated financial statements as of that datebut does not necessarily reflect all of the informational disclosurespreviously reported in accordance with generally accepted accounting principlesin the United States of America.

 

The accompanying condensedconsolidated financial statements should be read in conjunction with theconsolidated financial statements and notes thereto included with the Company’sForm 10-K and other documents that have been filed with the Securities andExchange Commission (“SEC”). The results of the Company’s operations for theinterim periods presented are not necessarily indicative of operating resultsfor the full fiscal year or any future periods.

 

***Revenue Recognition***

 

*Overview*

 

The Company’s revenue consists of fees for licenses of the Company’ssoftware products, maintenance, consulting services and customer training. TheCompany generally charges fees for licenses of its software products eitherbased on the number of persons registered to use the product or based on thenumber of Central Processing Units (“CPUs”) on the machine on which the productis installed. Licenses for software whereby fees charged are based upon thenumber of persons registered to use the product are differentiated betweenlicenses for development use and licenses for use in deployment of thecustomer’s website. Licenses for software whereby fees charged are on a per-CPUbasis do not differentiate between development and deployment usage. TheCompany’s revenue recognition policies are in accordance with Statement ofPosition (“SOP”) 97-2, as amended, SOP 98-9 and the Securities and ExchangeCommission’s Staff Accounting Bulletin No. 101, *Revenue Recognition in Financial Statements*.

 

*Software License Revenue*

 

The Company licenses its products through its direct sales force andindirectly through resellers. In general, software license revenues are recognizedwhen a non-cancelable license agreement has been signed and the customer 

 

6

----

 

acknowledgesan unconditional obligation to pay, the software product has been delivered,there are no uncertainties surrounding product acceptance, the fees are fixedand determinable and collection is considered probable. Delivery is consideredto have occurred when title and risk of loss have been transferred to thecustomer, which generally occurs when media containing the licensed programs isprovided to a common carrier. In case of electronic delivery, delivery occurswhen the customer is given access to the licensed programs.  For products that cannot be used without alicensing key, the delivery requirement is met when the licensing key is madeavailable to the customer. If collectibility is not considered probable,revenue is recognized when the fee is collected. Subscription-based licenserevenues are recognized ratably over the subscription period. The Company entersinto reseller arrangements that typically provide for sublicense fees payableto the Company based upon a percentage of list price. The Company does notgrant its resellers the right of return.

 

The Company recognizes revenue using the residual method pursuant tothe requirements of SOP 97-2, as amended by SOP 98-9. Revenues recognized frommultiple-element software arrangements are allocated to each element of thearrangement based on the fair values of the elements, such as licenses forsoftware products, maintenance, consulting services or customer training. Thedetermination of fair value is based on objective evidence, which is specificto the Company. The Company limits its assessment of objective evidence foreach element to either the price charged when the same element is soldseparately or the price established by management having the relevant authorityto do so, for an element not yet sold separately. If evidence of fair value ofall undelivered elements exists but evidence does not exist for one or moredelivered elements, then revenue is recognized using the residual method. Underthe residual method, the fair value of the undelivered elements is deferred andthe remaining portion of the arrangement fee is recognized as revenue.

 

The Company records unearned revenue for software license agreementswhen cash has been received from the customer and the agreement does notqualify for revenue recognition under the Company’s revenue recognition policy.The Company records accounts receivable for software license agreements whenthe agreement qualifies for revenue recognition but cash or other considerationhas not been received from the customer.

 

*Services Revenue*

 

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

 

The Company’sconsulting services, which consist of consulting, maintenance and training, aredelivered through the BroadVision Global Services (“BVGS”) organization.  Services that the Company provides are notessential to the functionality of the software.  The Company records reimbursement from its customers forout-of-pocket expenses as an increase to services revenues.

 

***Employee StockOption and Purchase Plans***

 

The Company accounts for employee stock-based awards in accordance withthe provisions of Accounting Principles Board (“APB”) Opinion 25, FinancialAccounting Standards Board Interpretation No. 44 (FIN 44), Accounting forCertain Transactions Involving Stock Compensation—an Interpretation of APBOpinion 25, and related interpretations. As such, compensation expense isrecorded on the date of grant only if the current market price of theunderlying stock exceeded the exercise price. Pursuant to Statement ofFinancial Accounting Standards (“SFAS 123”), the Company discloses the proforma effects of using the fair value method of accounting for stock-basedcompensation arrangements. The Company accounts for equity instruments issuedto non-employees in accordance with the provisions of SFAS 123 andEmerging Issues Task Force (EITF) 96-18, *Accountingfor Equity Instruments That Are Issued to Other Than Employees For Acquiring orin Conjunction with Selling Goods or Services.*

 

7

----

 

The Company applies APB Opinion 25 and related interpretations whenaccounting for its stock option and stock purchase plans. In accordance withAPB Opinion 25, we apply the intrinsic value method in accounting for employeestock options. Accordingly, the Company generally recognizes no compensationexpense with respect to stock-based awards to employees.

 

During the quarter ended March 31, 2004, the Company recorded netcompensation expense of $15,000. This charge was recorded as a result ofgranting a third party consultant shares of our common stock.  The compensation charge was calculated usingthe Black-Scholes model. The $15,000 is recorded in sales and marketingexpense.

 

We have determined proforma information regarding net income and earnings per share as if we had accountedfor employee stock options under the fair value method as required by SFASNo. 123, *Accounting for StockCompensation*. The fair value of these stock-based awards toemployees was estimated using the Black-Scholes option pricing model. Hadcompensation cost for our stock option plan and employee stock purchase planbeen determined consistent with SFAS 123, our reported net income (loss)and net earnings (loss) per share would have been changed to the amountsindicated below (in thousands except per share data):

 
|                                                                                                                                          |   | **Three  Months Ended  March 31,** |         |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------|--------------|
|                                                                                                                                          |   | **2004**                           |         | **2003** | ** ** |
| Net income (loss) as reported                                                                                                                 |   | $                                  | (867         | ) | $ | 1,337 |   |
| Add: Stock-based employee compensation  expense included in reported net income (loss), net of related tax effects                            |   | 15                                 |         | 49 |   |
| Deduct: Total stock-based employee  compensation expense determined under fair value based method for all awards,  net of related tax effects |   | (2,814                             | )            | (1,655 | ) |
| Pro forma net loss                                                                                                                            |   | $                                  |  (3,666 | ) | $ |  (269 | ) |
|                                                                                                                                          |   |                               |         |   |   |
| Income (loss) per share:                                                                                                                      |   |                               |         |   |   |
| Basic—as reported                                                                                                                        |   | $                                  |  (0.03  | ) | $ |  0.04 |   |
| Basic—pro forma                                                                                                                          |   | $                                  |  (0.11  | ) | $ |  (0.01 | ) |
|                                                                                                                                          |   |                               |         |   |   |
| Diluted—as reported                                                                                                                      |   | $                                  |  (0.03  | ) | $ |  0.04 |   |
| Diluted—pro forma                                                                                                                        |   | $                                  |  (0.11  | ) | $ |  (0.01 | ) |
|                                                                                                                                               |        |                                    |              |  |  |  |  |  |  |

 

***Earnings Per Share Information***

 

Basic income(loss) per share is computed using the weighted-average number of shares ofcommon stock outstanding less shares subject to repurchase. Diluted income(loss) per share is computed using the weighted-average number of shares ofcommon stock outstanding and, when dilutive, common equivalent shares fromoutstanding stock options and warrants using the treasury stock method andshares subject to repurchase. The following table sets forth the basic anddiluted income (loss) per share computational data for the periods presented.

 

There were 131,326 potential common shares excluded from thedetermination of diluted net loss per share for the three months ended March31, 2004 as the effect of such shares is anti-dilutive.

 

8

----

 
|                                                                                |   | **Three  Months Ended  March 31,** |   |
|-------------------------------------------------------------------------------------|--------|------------------------------------|--------|
|                                                                                |   | **2004**                           |   | **2003** | ** ** |
| Net income (loss)                                                                   |   | $                                  | (867   | ) | $ | 1,337 |   |
|                                                                                |   |                               |   |   |   |
| Weighted average common shares outstanding  utilized for basic net loss per share   |   | 33,300                             |   | 32,447 |   |
| Potential common shares                                                             |   | —                             |   | 2,280 |   |
| Weighted average common shares outstanding  utilized for diluted net loss per share |   | 33,300                             |   | 34,727 |   |
| Basic net income (loss) per share                                                   |   | $                                  | (0.03  | ) | $ | 0.04 |   |
| Diluted net income (loss) per share                                                 |   | $                                  | (0.03  | ) | $ | 0.04 |   |

 

***Allowances and Reserves***

 

Occasionally,the Company’s customers experience financial difficulty after the Companyrecords the revenue but before payment has been received. The Company maintainsallowances for doubtful accounts for estimated losses resulting from theinability of its customers to make required payments. The Company’s normalpayment terms are 30 to 90 days from invoice date. If the financialcondition of the Company’s customers was to deteriorate, resulting in animpairment of their ability to make payments, additional allowances may berequired.

 

***Restructuring***

 

Through March 31, 2004, we have approved certain restructuring plansto, among other things, reduce our workforce and consolidate facilities.Restructuring and asset impairment charges were taken to align our coststructure with changing market conditions and to create a more efficientorganization. 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 Staff Accounting Bulletin No. 100, *Restructuring and Impairment Charges.*

 

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

 

•                  Forexit or disposal activities initiated on or prior to December 31, 2002, weaccount for costs in accordance with EITF Issue No. 94-3, *Liability Recognition for Certain EmployeeTermination Benefits and Other Costs to Exit an Activity (Including CertainCosts Incurred in a Restructuring)*. Accordingly, we record theliability related to these termination costs when the following conditions havebeen met: (i) management with the appropriate level of authority approvesa termination plan that commits us to such plan and establishes the benefitsthe employees will receive upon termination; (ii) the benefit arrangementis communicated to the employees in sufficient detail to enable the employeesto determine the termination benefits; (iii) the plan specificallyidentifies the number of employees to be terminated, their locations and theirjob classifications; and (iv) the period of time to implement the plandoes not indicate changes to the plan are likely

•                  Forexit or disposal activities initiated after December 31, 2002, we account forcosts in accordance with SFAS No. 146, *Accountingfor Costs Associated with Exit Activities*. SFAS 146 requiresthat a liability for a cost associated with an exit or disposal activity berecognized and measured initially at fair value only when the liability isincurred.

 

*Excess Facilities Costs*. We account forexcess facilities costs as follows:

 

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

 

9

----

 

•                  Forexit or disposal activities initiated after December 31, 2002, we account forlease termination and/or abandonment costs in accordance with SFASNo. 146, which requires that a liability for such costs be recognized andmeasured initially at fair value on the cease use 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 to our restructuringefforts are assessments related to the most likely expected outcome of the significantactions to accomplish the restructuring. In determining the charges related tothe restructurings to date, the majority of estimates made by management haverelated to charges for excess facilities. In determining the charges for excess facilities, we were required toestimate future sublease income, future net operating expenses of thefacilities, and brokerage commissions, among other expenses. The mostsignificant of these estimates have related to the timing and extent of futuresublease income in which to reduce our lease obligations.  We based 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 otherfactors.  The Company has recorded thelow-end of a range of assumptions modeled for restructuring charges, inaccordance with SFAS No. 5, Accounting for Contingencies.  Adjustments to the facilities accrual willbe required 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.

 

***Legal Matters***

 

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

 

***Concentrations of Credit Risk***

 

Financialassets that potentially subject us to significant concentrations of credit riskconsist principally of cash, cash equivalents, short-term investments, andtrade accounts receivable. The Company maintains its cash and cash equivalentsand short-term investments with four separate financial institutions. TheCompany markets and sell its products throughout the world and perform ongoingcredit evaluations of its customers. The Company maintains reserves forpotential credit losses. For the quarters ended March 31, 2004 and March31,2003 no one customer accounted for more than 10% of total revenue.  As of March 31, 2004 and December 31,2003, no customer individually accounted for more than 10% of accountsreceivable.

