**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,DC 20549**

 

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**FORM 10-Q**

 

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| **(Mark One)**                                 |
|------------------------------------------------|
|                                           |   |   |
| **ý**                                     | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|                                           |   |   |
| **For the  Quarter ended March 31, 2005** |
|                                           |
| **OR**                                         |
|                                           |   |   |
| **o**                                          | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|                                           |   |   |
| **0-28252**                                    |
| **(Commission  File Number)**                  |
|                                                |  |  |  |  |

 

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**BROADVISION, INC.**

(Exact name of registrant asspecified in its charter)

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

 

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

 

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

 

As of May 2, 2005 there were 34,181,112 sharesof the Registrant’s Common Stock issued and outstanding.

 

 

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**BROADVISION,INC. AND SUBSIDIARIESFORM 10-QQuarter Ended March 31, 2005**

 

**TABLE OFCONTENTS**

 
| **PART I.**  | **FINANCIAL  INFORMATION**                                                                                                        | ** ** |
|-------------------|-----------------------------------------------------------------------------------------------------------------------------------|------------|
| Item 1.           | Financial Statements                                                                                                              |       |
|              | Condensed  Consolidated Balance Sheets-March 31, 2005 and December 31, 2004                                             |       |
|              | Condensed  Consolidated Statements of Operations and Comprehensive Income (Loss)-Three  months ended March 31, 2005 and 2004 |       |
|              | Condensed  Consolidated Statements of Cash Flows-Three months ended March 31, 2005  and 2004                                 |       |
|              | Notes  to Condensed Consolidated Financial Statements                                                                             |       |
| Item  2.          | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                       |       |
| Item  3.          | Quantitative  and Qualitative Disclosures About Market Risk                                                                       |       |
| Item 4.           | Controls and  Procedures                                                                                                          |       |
|              |                                                                                                                              |       |
| **PART II.** | **OTHER INFORMATION**                                                                                                             | ** ** |
| Item 1.           | Legal Proceedings                                                                                                                 |       |
| Item  2.          | Changes  in Securities and Use of Proceeds                                                                                        |       |
| Item 3.           | Defaults Upon  Senior Securities                                                                                                  |       |
| Item  4.          | Submission  of Matters to a Vote of Security Holders                                                                              |       |
| Item 5.           | Other Information                                                                                                                 |       |
| Item 6.           | Exhibits and Reports on Form 8-K                                                                                             |       |
|              |                                                                                                                              |       |
| **SIGNATURES**    |                                                                                                                              |

 

2

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**PART I. FINANCIAL INFORMATION**

**Item 1.****Financial Statements**

 

**BROADVISION, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

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

 
| ** **                                                                                                                                                                                           | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                           | ** ** | **(unaudited)**          | ** ** | ** **                  | ** ** |
| **ASSETS**                                                                                                                                                                                           |       |                     |       |                        |       |
| Current assets:                                                                                                                                                                                      |       |                     |       |                        |       |
| Cash and cash equivalents                                                                                                                                                                            |       | $                        | 37,218     |                        | $          | 41,851 |   |
|                                                                                                                                                                                                 |       |                     |       |                        |       |   |   |
| Accounts receivable, less receivable  reserves of $1,250 as of March 31, 2005 and $1,409 as of  December 31, 2004                                                                     |       | 12,740                   |       | 14,370                      |       |
| Restricted cash, current portion                                                                                                                                                                     |       | 3,156                    |       | 21,933                      |       |
| Prepaids and other                                                                                                                                                                                   |       | 2,509                    |       | 2,232                       |       |
| Total current assets                                                                                                                                                                                 |       | 55,623                   |       | 80,386                      |       |
|                                                                                                                                                                                                 |       |                     |       |                        |       |
| Property and equipment, net                                                                                                                                                                          |       | 3,168                    |       | 3,566                       |       |
| Restricted cash, net of current portion                                                                                                                                                              |       | 1,997                    |       | 2,323                       |       |
| Equity investments                                                                                                                                                                                   |       | 338                      |       | 574                         |       |
| Goodwill                                                                                                                                                                                             |       | 56,434                   |       | 56,434                      |       |
| Other assets                                                                                                                                                                                         |       | 1,282                    |       | 1,370                       |       |
|                                                                                                                                                                                                 |       |                     |       |                        |       |
| Total assets                                                                                                                                                                                         |       | $                        | 118,842    |                        | $          | 144,653 |   |
|                                                                                                                                                                                                 |       |                     |       |                        |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                        |       |                     |       |                        |       |
| Current liabilities:                                                                                                                                                                                 |       |                     |       |                        |       |
| Bank borrowings and current portion of  long-term debt                                                                                                                                               |       | $                        | 33,116     |                        | $          | 25,566 |   |
| Accounts payable                                                                                                                                                                                     |       | 6,335                    |       | 7,470                       |       |
| Accrued expenses                                                                                                                                                                                     |       | 17,861                   |       | 40,745                      |       |
| Warrant liability                                                                                                                                                                                    |       | 2,382                    |       | 4,899                       |       |
| Unearned revenue                                                                                                                                                                                     |       | 3,107                    |       | 3,870                       |       |
| Deferred maintenance                                                                                                                                                                                 |       | 14,986                   |       | 15,972                      |       |
| Total current liabilities                                                                                                                                                                            |       | 77,787                   |       | 98,522                      |       |
|                                                                                                                                                                                                 |       |                     |       |                        |       |
| Long-term debt, net of current portion                                                                                                                                                               |       | 276                      |       | 7,443                       |       |
| Other non-current liabilities                                                                                                                                                                        |       | 7,036                    |       | 8,278                       |       |
|                                                                                                                                                                                                 |       |                     |       |                        |       |
| Total liabilities                                                                                                                                                                                    |       | 85,099                   |       | 114,243                     |       |
|                                                                                                                                                                                                 |       |                     |       |                        |       |
| Commitments and Contingencies (Note 4)                                                                                                                                                               |       |                     |       |                        |       |
|                                                                                                                                                                                                 |       |                     |       |                        |       |
| Stockholders’ equity:                                                                                                                                                                           |       |                     |       |                        |       |
| Convertible preferred stock, $0.0001 par  value; 10,000 shares authorized; none issued and outstanding                                                                                               |       | —                   |       | —                      |       |
| Common stock, $0.0001 par value; 2,000,000  shares authorized; 34,178 shares issued and outstanding as of March 31,  2005 and 33,951 shares issued and outstanding as of December 31, 2004 |       | 3                        |       | 3                           |       |
| Additional paid-in capital                                                                                                                                                                           |       | 1,214,989                |       | 1,214,619                   |       |
| Accumulated other comprehensive loss                                                                                                                                                                 |       | (127                     | )          | (172                        | )          |
| Accumulated deficit                                                                                                                                                                                  |       | (1,181,122               | )          | (1,184,040                  | )          |
| Total stockholders’ equity                                                                                                                                                                      |       | 33,743                   |       | 30,410                      |       |
|                                                                                                                                                                                                 |       |                     |       |                        |       |
| Total liabilities and stockholders’ equity                                                                                                                                                      |       | $                        | 118,842    |                        | $          | 144,653 |   |

 

*See Accompanying Notes to CondensedConsolidated