*** ***

***Equity Investment***

 

In January 2000, the Companyentered into a limited partnership agreement with a venture capital firm underwhich it is obligated to contribute capital based upon the periodic fundingrequirements.  The total capitalcommitment is $2.0 million, of which approximately $1.2 million has beencontributed through March 31, 2004.  Theremaining amounts will be contributed in future periods based upon the capitalrequirements of the fund.

 

***Foreign Currency Transactions***

 

The functional currency of the Company’s foreign subsidiaries is theU.S. dollar. Foreign exchange gains and losses resulting from the remeasurementof foreign currency assets and liabilities are included in other income 

 

10

----

 

(expense), net in the CondensedConsolidated Statements of Operations.

 

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

 

The Company periodically assesses the impairment of long-lived assetsin accordance with the provisions of SFAS No. 144. The Company assessesthe impairment of goodwill and identifiable intangible assets in accordancewith SFAS No. 141, Business Combinations and SFAS No. 142, Goodwilland Other Intangible Assets.  The Companyadopted the provisions of SFAS as of January 1, 2002.

 

***Fair Value of Financial Instruments***

 

TheCompany’s financial instruments consist of cash and cash equivalents,short-term investments, restricted cash, long-term investments, equityinvestments, accounts receivable, accounts payable and debt. The Company doesnot 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, short-terminvestments, long-term investments, accounts receivable and payable, and basedon the current rates available to it on similar debt issues. Additionally, theCompany periodically evaluates the carrying value of all of its investments forother-than-temporary impairment when events and circumstances indicate that thebook value of an asset may not be recoverable. If such assets are considered tobe impaired, the impairment to be recognized is measured by the amounts bywhich the carrying amount exceeds its fair market value. The Company’s equityinvestments are comprised of investments in public and non-publictechnology-related companies. The Company may record future impairment chargesdue to continued economic decline and the potential resulting negative impacton these companies.

 

***New Accounting Pronouncements***

 

In January 2003, the Financial Accounting Standards Board (“FASB”)issued Interpretation No. 46 (FIN 46), “Consolidation of Variable InterestEntities.” FIN 46 expands upon and strengthens existing accounting guidancethat addresses when a company should include in its financial statements theassets, liabilities and activities of another entity. A variable interestentity is a corporation, partnership, trust, or any other legal structure usedfor business purposes that either (i) does not have equity investors withvoting rights or (ii) has equity investors that do not provide sufficientfinancial resources for the entity to support its activities. FIN 46 requires avariable interest entity to be consolidated by a company if that company issubject to a majority of the risk of loss from the variable interest entity’sactivities or is entitled to receive a majority of the entity’s residualreturns or both. The consolidation requirements of FIN 46 apply immediately tovariable interest entities created after January 31, 2003. Theconsolidation requirements apply to older entities in the first fiscal year orinterim period beginning after December 15, 2003. Disclosure requirementsapply to any financial statements issued after January 31, 2003. TheCompany does not expect the adoption of SFAS 146 to have a material impacton our consolidated financial position, results of operations or cash flows.

 

In May 2003, the FASB issued SFAS 150, “Accounting forCertain Financial Instruments with Characteristics of both Liabilities andEquity.” SFAS 150 requires that certain financial instruments, which underprevious guidance were accounted for as equity, must now be accounted for as liabilities.The financial instruments affected include mandatorily redeemable stock,certain financial instruments that require or may require the issuer to buyback some of its shares in exchange for cash or other assets and certainobligations that can be settled with shares of stock. SFAS 150 iseffective for all financial instruments entered into or modified afterMay 31, 2003, and otherwise is effective at the beginning of the firstinterim period beginning after June 15, 2003. The Company does not expectthe adoption of SFAS 150 to have a material impact on our consolidatedfinancial position, results of operations or cash flows.

 

11

----

 

**Note 2.   SelectiveBalance Sheet Detail**

 

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

 
|                                            |   | **March 31,  2004** |       | **December 31,  2003** |       |
|-------------------------------------------------|--------|---------------------|------------|-----------------------------|------------|
|                                            |   | **(unaudited)**     | ** ** |                        | ** ** |
| Furniture and fixtures                          |   | $                   | 9,006      |                        | $          | 8,030 |   |
| Computers and software                          |   | 47,882              |       | 49,041                      |       |
| Leasehold improvements                          |   | 20,678              |       | 20,842                      |       |
|                                            |   | 77,566              |       | 77,913                      |       |
| Less accumulated depreciation and  amortization |   | (63,529             | )          | (62,513                     | )          |
|                                            |   | $                   | 14,037     |                        | $          | 15,400 |   |

 

Accrued expenses consisted of the following (in thousands):

 
|                       |   | **March 31,  2004** |       | **December 31,  2003** |       |
|----------------------------|--------|---------------------|------------|-----------------------------|------------|
|                       |   | **(unaudited)**     | ** ** |                        | ** ** |
| Employee benefits          |   | $                   | 1,913      |                        | $          | 1,511 |   |
| Commissions and bonuses    |   | 1,148               |       | 1,519                       |       |
| Sales and other taxes      |   | 7,483               |       | 7,983                       |       |
| Restructuring (See Note 6) |   | 17,402              |       | 18,549                      |       |
| Other                      |   | 5,328               |       | 5,199                       |       |
|                       |   | $                   | 33,274     |                        | $          | 34,761 |   |

 

Other noncurrent liabilities consisted of the following (in thousands):

 
|                       |   | **March 31,  2004** |       | **December 31,  2003** |       |
|----------------------------|--------|---------------------|------------|-----------------------------|------------|
|                       |   | **(unaudited)**     | ** ** |                        | ** ** |
| Restructuring (See Note 6) |   | $                   | 83,097     |                        | $          | 86,831 |   |
| Other                      |   | 578                 |       | 578                         |       |
|                       |   | $                   | 83,675     |                        | $          | 87,409 |   |

 

**Note3.   Commercial Credit Facilities**

 

The Companyhas various credit facilities with a commercial lender which include term debtin the form of notes payable, a revolving line of credit and an equipment lineof credit.

 

As of March31, 2004 and December 31, 2003, outstanding term debt borrowings wereapproximately $1.7 million and $1.9 million, respectively.  Borrowings bear interest at the bank’s primerate (4.00% as of March 31, 2004 and December 31, 2003) plus 1.25%. Principaland interest are due in monthly payments through maturity based on the terms ofthe facilities. Principal payments of $977,000 are due annually from 2000through 2004, $611,000 due in 2005, and a final payment of $357,000 due in2006.

 

The Companymaintains a $27 million revolving line of credit, which iscollateralized by all of the Company’s assets and under which borrowings bearinterest at the bank’s prime rate (floating with a floor of 4.25%). Interest isdue monthly and principal is due at expiration in February 2005. The amendedand restated loan and security agreement requires the Company to maintaincertain levels in cash and cash equivalents, short-term investments andlong-term investments (excluding equity investments). Additionally, the amendedand restated loan and security agreement requires the Company to maintaincertain levels on deposit with its commercial lender.  At both March 31, 2004 and December 31, 2003, $27.0 million wasoutstanding under the line of credit.

 

As of March 31, 2004, the Company was not in compliance with theprofitability and financial covenants of its commercial credit facilities.  Subsequently, the Company received a waiverfrom the bank regarding non-compliance.

 

During thefirst fiscal quarter of 2004, the Company entered into a $500,000 equipmentline of credit with the commercial lender. Such line of credit is secured by all of the Company’s assets andunder which borrowings bear interest at the banks prime rate (4.00% as of March31, 2004) plus .75%.  Principal paymentsare due in 36

 

12

----

 

monthly payments.  Principal payments of $17,143 are due in2004, $25,715 due in 2005 and 2006, and a final payment of $8,572 due in2006.  As of March 31, 2004, $77,000 wasoutstanding under the equipment loan.

 

Commitmentstotaling $18.8 million and $19.8 million in the form of standby letters ofcredit were issued on the Company’s behalf from financial institutions as ofMarch 31, 2004 and December 31, 2003, respectively, primarily in favor of theCompany’s various landlords to secure obligations under the Company’s facilityleases.  Accordingly, $18.8 millionand $19.8 million have been presented as restricted cash in theaccompanying Condensed Consolidated Balance Sheets as of March 31, 2004 and December 31,2003, respectively.

 

**Note 4.   Commitmentsand Contingencies**

 

*Warrantiesand Indemnification*

 

The Company provides a warranty to its customers that its software willperform substantially in accordance with documentation typically for a periodof 90 days following receipt of the software. The Company also indemnifiescertain customers from third-party claims of intellectual property infringementrelating to the use of its products. Historically, costs related to these guarantees have not beensignificant and the Company is unable to estimate the maximum potential impactof these guarantees on its future results of operations.

 

The Companyhas agreements whereby it indemnifies its officers and directors for certainevents or occurrences while the officer is, or was, serving in such capacity.The term of the indemnification period is for so long as such officer ordirector is subject to an indemnifiable event by reason of the fact that suchperson was serving in such capacity. The maximum potential amount of futurepayments the Company could be required to make under these indemnificationagreements is unlimited; however, the Company has a director and officerinsurance policy that limits its exposure and enables the Company to recover aportion of any future amounts paid. As a result of the Company’s insurancepolicy coverage, the Company believes the estimated fair value of theseindemnification agreements is insignificant. Accordingly, the Company has noliabilities recorded for these agreements as of either March 31, 2004 orDecember 31, 2003. The Company assesses the need for an indemnification reserveon a quarterly basis and there can be no guarantee that an indemnificationreserve will not become necessary in the future.

 

*Leases*

 

The Company leases itsheadquarters facility and its other facilities under non-cancelable operatinglease agreements expiring through the year 2013. Under the terms of theagreements, the Company is required to pay lease costs, property taxes,insurance and normal maintenance costs.

 

A summary of total futureminimum lease payments as of March 31, 2004, under noncancelable operatinglease agreements is as follows (in millions):

 
| **Years Ending December 31,** |   | **Operating  Leases** |   |
|------------------------------------|--------|-----------------------|--------|
| 2004                               |   | $                     | 17.5   |   |
| 2005                               |   | 23.7                  |   |
| 2006                               |   | 21.2                  |   |
| 2007                               |   | 18.7                  |   |
| 2008                               |   | 14.6                  |   |
| 2009 and thereafter                |   | 75.0                  |   |
|                               |   |                  |   |
| Total minimum lease payments       |   | $                     | 170.7  |   |

 

As of March 31, 2004, the Company has accrued $100.0 million ofestimated future facilities costs as a restructuring accrual (see Note 6). Theestimated sublease income netted against the restructuring accrual consists ofthe following (unaudited, in millions):

 

13

----

 
| Sublease income to be received under  non-cancelable sublease agreements signed prior to March 31, 2004 |   | $    | 20.8   |   |
|--------------------------------------------------------------------------------------------------------------|--------|------|--------|--------|
| Estimated sublease income for sublease  agreements yet to be negotiated                                      |   | 26.6 |   |
| Total estimated sublease income                                                                              |   | $    | 47.4   |   |

 

*Equity Investment*

 

InJanuary 2000, the Company entered into a limited partnership agreement with aventure capital firm under which it is obligated to contribute capital basedupon the periodic funding requirements. The total capital commitment is $2.0 million, of which $1.2 million hasbeen contributed through March 31, 2004. The remaining $0.8 million will be contributed in future periods basedupon the capital requirements of the fund.

 

*Standby Letter of Credit Commitments*

 

Asof March 31, 2004, the Company had $18.8 million of outstanding commitments inthe form of standby letters of credit, primarily in favor of the Company’svarious landlords to secure obligations under the Company’s facility leases.

 

*Legal Proceedings*

 

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

 

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

 

The Company operates in one segment, electronic business commercesolutions. The Company’s reportable segment includes the Company’s facilitiesin North and South America (“Americas”), Europe and Asia Pacific and the MiddleEast (“Asia/Pacific”). The Company’s chief operating decision maker isconsidered to be the Company’s Chief Executive Officer (“CEO”). The CEO reviewsfinancial information presented on a consolidated basis accompanied bydisaggregated information about revenues by geographic region and by productfor purposes of making operating decisions and assessing financial performance.

 

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

 
|                |   | **Three  months ended  March 31,** |   |
|---------------------|--------|------------------------------------|--------|
|                |   | **2004**                           |   | **2003** | ** ** |
| Software licenses   |   | $                                  | 7,840  |   | $ | 7,975 |   |
| Consulting services |   | 4,911                              |   | 6,471 |   |
| Maintenance         |   | 8,138                              |   | 10,009 |   |
| Total revenues      |   | $                                  | 20,889 |   | $ | 24,455 |   |

 

The Company sells its products and provides services worldwide througha direct sales force and through a channel of independent distributors, VARsand ASPs. In addition, the licenses of the Company’s products are promotedthrough independent professional consulting organizations known as systemsintegrators. The Company provides services worldwide through its BroadVisionGlobal Services Organization and indirectly through distributors, VARs, ASPsand systems integrators.

 

Disaggregated financial information regarding the Company’s geographicrevenues and long-lived assets is as follows (in thousands):

 

14

----

 
|               |   | **Three  months ended  March 31,** |   |
|--------------------|--------|------------------------------------|--------|
|               |   | **2004**                           |   | **2003** | ** ** |
|               |   | **(unaudited)**                    |   | **(unaudited)** |   |
| Revenues:          |   |                               |   |   |   |
| Americas           |   | $                                  | 9,651  |   | $ | 13,308 |   |
| Europe             |   | 10,093                             |   | 8,321 |   |
| Asia/Pacific       |   | 1,145                              |   | 2,826 |   |
| Total Company      |   | $                                  | 20,889 |   | $ | 24,455 |   |
|               |   |                               |   |   |   |   |   |
|               |   | **March 31,  2004**                |   | **December 31,  2003** |   |
|               |   | **(unaudited)**                    |   |   |   |
| Long-Lived Assets: |   |                               |   |   |   |
| Americas           |   | $                                  | 71,570 |   | $ | 73,016 |   |
| Europe             |   | 510                                |   | 537 |   |
| Asia/Pacific       |   | 626                                |   | 636 |   |
| Total Company      |   | $                                  | 72,706 |   | $ | 74,189 |   |
|                    |        |                                    |        |  |  |  |  |  |  |

 

During thethree months ended March 31, 2004 and 2003, no single customer accounted formore than 10% of the Company’s revenues.

 

**Note6.   Restructuring Charges**

 

Through March 31, 2004, the Company has approved certain restructuringplans to, among other things, reduce its workforce and consolidate facilities.Restructuring and asset impairment charges have been taken to align our coststructure with changing market conditions and to create a more efficientorganization. Our restructuring charges have been 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 costs incurredas a direct result of the restructuring plan; and (iv) impairment costsrelated to certain long-lived assets abandoned. We account for each of thesecosts in accordance with Staff Accounting Bulletin No. 100, *Restructuring and Impairment Charges.*

 

For each of the periods presented herein, restructuring charges consistsolely of:

 

•                  *Severance and Termination Benefits*— Thesecosts represent severance, payroll taxes and COBRA benefits related torestructuring plans implemented prior to the date recognized.

 

•                  *Excess Facilities*— These costs representfuture minimum lease payments related to excess and abandoned space underlease, net of estimated sublease income and planned company occupancy.

 

As of March 31, 2004, the total restructuring accrual was $100.5 millionunder EITF 94-3 and FAS 146, consisting of the following (in millions):

 

|                      |   | **Current** |   | **Non-Current** |   | **Total** |   |
|---------------------------|--------|-------------|--------|-----------------|--------|-----------|--------|
| Severance and Termination |   | $           | 0.5    |            | $      | —    |   | $ | 0.5 |   |
| Excess Facilities         |   | 16.9        |   | 83.1            |   | 100.0     |   |
| Total                     |   | $           | 17.4   |            | $      | 83.1      |   | $ | 100.5 |   |

 

The Company estimates that the $0.5 million severance and terminationaccrual will be paid in full by March 31, 2005.  We expect to pay the excess facilities amounts related torestructured or abandoned leased space as follows (in millions):

 

15

----

 
| Years Ending December 31,             |   |   |   |
|--------------------------------------------|--------|--------|--------|
| 2004                                       |   | $      | 12.7   |   |
| 2005                                       |   | 15.3   |   |
| 2006                                       |   | 13.9   |   |
| 2007                                       |   | 13.1   |   |
| 2008                                       |   | 7.2    |   |
| 2009 and thereafter (through October 2013) |   | 37.8   |   |
| Total minimum lease payments               |   | $      | 100.0  |   |

 

Of this excess facilities accrual, $81.7million relates to future minimum lease payments, net of estimated subleaseincome and planned company occupancy, and the remaining $18.3 million relatesto estimated allowances, fees and expenses. Actual future cash requirements may differ materially from the accrualat March 31, 2004, particularly if actual sublease income is significantlydifferent from prospective estimates.

 

The following table summarizes the activity related to therestructuring plans initiated subsequent to December 31, 2002, and accountedfor in accordance with FAS 146 (in thousands):

 
|                                                |   | **Accrued  restructuring costs  at Dec. 31, 2003** |   | **Amounts  charged to  restructuring costs  and other** |   | **Amounts  paid  or written off** |   | **Accrued  restructuring  costs at Mar. 31,  2004** |   |
|-----------------------------------------------------|--------|---------------------------------------------------------|--------|---------------------------------------------------------|--------|-----------------------------------|--------|----------------------------------------------------------|--------|
| **Quarter Ended March 31, 2004**               |   |                                                    |   |                                                    |   |                              |   |                                                     |   |
| Lease cancellations and commitments                 |   | $                                                       | 21,683 |                                                    | $      | —                            |   | $                                                        | — |   | $ | 21,683 |   |
| Termination payments to employees and related costs |   | 242                                                     |   | 318                                                     |   | (465                              | )      | 95                                                       |   |
| Write-off on disposal of assets and related costs   |   | —                                                  |   | —                                                  |   | —                            |   | —                                                   |   |
|                                                |   | $                                                       | 21,925 |                                                    | $      | 318                               |   | $                                                        | (465   | ) | $ | 21,778 |   |

 

The following table summarizes the activity related to therestructuring plans initiated on or prior to December 31, 2002, and accountedfor 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** |   |
|-----------------------------------------------------|--------|----------------------------------------------|--------|---------------------------------------------------------|--------|-----------------------------------|--------|-------------------------------------------|--------|
| **Quarter Ended March 31, 2003**                    |   |                                         |   |                                                    |   |                              |   |                                      |   |   |   |   |   |
| Lease cancellations and commitments                 |   | $                                            | 94,691 |                                                    | $      | 1,173                             |   | $                                         | (6,959 | ) | $ | 88,905 |   |
| Termination payments to employees and related costs |   | 1,425                                        |   | (138                                                    | )      | (174                              | )      | 1,113                                     |   |
| Write-off on disposal of assets and related costs   |   | 79                                           |   | —                                                  |   | (47                               | )      | 32                                        |   |
|                                                |   | $                                            | 96,195 |                                                    | $      | 1,035                             |   | $                                         | (7,180 | ) | $ | 90,050 |   |
| **Quarter Ended March 31, 2004**               |   |                                         |   |                                                    |   |                              |   |                                      |   |   |   |   |   |
| Lease cancellations and commitments                 |   | $                                            | 83,026 |                                                    | $      | 252                               |   | $                                         | (4,986 | ) | $ | 78,292 |   |
| Termination payments to employees and related costs |   | 429                                          |   | —                                                  |   | —                            |   | 429                                       |   |
| Write-off on disposal of assets and related costs   |   | —                                       |   | —                                                  |   | —                            |   | —                                    |   |
|                                                |   | $                                            | 83,455 |                                                    | $      | 252                               |   | $                                         | (4,986 | ) | $ | 78,721 |   |

 

As mentioned above, we have based our excess facilities accrual, inpart, upon estimates of future sublease income.  We have used the following factors, among others, in making suchestimates: opinions of independent real estate experts, current marketconditions and rental rates, an assessment of the time period over whichreasonable

 

16

----

 

estimatescould be made, the status of negotiations with potential subtenants, and thelocation of the respective facilities. The estimated sublease income netted against the restructuring accrualconsists of the following (in millions):

 
| Sublease income to be received under  non-cancelable sublease agreements signed prior to March 31, 2004 |   | $    | 20.8   |   |
|--------------------------------------------------------------------------------------------------------------|--------|------|--------|--------|
| Estimated sublease income for sublease  agreements yet to be negotiated                                      |   | 26.6 |   |
| Total estimated sublease income                                                                              |   | $    | 47.4   |   |

 

The Company has recorded the low-end of a range of assumptions modeledfor restructuring charges, in accordance with SFAS No. 5, Accounting forContingencies.  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.

 

**Note 7.   Goodwilland Other Intangible Assets**

 

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

 
|                                |   | **March 31,  2004** |       | **December  31,  2003** |       |
|-------------------------------------|--------|---------------------|------------|-------------------------|------------|
|                                |   | **(unaudited)**     | ** ** |                    | ** ** |
| Goodwill                            |   | $                   | 437,206    |                    | $          | 437,206 |   |
| Less: Accumulated amortization |   | (383,785            | )          | (383,785                | )          |
| Goodwill, net                       |   | $                   | 53,421     |                    | $          | 53,421 |   |
|                                |   |                |       |                    |       |
| Other intangibles                   |   | 22,732              |       | 22,732                  |       |
| Less: Accumulated amortization |   | (19,719             | )          | (19,719                 | )          |
| Other intangibles, net              |   | $                   | 3,013      |                    | $          | 3,013 |   |
|                                     |        |                     |            |                         |            |  |  |  |  |

 

On January 1, 2002, the Company adopted SFAS No. 142, *Goodwill and Intangible Assets.*Under SFASNo. 142, goodwill and intangible assets with indefinite lives are nolonger subject to amortization but are tested for impairment at least annuallyusing a fair value approach, and whenever there is an impairment indicator.Other intangible assets continue to be valued and amortized over theirestimated lives.

 

Pursuant to SFAS No. 142, the Company is required to test itsgoodwill 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,the Company concluded that, based on the existence of impairment indicators,including a decline in its market value, it would be required to test goodwillfor impairment. SFAS No. 142 provides for a two-stage approach todetermining whether and by how much goodwill has been impaired. Since the Companyhas only one reporting unit for purposes of applying SFAS No. 142, thefirst stage requires a comparison of the fair value of the Company to its netbook value. If the fair value is greater, then no impairment is deemed to haveoccurred. If the fair value is less, then the second stage must be completed todetermine the amount, if any, of actual impairment. The Company completed thefirst stage and has determined that its fair value at September 30, 2002exceeded its net book value on that date, and as a result, no impairment ofgoodwill was recorded in the consolidated financial statements. The Companyobtained an independent appraisal of fair value to support its conclusion.Additionally, the Company concluded that, based upon the market value of its stockin relation to the Company’s net book value at March 31, 2004 andDecember 31, 2003, there was no additional impairment of goodwillwarranted.

 

The process of evaluating the potential impairment of goodwill ishighly subjective and requires significant judgment. In estimating the fairvalue of the Company, the Company made estimates and judgments about futurerevenues and cash flows. The Company’s forecasts were based on assumptions thatare consistent with the plans and estimates the Company is using to manage thebusiness. Changes in these estimates could change the Company’s conclusionregarding impairment of goodwill and potentially result in a non-cash goodwillimpairment charge for all or a portion of the goodwill balance at March 31,2004.

 

17

----

 

Upon adoption of SFAS No. 142, on January 1, 2002, theCompany no longer amortizes goodwill. Additionally, upon adoption of SFASNo. 141 and 142, the Company no longer amortizes its non-technology basedintangible asset, or assembled workforce. The remaining other intangible assetshave been fully amortized as of March 31, 2004.

 

**Item 2. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations**

 

*This report on Form 10-Q contains forward-lookingstatements within the meaning of Section 27A of the Securities Act of 1933, asamended, and within the meaning of Section 21E of the Securities Exchange Actof 1934, as amended, which are subject to the “safe harbor” created by thosesections. These forward-looking statements are generally identified by wordssuch as “expect,” “anticipate,” “intend,” “believe,” “hope,” “assume,”“estimate,” “plan,” “will” and other similar words and expressions. Theseforward-looking statements involve risks and uncertainties that could cause ouractual results to differ materially from those expressed or implied in theforward-looking statements as a result of certain factors, including thosedescribed herein and in the Company’s most recently filed Annual Report on Form10-K and other documents filed with the Securities and ExchangeCommission.  We undertake no obligationto publicly release any revisions to the forward-looking statements or toreflect events and circumstances after the date of this document.*

 

**Overview**

 

We develop, market and support a suite of personalized self-service webapplications that enable organizations to unify their e-business infrastructureand conduct both interactions and transactions with employees, partners andcustomers. Our integrated suite of process, commerce, portal and contentsolutions helps organizations rapidly increase revenues and reduce costs.

 

As of March 31, 2004, more than 1,000 companies and government entitiesaround the globe are using our applications to power and personalize theirmission-critical web initiatives.

 

Worldwide demand for enterprise software has declined significantlyover the past several quarters. The decline in venture capital spending hasresulted in fewer new companies with funding to, among other things, build anon-line business. Established companies have scaled back, delayed or cancelledweb-based initiatives. As a result, we have seen significant declines in ourrevenue over the past three fiscal years.

 

**Recent Events**

 

We renewed and amended our revolving credit facility in February2004. Borrowings under the revolving line of credit are collateralized by allof our assets and bear interest at the bank’s prime rate (floating with a floorof 4.00%). Interest is due monthly and principal is due at expiration inFebruary 2005. The amended and restated loan and security agreement requires usto maintain certain levels in cash and cash equivalents, short-term investmentsand long-term investments (excluding equity investments). Additionally, the amendedand restated loan and security agreement requires us to maintain certain levelson deposit with our commercial lender.  Asof March 31, 2004, we were not in compliance with the profitability andfinancial covenants of the commercial credit facilities.  Subsequently, we received a waiver from thebank regarding non-compliance.  At both March 31, 2004 and December 31, 2003,$27.0 million was outstanding under the line of credit.

 

**Critical Accounting Policies**

 

This management’s discussion and analysis of our financial conditionand results of operations is based upon our condensed consolidated financialstatements, which have been prepared in accordance with generally acceptedaccounting principles in the United States of America. In preparing these financialstatements, we are required to make estimates and judgments that affect thereported amounts of assets, liabilities, revenues and expenses, and relateddisclosures of contingent assets and liabilities. On an ongoing basis, weevaluate our estimates, including those related to doubtful accounts, productreturns, investments, goodwill and intangible assets, income taxes andrestructuring, as well as contingencies and litigation. We base our estimateson historical experience and on various other assumptions that we believe arereasonable, the results of which form the basis for making judgments about thecarrying values of assets and liabilities that are not readily apparent fromother sources. Actual

 

18

----

 

results may differ from theseestimates using different assumptions or conditions. We believe the followingcritical accounting policies reflect the more significant judgments andestimates used in the preparation of our consolidated financial statements.

 

*Revenue Recognition*

 

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

 

*Software License Revenue*

 

We license our products through our direct sales force and indirectlythrough resellers. In general, software license revenues are recognized when anon-cancelable license agreement has been signed and the customer acknowledgesan unconditional obligation to pay, the software product has been delivered,there are no uncertainties surrounding product acceptance, the fees are fixedand determinable and collection is considered probable. Delivery is consideredto have occurred when title and risk of loss have been transferred to thecustomer, which generally occurs when media containing the licensed programs isprovided to a common carrier. In case of electronic delivery, delivery occurswhen the customer is given access to the licensed programs.  For products that cannot be used without alicensing key, the delivery requirement is met when the licensing key is madeavailable to the customer.  If collectibilityis not considered probable, revenue is recognized when the fee is collected.Subscription-based license revenues are recognized ratably over thesubscription period. We enter into reseller arrangements that typically providefor sublicense fees payable to the usbased upon a percentage of list price. Wedo not grant its resellers the right of return.

 

We recognize revenue using the residual method pursuant to therequirements of SOP 97-2, as amended by SOP 98-9. Revenues recognized frommultiple-element software arrangements are allocated to each element of thearrangement based on the fair values of the elements, such as licenses forsoftware products, maintenance, consulting services or customer training. Thedetermination of fair value is based on objective evidence, which is specifictous. We limit its assessment of objective evidence for each element to eitherthe price charged when the same element is sold separately or the priceestablished by management having the relevant authority to do so, for anelement not yet sold separately. If evidence of fair value of all undeliveredelements exists but evidence does not exist for one or more delivered elements,then revenue is recognized using the residual method. Under the residualmethod, the fair value of the undelivered elements is deferred and theremaining portion of the arrangement fee is recognized as revenue.

 

We record unearned revenue for software license agreements when cashhas been received from the customer and the agreement does not qualify forrevenue recognition under our revenue recognition policy. We record accountsreceivable for software license agreements when the agreement qualifies forrevenue recognition but cash or other consideration has not been received fromthe customer.

 

*Services Revenue*

 

Consulting services revenues and customer training revenues arerecognized as such services are performed. Maintenance revenues, which includerevenues bundled with software license agreements that entitle the customers totechnical support and future unspecified enhancements to our products, aredeferred and recognized ratably over the related agreement period, generallytwelve months.

 

19

----

 

Our consulting services, which consist of consulting, maintenance andtraining, are delivered through the BroadVision Global Services (“BVGS”)organization.  Services that we provideare not essential to the functionality of the software.  We record reimbursement from our customersfor out-of-pocket expenses as an increase to services revenues.

 

*Allowances andReserves*

 

Occasionally, our customers experience financial difficulty after werecord the revenue but before we are paid. We maintain allowances for doubtfulaccounts for estimated losses resulting from the inability of our customers tomake required payments. Our normal payment terms are 30 to 90 days frominvoice date. If the financial condition of our customers were to deteriorate,resulting in an impairment of their ability to make payments, additionalallowances may be required.

 

*ImpairmentAssessments*

 

We adopted Statement of Financial Accounting Standard (“SFAS”)No. 142, “Goodwill and Other Intangible Assets,” on January 1, 2002.This standard requires that goodwill no longer be amortized, and instead, betested for impairment on a periodic basis.

 

Pursuant to SFAS No. 142, we are required to test goodwill forimpairment upon adoption and annually or more often if events or changes incircumstances indicate that the asset might be impaired. While there was noaccounting charge to record upon adoption, at September 30, 2002, weconcluded that, based on the existence of impairment indicators, including adecline in our market value, we would be required to test goodwill forimpairment. SFAS No. 142 provides for a two-stage approach to determiningwhether and by how much goodwill has been impaired. Since we have only onereporting unit for purposes of applying SFAS No. 142, the first stagerequires a comparison of the fair value of the Company to its net book value.If the fair value is greater, then no impairment is deemed to have occurred. Ifthe fair value is less, then the second stage must be completed to determinethe amount, if any, of actual impairment. We completed the first stage anddetermined that our fair value at September 30, 2002 exceeded our net bookvalue on that date and, as a result, no impairment of goodwill was recorded inthe consolidated financial statements. We obtained an independent appraisal offair value to support our conclusion. We also determined that our fair valueexceeded our net book value as of March 31, 2004 and December 31, 2003 and,therefore, no additional impairment was warranted.

 

The process of evaluating the potential impairment of goodwill ishighly subjective and requires significant judgment. In estimating our fairvalue, we made estimates and judgments about future revenues and cash flows.Our forecasts were based on assumptions that are consistent with the plans andestimates we are using to manage our business. Changes in these estimates couldchange our conclusion regarding impairment of goodwill and potentially resultin a non-cash goodwill impairment charge, for all or a portion of the goodwillbalance at March 31, 2004. For long-lived assets, accounting standards dictatethat assets become impaired when the undiscounted future cash flows expected tobe generated by them are less than their carrying amounts. When that occurs,the affected assets are written down to their estimated fair value.

 

*Deferred Tax Assets*

 

We analyze our deferred tax assets with regard to potentialrealization. We have established a valuation allowance on our deferred taxassets to the extent that we determined that it is more likely than not thatsome portion or all of the deferred tax assets will not be realized based uponthe uncertainty of their realization. We have considered estimated futuretaxable income and ongoing prudent and feasible tax planning strategies inassessing the amount of the valuation allowance.

 

*Accounting forStock-Based Compensation*

 

We apply Accounting Principles Board (“APB”) Opinion Number 25, *Accounting for Stock Issued to Employees*,and related interpretations when accounting for our stock option and stockpurchase plans. In accordance with APB No. 25, we apply the intrinsicvalue method in accounting for employee stock options. Accordingly, wegenerally recognize no compensation expense with respect to stock-based awardsto employees.

 

20

----

 

During the three months ended March 31, 2004, the Company recordedcompensation expense of $15,000 as a result of granting common stock to a thirdparty consultant. These charges were calculated based upon the market value ofthe underlying stock.  During the threemonths ended March 31, 2003, the Company recorded compensation expense of$49,000 as a result of granting common stock to a third party consultant.  The charge was calculated as the fair marketvalue of the stock determined by the stock price of the underlying stock.

 

We have determined pro forma information regarding net loss and netloss per share as if we had accounted for employee stock options under the fairvalue method as required by SFAS Number 123, *Accountingfor Stock Compensation*. The fair value of these stock-based awardsto employees 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 No. 123, the Company’sreported 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  March 31,** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------|--------|
|                                                                                                                                          |   | **2004**                           |   | **2003** | ** ** |
| Net income (loss) as reported                                                                                                                 |   | $                                  | (867   | ) | $ | 1,337 |   |
| Add: Stock-based employee compensation  expense included in reported net loss, net of related tax effects                                     |   | 15                                 |   | 49 |   |
| Deduct: Total stock-based employee  compensation expense determined under fair value based method for all awards,  net of related tax effects |   | (2,814                             | )      | (1,655 | ) |
| Pro forma net loss                                                                                                                            |   | $                                  | (3,666 | ) | $ | (269 | ) |
|                                                                                                                                          |   |                               |   |   |   |
| Income (loss) per share:                                                                                                                      |   |                               |   |   |   |
| Basic—as reported                                                                                                                        |   | $                                  | (0.03  | ) | $ | 0.04 |   |
| Basic—pro forma                                                                                                                          |   | $                                  | (0.11  | ) | $ | (0.01 | ) |
|                                                                                                                                          |   |                               |   |   |   |
| Diluted—as reported                                                                                                                      |   | $                                  | (0.03  | ) | $ | 0.04 |   |
| Diluted—pro forma                                                                                                                        |   | $                                  | (0.11  | ) | $ | (0.01 | ) |

 

*RestructuringCharges*

 

Through March 31, 2004, the Company has approved restructuring plansto, among other things, reduce its workforce and consolidate facilities.Restructuring and asset impairment charges were taken to align the Company’scost structure with changing market conditions and to create a more efficientorganization. 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 Staff Accounting Bulletin No. 100, *Restructuring and Impairment Charges.*

 

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

 

•                  Forexit or disposal activities initiated on or prior to December 31, 2002, weaccount for costs in accordance with EITF Issue No. 94-3, *Liability Recognition for Certain EmployeeTermination Benefits and Other Costs to Exit an Activity (Including CertainCosts Incurred in a Restructuring)*. Accordingly, we record theliability related to these termination costs when the following conditions havebeen met: (i) management with the appropriate level of authority approvesa termination plan that commits us to such plan and establishes the benefitsthe employees will receive upon termination; (ii) the benefit arrangementis communicated to the employees in sufficient detail to enable the employeesto determine the termination benefits; (iii) the plan

 

21

----

 

specifically identifies the number ofemployees to be terminated, their locations and their job classifications; and(iv) the period of time to implement the plan does not indicate changes tothe plan are likely

 

•                  Forexit or disposal activities initiated after December 31, 2002, we account forcosts in accordance with SFAS No. 146, *Accountingfor Costs Associated with Exit Activities*. SFAS 146 requiresthat a liability for a cost associated with an exit or disposal activity berecognized and measured initially at fair value only when the liability isincurred.

 

*Excess Facilities Costs*. We account forexcess facilities costs as follows:

 

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

 

•                  Forexit or disposal activities initiated after December 31, 2002, we account forlease termination and/or abandonment costs in accordance with SFASNo. 146, which requires that a liability for such costs be recognized andmeasured initially at fair value on the cease use 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 to our restructuringefforts are assessments related to the most likely expected outcome of thesignificant actions to accomplish the restructuring. In determining the chargesrelated to the restructurings to date, the majority of estimates made bymanagement have related to charges for excess facilities.  In determining the charges for excessfacilities, we were required to estimate future sublease income, future netoperating expenses of the facilities, and brokerage commissions, among otherexpenses. The most significant of these estimates have related to the timingand extent of future sublease income in which to reduce our leaseobligations.  We based our estimates ofsublease income, in part, on the opinions of independent real estate experts,current market conditions and rental rates, an assessment of the time periodover which reasonable estimates could be made, the status of negotiations withpotential subtenants, and the location of the respective facility, among otherfactors.  The Company has recorded the low-endof a range of assumptions modeled for restructuring charges, in accordance withSFAS No. 5, Accounting for Contingencies. Adjustments to the facilities accrual will be required if actual leaseexit costs or sublease income differ from amounts currently expected. We willreview the status of restructuring activities on a quarterly basis and, ifappropriate, record changes to our restructuring obligations in currentoperations based on management’s most current estimates.

 

As of March 31, 2004, the total restructuring accrual was$100.5 million under EITF 94-3 and FAS 146, consisting of thefollowing (in millions):

 
|                      |   | **Current** |   | **Non-Current** |   | **Total** |   |
|---------------------------|--------|-------------|--------|-----------------|--------|-----------|--------|
| Severance and Termination |   | $           | 0.5    |            | $      | —    |   | $ | 0.5 |   |
| Excess Facilities         |   | 16.9        |   | 83.1            |   | 100.0     |   |
| Total                     |   | $           | 17.4   |            | $      | 83.1      |   | $ | 100.5 |   |

 

The Company estimates that the $0.5 million severance and terminationaccrual will be paid in full by March 31, 2005.  We expect to pay the excess facilities amounts related torestructured or abandoned leased space as follows (in millions):

 
| Years Ending December 31,             |   |   |   |
|--------------------------------------------|--------|--------|--------|
| 2004                                       |   | $      | 12.7   |   |
| 2005                                       |   | 15.3   |   |
| 2006                                       |   | 13.9   |   |
| 2007                                       |   | 13.1   |   |
| 2008                                       |   | 7.2    |   |
| 2009 and thereafter (through October 2013) |   | 37.8   |   |
| Total minimum lease payments               |   | $      | 100.0  |   |

 

22

----

 

Of this excess facilities accrual, $81.7million relates to future minimum lease payments, net of estimated subleaseincome and planned company occupancy, and the remaining $18.3 million relatesto estimated allowances, fees and expenses. Actual future cash requirements may differ materially from the accrualat March 31, 2004, particularly if actual sublease income is significantlydifferent from prospective estimates.

 

The following table summarizes the activity related to therestructuring plans initiated subsequent to December 31, 2002, and accountedfor in accordance with FAS 146 (in thousands):

 
|                                                |   | **Accrued  restructuring costs  at Dec. 31, 2003** |   | **Amounts  charged to  restructuring costs  and other** |   | **Amounts  paid  or written off** |   | **Accrued  restructuring  costs at Mar. 31,  2004** |   |
|-----------------------------------------------------|--------|---------------------------------------------------------|--------|---------------------------------------------------------|--------|-----------------------------------|--------|----------------------------------------------------------|--------|
| **Quarter Ended March 31, 2004**               |   |                                                    |   |                                                    |   |                              |   |                                                     |   |
| Lease cancellations and commitments                 |   | $                                                       | 21,683 |                                                    | $      | —                            |   | $                                                        | — |   | $ | 21,683 |   |
| Termination payments to employees and related costs |   | 242                                                     |   | 318                                                     |   | (465                              | )      | 95                                                       |   |
| Write-off on disposal of assets and related costs   |   | —                                                  |   | —                                                  |   | —                            |   | —                                                   |   |
|                                                |   | $                                                       | 21,925 |                                                    | $      | 318                               |   | $                                                        | (465   | ) | $ | 21,778 |   |

 

The following table summarizes the activity related to therestructuring plans initiated on or prior to December 31, 2002, and accountedfor 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** |   |
|-----------------------------------------------------|--------|----------------------------------------------|--------|---------------------------------------------------------|--------|-----------------------------------|--------|-------------------------------------------|--------|
| **Quarter Ended March 31, 2003**                    |   |                                         |   |                                                    |   |                              |   |                                      |   |   |   |   |   |
| Lease cancellations and commitments                 |   | $                                            | 94,691 |                                                    | $      | 1,173                             |   | $                                         | (6,959 | ) | $ | 88,905 |   |
| Termination payments to employees and related costs |   | 1,425                                        |   | (138                                                    | )      | (174                              | )      | 1,113                                     |   |
| Write-off on disposal of assets and related costs   |   | 79                                           |   | —                                                  |   | (47                               | )      | 32                                        |   |
|                                                |   | $                                            | 96,195 |                                                    | $      | 1,035                             |   | $                                         | (7,180 | ) | $ | 90,050 |   |
|                                                |   |                                         |   |                                                    |   |                              |   |                                      |   |   |   |   |   |
| **Quarter Ended March 31, 2004**               |   |                                         |   |                                                    |   |                              |   |                                      |   |   |   |   |   |
| Lease cancellations and commitments                 |   | $                                            | 83,026 |                                                    | $      | 252                               |   | $                                         | (4,986 | ) | $ | 78,292 |   |
| Termination payments to employees and related costs |   | 429                                          |   | —                                                  |   | —                            |   | 429                                       |   |
| Write-off on disposal of assets and related costs   |   | —                                       |   | —                                                  |   | —                            |   | —                                    |   |
|                                                |   | $                                            | 83,455 |                                                    | $      | 252                               |   | $                                         | (4,986 | ) | $ | 78,721 |   |

 

23

----

 

As mentioned above, we have based our excess facilities accrual, inpart, upon estimates of future sublease income.  We have used the following factors, among others, in making suchestimates: opinions of independent real estate experts, current marketconditions and rental rates, an assessment of the time period over whichreasonable estimates could be made, the status of negotiations with potentialsubtenants, and the location of the respective facilities.  The estimated sublease income netted againstthe restructuring accrual consists of the following (in millions):

 
| Sublease income to be received under  non-cancelable sublease agreements signed prior to March 31, 2004 |   | $    | 20.8   |   |
|--------------------------------------------------------------------------------------------------------------|--------|------|--------|--------|
| Estimated sublease income for sublease  agreements yet to be negotiated                                      |   | 26.6 |   |
| Total estimated sublease income                                                                              |   | $    | 47.4   |   |

 

The Company has recorded the low-end of a range of assumptions modeledfor restructuring charges, in accordance with SFAS No. 5, Accounting forContingencies.  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 liability related to pendinglitigation is based on claims for which it is probable that a liability hasbeen incurred and the Company can estimate the amount and range of loss. TheCompany has recorded the minimum estimated liability related to those claims,where there is a range of loss. Because of the uncertainties related to boththe determination of the probability of an unfavorable outcome and the amountand range of loss in the event of an unfavorable outcome, the Company is unableto make a reasonable estimate of the liability that could result from theremaining pending litigation. As additional information becomes available, theCompany will assess the potential liability related to its pending litigationand revise its estimates, if necessary. Such revisions in the Company’sestimates of the potential liability could materially impact the Company’sresults of operations and financial position.

 

***Resultsof Operations***

 

*Revenues*

 

*Total revenues*decreased 15% during the quarter ended March 31, 2004 to $20.9 million ascompared to $24.5 million for the quarter ended March 31, 2003.  A summary of our revenues by geographicregion is as follows (dollars in thousands, unaudited):

 
|                |   | **Software  Licenses** |   | **%**  |   | **Services** |   | **%**  |   | **Total** |   | **%**  |   |
|---------------------|--------|------------------------|--------|--------|--------|--------------|--------|--------|--------|-----------|--------|--------|--------|
| Three Months Ended: |   |                   |   |   |   |         |   |   |   |      |   |   |   |
|                |   |                   |   |   |   |         |   |   |   |      |   |   |   |
| March 31, 2004      |   |                   |   |   |   |         |   |   |   |      |   |   |   |
| Americas            |   | $                      | 2,590  |   | 33     | %            | $      | 7,061  |   | 54        | %      | $      | 9,651  |   | 46 | % |
| Europe              |   | 4,896                  |   | 62     |   | 5,197        |   | 40     |   | 10,093    |   | 48     |   |
| Asia Pacific        |   | 354                    |   | 5      |   | 791          |   | 6      |   | 1,145     |   | 6      |   |
| Total               |   | $                      | 7,840  |   | 100    | %            | $      | 13,049 |   | 100       | %      | $      | 20,889 |   | 100 | % |
|                |   |                   |   |   |   |         |   |   |   |      |   |   |   |
| March 31, 2003      |   |                   |   |   |   |         |   |   |   |      |   |   |   |
| Americas            |   | $                      | 4,396  |   | 55     | %            | $      | 8,912  |   | 54        | %      | $      | 13,308 |   | 54 | % |
| Europe              |   | 1,685                  |   | 21     |   | 6,636        |   | 40     |   | 8,321     |   | 34     |   |
| Asia Pacific        |   | 1,894                  |   | 24     |   | 932          |   | 6      |   | 2,826     |   | 12     |   |
| Total               |   | $                      | 7,975  |   | 100    | %            | $      | 16,480 |   | 100       | %      | $      | 24,455 |   | 100 | % |

 

The Company operates in a competitive industry.  There have been declines in both thetechnology industry and in general economic conditions since the beginning of2001.  These declines may continue.  Financial comparisons discussed herein maynot be indicative of future performance.

 

*Software license revenues*decreased 2% during the quarter ended March 31, 2004 to $7.8 million ascompared to $8.0 million for the quarter ended March 31, 2003.  License revenue in the Americas declined dueto continued softness in the North American market for enterprise softwareapplications.  European license revenueincreased mainly due to a larger number of follow-on licenses with Europeancustomers that are expanding the use of our technology.  Asia Pacific revenue declined due to asingle large license transaction in the first quarter of fiscal 2003 that didnot recur in fiscal 2004.

 

*Services revenues*consisting of consulting revenues, customer training revenues and maintenancerevenues decreased 21% during the quarter ended March 31, 2004 to$13.0 million as compared to $16.5 million for the quarter ended March 31,2003.  The decline was due to decreasesin consulting services and maintenance revenue.  Consulting services revenues decreased 23% for the three monthsended March 31, 2004 to $4.9 million as compared to $6.4 million for the threemonths ended March 31, 2003.  Thisdecrease was a result of a corresponding decline in license revenues and ofeconomic and geopolitical uncertainties. Maintenance revenue decreased 19% for the three months ended March 31,2004 to $8.1 million as compared to $10.0 million for the three months endedMarch 31, 2003, due to a decline in new customer licenses and certain existingcustomers declining the renewal of annual maintenance services.

 

*Cost of Revenues*

 

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

 

Cost of services consists primarily of employee-related costs,third-party consultant fees incurred on consulting projects, post-contractcustomer support and instructional training services.

 
|                          |   | **Three  Months Ended  March 31,** |   |
|-------------------------------|--------|-----------------------------------------|--------|
|                          |   | **2004**                                |   | **%** |   | **2003** |   | **%** |   |
| Cost of software licenses (1) |   | $                                       | 578    |   | 7 | % | $ | 388 |   | 5 | % |
| Cost of services (2)          |   | 6,277                                   |   | 48 |   | 6,558 |   | 40 |   |
|                          |   |                                    |   |   |   |   |   |   |   |
| Total cost of revenues (3)    |   | $                                       | 6,855  |   | 33 | % | $ | 6,946 |   | 28 | % |

 

----

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

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

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

 

*Cost ofsoftware licenses* increased 49% in absolute dollarterms during the quarter ended March 31, 2004 to $578,000 as compared to$388,000 for the quarter ended March 31, 2003. This increase was primarily a result of a higher percentage ofthird-party software license revenue.

 

*Cost ofservices* decreased 4% in absolute dollar terms duringthe quarter ended March 31, 2004to $6.3 million as compared to $6.6 million for the quarter ended March 31,2003.  This decline was primarily due tolower

 

24

----

 

consulting services headcount,such lower headcount being due to the lower consulting services revenuediscussed above.  Partially offsettingthis decline was a $473,000 non-recurring credit in the first quarter of fiscal2003 related to telecommunications services.

 

*Operating Expensesand Other Income, net*

 

Operating expenses consists of the following:

 

•                  *Research and development expenses* consistprimarily of salaries, employee-related benefit costs and consulting feesincurred in association with the development of our products. Costs incurredfor the research and development of new software products are expensed asincurred until such time that technological feasibility, in the form of aworking model, is established at which time such costs are capitalized andrecorded at the lower of unamortized cost or net realizable value. The costsincurred subsequent to the establishment of a working model but prior togeneral release of the product have not been significant. To date, we have notcapitalized any costs related to the development of software for external use.

 

•                  *Sales and marketing expenses* consistprimarily of salaries, employee-related benefit costs, commissions and otherincentive compensation, travel and entertainment and marketing program-relatedexpenditures such as collateral materials, trade shows, public relations,advertising, and creative services.

 

•                  *General and administrative expenses*consist primarily of salaries, employee-related benefit costs, provisions andcredits related to uncollectible accounts receivable and professional servicefees.

 

•                    *Other intangible amortization* representscosts to amortize other intangible assets, generally on a straight-line basis.As described in Note 7 in the Notes to Consolidated Financial Statements,as of January 1, 2002, we no longer amortize goodwill or the assembledworkforce as we have identified the assembled workforce as an intangible assetwhich does not meet the criteria of a recognizable intangible asset as definedby SFAS 142..

 

•                  *Restructuring charges* represent costsincurred to restructure company operations. These charges, including chargesfor excess facilities, severance and certain non-cash items, were recordedunder the provisions of EITF 94-3, and SFAS. 146.

 

A summary of operating expenses is set forth in the following table.The percentage of expenses is calculated based on total revenues: (inthousands):

 
|                          |   | **Three  Months Ended March 31,** |   |
|-------------------------------|--------|----------------------------------------|--------|
|                          |   | **2004**                               |   | **%** |   | **2003** |   | **%** |   |
| Research and development      |   | $                                      | 4,888  |   | 23 | % | $ | 6,151 |   | 25 | % |
| Sales and marketing           |   | 6,866                                  |   | 32 |   | 6,832 |   | 28 |   |
| General and administrative    |   | 2,417                                  |   | 12 |   | 2,288 |   | 9 |   |
| Other intangible amortization |   | —                                 |   | — |   | 887 |   | 4 |   |
| Restructuring charges         |   | 570                                    |   | 3 |   | 1,035 |   | 4 |   |
| Total operating expenses      |   | $                                      | 14,741 |   | 70 | % | $ | 17,193 |   | 70 | % |

 

*Research anddevelopment expenses* decreased 21% during the quarterended March 31, 2004 to $4.9 million as compared to $6.2 million for thequarter ended March 31, 2003.  Thedecrease in research and development expenses was primarily attributable tolower depreciation costs due to assets becoming fully depreciated and headcountreductions as a result of cost-cutting efforts.  Partially offsetting these declines were incremental engineeringand quality assurance spending in the first quarter of fiscal 2004 related tothe launch of the Company’s BroadVision Process product and a $531,000non-recurring credit in the first quarter of fiscal 2003 related totelecommunications services.

 

25

----

 

*Sales andmarketing expenses* increased 1% during the quarterended March 31, 2004 to $6.9 million as compared to $6.8 million for thequarter ended March 31, 2003.  Theincrease was due to higher variable selling costs and a $259,000 non-recurringcredit in the first quarter of fiscal 2003 related to telecommunicationsservices.  Partially offsetting theseincreases were headcount reductions in both selling and marketing functions dueto cost-cutting efforts.

 

*General andadministrative expenses* increased 4% during thequarter ended March 31, 2004 to $2.4 million as compared to $2.3 million forthe quarter ended March 31, 2003, due to higher accounting costs related to theimplementation of certain provisions of the Sarbanes-Oxley Act of 2002 and a$130,000 non-recurring credit in the first quarter of fiscal 2003 related totelecommunications services.  Partiallyoffsetting these increases was a $300,000 non-recurring credit in the firstquarter of fiscal 2004 related to a reduction in required reserves foruncollectible accounts receivable.

 

*Other intangible amortization.*    As described in Note 7 in the Notes to theCondensed Consolidated Financial Statements above, we no longer amortizegoodwill on the assembled workforce as we have identified the assembledworkforce as an intangible asset which does not meet the criteria of recognizableintangible asset as defined by SFAS No. 142. The remaining other intangible assets have been fully amortized as ofMarch 31, 2004.  We periodically assessgoodwill and other intangibles for impairment as discussed in Note 7 of Notesto the Condensed Consolidated Financial Statements.  The remaining intangible assets that are being amortized are aresult of the acquisition of Interleaf, Inc. that was completed in April of2000.  We have accounted for theacquisition as a purchase business combination.  It is possible that we may continue to expand our businessthrough acquisitions and internal development. Any additional acquisitions or impairment of goodwill and otherpurchased intangibles could result in additional merger and acquisition relatedexpenses.

 

*Restructuring charges.*** ** Through March 31, 2004, the Company has approved restructuringplans to, among other things, reduce its workforce and consolidate facilities.Restructuring and asset impairment charges were taken to align the Company’scost structure with changing market conditions and to create a more efficientorganization. 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 Staff Accounting Bulletin No. 100, *Restructuring and Impairment Charges.*

 

Restructuring charges consisted of the following (in thousands):

 
|                            |   | **Three  Months Ended  March 31,** |   |
|---------------------------------|--------|------------------------------------|--------|
|                            |   | **2004**                           |   | **2003** | ** ** |
| Excess Facilities               |   | $                                  | 252    |   | $ | 1,200 |   |
| Severance and Termination Costs |   | 318                                |   | (138 | ) |
| Total                           |   | $                                  | 570    |   | $ | 1,062 |   |

 

The excess facilities charge for the three-months ended March 31, 2004,related to interest on excess facilities obligations that were discounted underSFAS 146.  Similar charges will be recordedin future periods through the term of the underlying leases (October2013).  The excess facilities charge forthe three-month period ended March 31, 2003, related to adjustments tounderlying sublease assumptions.  Theseverance and termination costs for both periods reflectseverance, payroll taxes and COBRA benefits related to restructuring plansimplemented prior to the end of the period. The Company recorded these charges at the low-end of a range ofassumptions modeled for the restructuring charges, in accordance with SFASNo. 5, *Accounting for Contingencies*.Adjustments to the restructuring accruals will be made in future periods, ifnecessary, based upon the then current actual events and circumstances.

 

*Interest income , net*forthe three months ended March 31, 2004 was income of $109,000 as compared toincome of $434,000 for the three months ended March 31, 2003.  Interest income has declined year-over-yeardue to lower cash balances and lower interest rates being earned on investedfunds.

 

26

----

 

*Other (expense) income, net,*forthe three months ended March 31, 2004 was a loss of $133,000 as compared toincome of $642,000 for the three months ended March 31, 2003.  The increase in expense was primarily due tothe sale of fixed assets as well as loss on foreign currency for the quarterended March 31, 2004.  The weakeningU.S. dollar against other world currencies, particularly the Euro, had afavorable impact on other income for the three months ended March 31, 2003,while the dollar strengthened against the Euro in the first quarter of fiscal2004.

 

*Income Taxes*.  During the quarter ended March 31, 2004, we recorded taxexpense of $136,000 as compared to a tax benefit of $55,000 for quarter ended March31, 2003 .  For quarter ended March 31,2004 tax expense, $76,000 relates to income taxes in foreign jurisdictions thatare not available to credit against US income taxes.  The remaining $60,000 was attributable to state franchisetaxes.  The tax benefit from the firstquarter of fiscal 2003 was primarily due to revised estimates for state incometaxes.

 

*Liquidity andCapital Resources (in thousands)*

 
|                                                      |   | **March 31,  2004** |   | **December  31,  2003** |   |
|-----------------------------------------------------------|--------|---------------------|--------|-------------------------|--------|
|                                                      |   |                |   |                    |   |
| Cash, cash equivalents and liquid  short-term investments |   | $                   | 76,480 |                    | $      | 78,776 |   |
| Restricted cash and investments                           |   | $                   | 18,784 |                    | $      | 19,827 |   |
| Working capital (deficit)                                 |   | $                   | (894   | )                       | $      | 747 |   |
| Working capital ratio                                     |   | 1.0                 |   | 1.0                     |   |

 

As of March 31, 2004, cash,cash equivalents, liquid short-term investments, liquid long-term investmentsand restricted cash and investments totaled $95.3 million, which represents adecrease of $3.3 million as compared to a balance of $98.6 million on December31, 2003. This decrease was attributable to net cash used for operations.

 

We had variouscredit facilities with a commercial lender that include term debt in the formof notes payable, a revolving line of credit and an equipment line of credit.

 

As of March31, 2004 and December 31, 2003, outstanding term debt borrowings wereapproximately $1.7 million and $1.9 million, respectively.  Borrowings bear interest at the bank’s primerate (4.00% as of March 31, 2004 and December 31, 2003) plus 1.25%. Principaland interest are due in monthly payments through maturity based on the terms ofthe facilities. Principal payments of $977,000 are due annually from 2000through 2004, $611,000 due in 2005, and a final payment of $357,000 due in2006.

 

We maintaineda $27 million revolving line of credit, which is collateralized by allof our assets and under which borrowings bear interest at the bank’s prime rate(floating with a floor of 4.25%). Interest is due monthly and principal is dueat expiration in February 2005. The amended and restated loan and securityagreement requires us to maintain certain levels in cash and cash equivalents,short-term investments and long-term investments (excluding equityinvestments). Additionally, the amended and restated loan and securityagreement requires us to maintain certain levels on deposit with our commerciallender.  At both March 31, 2004 andDecember 31, 2003, $27.0 million was outstanding under the line of credit.

 

As of March 31, 2004, we were not in compliance with the profitabilityand financial covenants of its commercial credit facilities.  Subsequently, we received a waiver from thebank regarding non-compliance.

 

During thefirst quarter of 2004, we entered into a $500,000 equipment line of credit withthe commercial lender.  Such line ofcredit is secured by all of our assets and under which borrowings bear interestat the banks prime rate (4.00% as of March 31, 2004) plus .75%.  Principal payments are due in 36 monthlypayments.  Principal payments of $17,143are due in 2004, $25,715 due in 2005 and 2006, and a final payment of $8,572due in 2006.  As of March 31, 2004,$77,000 was outstanding under the equipment loan.

 

Commitments totaling $18.8 million and $19.8 million in the form ofstandby letters of credit were issued on our behalf from financial institutionsas of March 31, 2004 and December 31, 2003, respectively, primarily in

 

27

----

 

favor of our various landlordsto secure obligations under our facility leases.  Accordingly, $18.8 million and $19.8 million have beenpresented as restricted cash in the accompanying Condensed Consolidated BalanceSheets at March 31, 2004 andDecember 31, 2003, respectively.

 

Our exposure to market riskfor changes in interest rates relates primarily to our investment portfolio. Wehad no derivative financial instruments as of March 31, 2004 and December 31,2003. We place our investments in instruments that meet high credit qualitystandards and the amount of credit exposure to any one issue, issuer and typeof instrument is limited.  Our interestrate risk related to borrowings historically has been minimal as interestexpense related to borrowings has been immaterial for the three months endedMarch 31, 2004 and 2003.

 

*Cash Provided By (Used For) OperatingActivities*

 

Cash used for operating activities was $3.7 million for the threemonths ended March 31, 2004. The primary reason for the net cash used byoperating activities was due to the net loss of $867,000 and decreases inaccrued expenses and non-current liabilities, primarily related to excessfacilities costs.  Partially offsettingthese uses of cash were $1.4 million of non-cash depreciation and amortizationexpense and a decrease in accounts receivable of $1.7 million due to lowerrevenue.  Cash provided by operatingactivities was $301,000 for the three months ended March 31, 2003.  The primary reason for the net cash providedby operating activities was due to net income of $1.3 million, $3.4million of non-cash depreciation and amortization expense, a decrease inaccounts receivable of $8.6 million. and a decline in prepaid expenses of $3.1million..  Partially offsetting thesesources of cash were an $8.7 million decline in accounts payable and accruedexpenses, a $7.2 million decline in unearned and deferred revenue and a $1.7million decline in other non-current liabilities.

 

*Cash Provided By Investing Activities*

 

Cash provided by investing activities was $0.8 million for thethree months ended March 31, 2004and was primarily due to transfers from restricted cash.  Cash provided by investing activities was$21.3 million for the three months ended March 31, 2003, and was primarily dueto net sales/maturities of investments of $21.5 million.  Capital expenditures were $144,000 and$132,000 during the three months ended March31, 2004 and 2003, respectively. Our capital expenditures consisted of purchases of operating resourcesto manage our operations and consisted primarily of computer hardware andsoftware.

 

*Cash Provided By Financing Activities*

 

Cash provided by financing activities was $637,000 for the three monthsended March 31, 2004, consistingof $803,000 in proceeds from the issuance of common stock and ($166,000) forrepayment of borrowings, net of new borrowings.  Cash provided by financing activities was $20,000 for the threemonths ended March 31, 2003, consisting of $264,000 in proceeds from theissuance of common stock partially offset by ($244,000) of repayments ofborrowings.

 

*Leases and Other Contractual Obligations*

 

Welease our headquarters facility and our other facilities under non-cancelableoperating lease agreements expiring through the year 2013. Under the terms ofthe agreements, we are required to pay lease costs, property taxes, insuranceand normal maintenance costs.

 

We expect to incur significant operating expenses for the foreseeablefuture in order to execute our business plan. A summary of total future minimumlease payments as of March 31, 2004, under noncancelable operating leaseagreements, together with amounts included in restructuring reserves is asfollows (in millions):

 
| **Years Ended December 31,** |   | **Operating  Leases** |   |
|-----------------------------------|--------|-----------------------|--------|
|                              |   |                  |   |
| 2004                              |   | $                     | 17.5   |   |
| 2005                              |   | 23.7                  |   |
| 2006                              |   | 21.2                  |   |
| 2007                              |   | 18.7                  |   |
| 2008                              |   | 14.6                  |   |
| 2009 and thereafter               |   | 75.0                  |   |
| Total minimum lease payments      |   | $                     | 170.7  |   |

 

28

----

 

As of March 31, 2004, we have accrued $100.0 million of estimatedfuture facilities costs as a restructuring accrual. See Note 6 in the Notes toCondensed Consolidated Financial Statements. The estimated sublease income netted against the restructuring accrualconsists of the following (unaudited, in millions):

 
| Sublease income to be received under  non-cancelable sublease agreements signed prior to March 31, 2004 |   | $    | 20.8   |   |
|--------------------------------------------------------------------------------------------------------------|--------|------|--------|--------|
| Estimated sublease income for sublease  agreements yet to be negotiated                                      |   | 26.6 |   |
| Total estimated sublease income                                                                              |   | $    | 47.4   |   |

 

The following table summarizes our letters of credit and the effectsuch letters of credit could have on our liquidity and cash flows in futureperiods if the letters of credit were drawn upon (in thousands):

 
| Less than 1 year |   | $      | 2,535  |   |
|------------------|--------|--------|--------|--------|
| 1-3 years        |   | 548    |   |
| 4-5 years        |   | 1,296  |   |
| Over 5 years     |   | 14,404 |   |
| Total            |   | $      | 18,783 |   |

 

Restricted cash represents collateral for these letters of credit.

 

Our net future cash flows will depend heavily on the level of futurerevenues, our ability to restructure operations successfully and our ability tomanage infrastructure costs.

 

We currentlyexpect to fund our short-term working capital and operating resourceexpenditure requirements, for at least the next twelve months, from ourexisting cash and cash equivalents and short-term investment resources, ouranticipated cash flows from operations and anticipated cash flows fromsubleases. However, we could experience unforeseen circumstances, such as aworsening economic downturn, lease settlements and less than anticipated cashinflows from operations, invested assets, and subleases that may increase ouruse of available cash or need to obtain additional financing. Also, we may findit necessary to obtain additional equity or debt financing in order to supportmore rapid expansion, develop new or enhanced services, respond to competitivepressures, acquire complementary businesses or technologies or respond tounanticipated requirements.

 

We may seek to raise additional funds through private or public salesof securities, strategic relationships, bank debt, financing under leasingarrangements or otherwise. If additional funds are raised through the issuanceof equity securities, the percentage ownership of our stockholders will bereduced, stockholders may experience additional dilution or such equitysecurities may have rights, preferences or privileges senior to those of theholders of our common stock. There can be no assurance that additionalfinancing will be available on acceptable terms, if at all. If adequate fundsare not available or are not available on acceptable terms, we may be unable todevelop our products, take advantage of future opportunities or respond tocompetitive pressures or unanticipated requirements, which could have a materialadverse effect on our business, financial condition and future operatingresults.

 

*Factors That May Affect Future OperatingResults*

 

Wemay experience significant fluctuations in quarterly operating results that maybe caused by many factors including, but not limited to, those discussed belowand herein, as set out in Items 7 and 7A in our annual report on Form 10-K forthe year ended December 31, 2003 and elsewhere therein and as disclosed inother documents filed with the Securities and Exchange Commission.

 

29

----

 

Significant fluctuations in future quarterly operating results may becaused by many factors including, among others, the timing of introductions orenhancements of products and services by us or our competitors, marketacceptance of new products, the mix of our products sold, changes in pricingpolicies by us or our competitors, our ability to retain customers, changes inour sales incentive plans, budgeting cycles of our customers, customer orderdeferrals in anticipation of new products or enhancements by us or ourcompetitors, nonrenewal of maintenance agreements, product life cycles,changes in strategy, seasonal trends, the mix of distribution channels throughwhich our products are sold, the mix of international and domestic sales, therate at which new sales people become productive, changes in the level ofoperating expenses to support projected growth and general economic conditions.We anticipate that a significant portion of our revenues will be derived from alimited number of orders, and the timing of receipt and fulfillment of any suchorders is expected to cause material fluctuations in our operating results,particularly on a quarterly basis. Due to the foregoing factors, quarterly revenuesand operating results are difficult to forecast, and we believe thatperiod-to-period comparisons of our operating results will not necessarily bemeaningful and should not be relied upon as any indication of futureperformance. It is likely that our future quarterly operating results from timeto time will not meet the expectations of market analysts or investors, whichmay have an adverse effect on the price of our common stock.

 

Weare continuing efforts to reduce and control our expense structure. We believestrict cost containment and expense reductions are essential to achievingpositive cash flow and profitability. A number of factors could preclude usfrom successfully bringing costs and expenses in line with our revenues,including unplanned uses of cash, the inability to accurately forecast businessactivities and further deterioration of our revenues. If we are not able toeffectively reduce our costs and achieve an expense structure commensurate withour business activities and revenues, we may have inadequate levels of cash foroperations or for capital requirements, which could significantly harm ourability to operate our business.

 

Werenewed and amended the SVB Facility during the first quarter of fiscal 2004.The SVB Facility is secured by substantially all of our owned assets.  Theprimary financial covenant under the SVB Facility obligates us to maintaincertain levels of available cash, cash equivalents, short-term investments andlong-term investments (excluding equity investments). Falling below such levelswould be an event of default for which Silicon Valley Bank may, among otherthings, accelerate the payment of the facility.  As of March 31, 2004, the Company was not in compliancewith the profitability and financial covenants of the commercial creditfacilities.  Subsequently, the Companyreceived a waiver from the bank regarding non-compliance.  Whilewe plan to adhere to the financial covenants of the SVB Facility and avoid anevent of default in future periods, in the event that we are unable to avoidanother event of default, it may be necessary or advisable to retire andterminate the SVB Facility and pay off all remaining balances borrowed. Such apayoff would further limit our available cash and cash equivalents.

 

Our successdepends largely on the skills, experience and performance of key personnel. Ifwe lose one or more key personnel, our business could be harmed. Our futuresuccess depends on our ability to continue attracting and retaining highlyskilled personnel. We may not be successful in attracting, assimilating andretaining qualified personnel in the future. Furthermore, the significantdownturn in our business environment had a negative impact on our operations.We are currently restructuring our operations and have taken actions to reduceour workforce and implement other cost containment activities. These actionscould lead to disruptions in our business, reduced employee morale andproductivity, increased attrition and problems with retaining existing employeesand recruiting future employees and increased financial costs.

 

Some of these risks and uncertainties relate to the rapidly evolvingnature of the markets in which we operate. These related market risks include,among other things, the evolution of the online commerce market, the dependenceof online commerce on the development of the Internet and its relatedinfrastructure, the uncertainty pertaining to widespread adoption ofonline commerce and the risk of government regulation of the Internet. Other risksand uncertainties relate to our ability to, among other things, successfullyimplement our marketing strategies, respond to competitive developments,continue to develop and upgrade our products and technologies more rapidly thanour competitors, and commercialize our products and services by incorporatingthese enhanced technologies. There can be no assurance that we will succeed inaddressing any or all of these risks.

 

Therehas been a general downturn in the Unites States of America and global economy.  If the economic environment continues todecline or if the current global slowdown worsens or becomes prolonged, ourfuture results may be significantly impacted. We believe that the currenteconomic decline has increased the average length

 

30

----

 

of our sales cycle and our operating resultscould suffer and our stock price could decline if we do not achieve the levelof revenues we expect.  Financialcomparisons discussed herein may not be indicative of future performance.

 

Like other U.S. companies, our business and operating results aresubject to uncertainties arising out of the terrorist attacks on the UnitedStates, including the economic consequences of military actions or additionalterrorist activities and associated political instability, and the impact ofheightened security concerns on domestic and international travel and commerce.Such uncertainties could also lead to delays or cancellations of customerorders, a general decrease in corporate spending or our inability toeffectively market and sell our products. Any of these results couldsubstantially harm our business and results of operations, causing a decreasein our revenues.

 

***Related Party Transactions***

 

BroadVision has an investment of 19.9% in Roundarch, a CRM servicescompany. We have a reseller relationship with Roundarch whereby Roundarch is animplementation partner who integrates our software products with otherthird-party software products into CRM customer installations.  During thethree months ended March 31, 2004 and 2003, transactions involving Roundarchcomprised $2,000 and $23,000 of our revenue, respectively.

 

**Item3.  Quantitative and QualitativeDisclosures About Market Risk**

 

Our exposure to market risk for changes in interest rates relatesprimarily to our investment portfolio. We had no derivative financialinstruments as of March 31, 2004 and December 31, 2003. 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 borrowings hasbeen immaterial for the three months ended March 31, 2004 and 2003.

 

Duringthe first quarter of fiscal 2004, we drew down $27.0 million on our revolvingline of credit.  Interest is payable monthly at the bank’s prime rate witha floor minimum of 4.25% (4.25% annually as of March 31, 2004) and principal isdue in full in February 2005.  Additionally, we have two outstanding termloans as of March 31, 2004.  Interest on those term loans are at thebank’s prime rate (4.00% as of March 31, 2004) and prime rate plus 1.25%.

 

***Cash and Cash Equivalents, Short-TermInvestments***

 

We consider all debt and equity securities with maturities of threemonths or less at the date of purchase to be cash equivalents. Our short-terminvestments consist of debt and equity securities that are classified asavailable-for-sale. Our debt securities are carried at fair value with relatedunrealized gains or losses reported as other comprehensive income (loss), netof tax.

 

**All short-term investments have aremaining maturity of twelve months or less. Total short-term investmentunrealized gains (losses) were approximately $0 and ($54,000) for the threemonths ended March 31, 2004 and 2003, respectively.**

 

Our cash, cash equivalents and short-term investments consisted of thefollowing as of March 31, 2004 (in thousands):

 

31

----

 
|                      |   | **Amortized  costs** |   | **Unrealized  gains** |   | **Unrealized  losses** |   | **Fair  value** |   |
|---------------------------|--------|----------------------|--------|-----------------------|--------|------------------------|--------|-----------------|--------|
| Cash                      |   | $                    | 65,275 |                  | $      | —                 |   | $               | — |   | $ | 67,319 |   |
| Money market              |   | 29,580               |   | —                |   | —                 |   | 29,580          |   |
| Corporate notes/bonds     |   | 408                  |   | —                |   | —                 |   | 408             |   |
|                      |   | $                    | 95,263 |                  | $      | —                 |   | $               | — |   | $ | 95,263 |   |
|                      |   |                 |   |                  |   |                   |   |            |   |
| Cash and cash equivalents |   | 95,263               |   | —                |   | —                 |   | 95,263          |   |
| Short-term investments    |   | —               |   | —                |   | —                 |   | —          |   |
|                      |   | $                    | 95,263 |                  | $      | —                 |   | $               | — |   | $ | 95,263 |   |
|                           |        |                      |        |                       |        |                        |        |                 |        |  |  |  |  |  |  |  |  |

 

Includedin the table above in cash and cash equivalents are $18.8 million ofnon-current restricted cash and investments.

 

Ourcash and cash equivalents and short-term investments consisted of the followingas of December 31, 2003 (in thousands):

 
|                      |   | **Amortized  costs** |   | **Unrealized  gains** |   | **Unrealized  losses** |   | **Fair  value** |   |
|---------------------------|--------|----------------------|--------|-----------------------|--------|------------------------|--------|-----------------|--------|
| Cash                      |   | $                    | 65,592 |                  | $      | —                 |   | $               | — |   | $ | 65,592 |   |
| Money market              |   | 32,602               |   | —                |   | —                 |   | 32,602          |   |
| Corporate notes/bonds     |   | 408                  |   | —                |   | —                 |   | 408             |   |
| Government notes/bonds    |   | —               |   | —                |   | —                 |   | 23,441          |   |
|                      |   | $                    | 98,602 |                  | $      | —                 |   | $               | — |   | $ | 98,602 |   |
|                      |   |                 |   |                  |   |                   |   |            |   |
| Cash and cash equivalents |   | $                    | 98,602 |                  | $      | —                 |   | $               | — |   | $ | 98,602 |   |
| Short-term investments    |   | —               |   | —                |   | —                 |   | —          |   |
|                      |   | $                    | 98,602 |                  | $      | —                 |   | $               | — |   | $ | 98,602 |   |

 

32

----

 

Includedin the table above in short-term investments are non-current restricted cashand investments of $19.8 million.

 

***Concentrations of Credit Risk***

 

Financial assets that potentially subject us to significantconcentrations of credit risk consist principally of cash, cash equivalents,short-term investments and trade accounts receivable. We maintain our cash,cash equivalents and short-term investments with four separate financialinstitutions. We market and sell our products throughout the world and performongoing credit evaluations of our customers. We maintain reserves for potentialcredit losses. For the three months ended March 31, 2004, no onecustomer accounted for more than 10% of total revenue.  For the three months ended March 31, 2004, no one customeraccounted for more than 10% of accounts receivable.

 

***Fair Value of Financial Instruments***

 

Ourfinancial instruments consist of cash equivalents, short-term investments,accounts receivable, long-term investments, accounts payable and debt. We donot have any derivative financial instruments. We believe the reported carryingamounts of its financial instruments approximates fair value, based upon theshort maturity of cash equivalents, short-term investments, long-terminvestments, accounts receivable and payable, and based on the current ratesavailable to it on similar debt issues.

 

***Foreign Currency***

 

Welicense our products and maintain significant operations in foreign countries.Fluctuations in the value of foreign currencies, principally the Euro, relativeto the United States dollar have impacted our operating results in the past andmay do so in the future. We expect that international license, maintenance andconsulting revenues will continue to account for a significant portion of ourtotal revenues in the future. We pay the expenses of our internationaloperations in local currencies and do not currently engage in hedgingtransactions with respect to such obligations.

 

33

----

 

***Equity Investments***

 

Ourequity investments consist of investments in public and non-public companiesthat are accounted for under the cost method of accounting. Equity investmentsare accounted for under the cost method of accounting when we have a minorityinterest and do not have the ability to exercise significant influence. Theseinvestments are classified as available for sale and are carried at fair valuewhen readily determinable market values exist or at cost when such marketvalues do not exist. Adjustments to fair value are recorded as a component ofother comprehensive income unless the investments are considered permanentlyimpaired in which case the adjustment is recorded as a component of otherincome (expense), net in the condensed consolidated statement of operations.

 

The total fair value of our cost method long-term equity investments inpublic and non-public companies as of March 31, 2004 was $1.7 million. Therewere not any “other than temporary write-down” during the three months endedMarch 31, 2004 related to long-term equity investments.

 

**ITEM 4. Controls and Procedures**

 

Our Chief Executive Officer and our Chief Financial Officer areresponsible for establishing and maintaining “disclosure controls andprocedures” (as defined in the rules promulgated under the Securities ExchangeAct of 1934, as amended) for our company. Based on their evaluation of ourdisclosure controls and procedures (as defined in the rules promulgated underthe Securities Exchange Act of 1934), our Chief Executive Officer and our ChiefFinancial Officer concluded that our disclosure controls and procedures wereeffective as of March 31, 2004, the end of the period covered by this report.

 

*Changes in Internal Control Over FinancialReporting*

 

There were no changes in our internal control over financial reportingduring the period covered by this report that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

*Limitations on the Effectiveness of Controls*

 

Our management, including our Chief Executive Officer and ChiefFinancial Officer, does not expect that our disclosure controls and proceduresor our internal controls will prevent all error and fraud. A control system, nomatter how well conceived and operated, can provide only reasonable, notabsolute, assurance that the objectives of the control system are met. Further,the design of a control system must reflect the fact that there are resourceconstraints, and the benefits of controls must be considered relative to theircosts. Because of the inherent limitations in all control systems, noevaluation of controls can provide absolute assurance that all control issuesand instances of fraud, if any, within the company have been detected. Theseinherent limitations include the realities that judgments in decision-makingcan be faulty, and that breakdowns can occur because of simple error ormistake. Additionally, controls can be circumvented by the individual acts ofsome persons, by collusion of two or more people, or by management override ofthe controls. The design of any system of controls also is based in part uponcertain assumptions about the likelihood of future events, and there can be noassurance that any design will succeed in achieving its stated goals under allpotential future conditions; over time, controls may become inadequate becauseof changes in conditions, or the degree of compliance with the policies orprocedures may deteriorate. Because of the inherent limitations in acost-effective control system, misstatements due to error or fraud may occurand not be detected. Our disclosure controls and procedures are designed toprovide reasonable assurance of achieving their objectives, and our ChiefExecutive Officer and the Chief Financial Officer have concluded that thesecontrols and procedures are effective at the “reasonable assurance” level.

 

34

----

 

**PART II.  OTHERINFORMATION**

 

**Item 1.    Legal Proceedings**

 

The Company is subject to various other claims and legal actionsarising in the ordinary course of business. In the opinion of management, afterconsultation with legal counsel, the Company has adequate defenses for each ofthe claims and actions, and believes that their ultimate disposition is notexpected to have a material effect on our business, financial condition orresults of operations. Although management currently believes that the outcomeof other outstanding legal proceedings, claims and litigation involving us willnot have a material adverse effect on our business, results of operations orfinancial condition, litigation is inherently uncertain, and there can be noassurance that existing or future litigation will not have a material adverseeffect on our business, results of operations or financial condition.

 

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

Notapplicable.

 

**Item 3.    Defaults Upon Senior Securities**

Notapplicable.

 

**Item 4.    Submission of Matters to a Vote of SecurityHolders**

Not applicable.

 

**Item 5.    Other Information**

Notapplicable.

 

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

 

(a)           Exhibits

 
| **Exhibits** |   | **Description**                                                                                                                                     |
|--------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1          |   | Amended and Restated Bylaws                                                                                                                         |
| 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 |

 

(b)           Reports on Form 8-K

 

On January 22, 2004, the Company filed a current report on Form 8-Krelated to the announcement of its financial results for the year endedDecember 31, 2003.

 

On April 21, 2004, the Company filed a current report on Form 8-Krelated to the announcement of its financial results for the quarter endedMarch 31, 2004.

 

35

----

 

**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:  May 10, 2004 | By:    | /s/   Pehong Chen                                                                              |   |
|                |   | Pehong  Chen                                                                                        |
|                |   | Chairman  of the Board, President and Chief Executive Officer (Principal Executive  Officer)        |
|                |   |                                                                                                |
| Date:  May 10, 2004 | By:    | /s/   William E. Meyer                                                                         |   |
|                |   | William  E. Meyer                                                                                   |
|                |   | Executive  Vice President and Chief Financial Officer  (Principal Financial and Accounting Officer) |
|                     |        |                                                                                                     |  |  |

 

36

----

 

**BROADVISION, INC. QUARTERLY REPORT ONFORM 10-Q MARCH 31, 2004**

 

**INDEX TO EXHIBITS**

 
| **Exhibit** |   | **Description**                                                                                                                                     |
|-------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1         |   | Amended and Restated Bylaws                                                                                                                         |
| 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 |

 

37

----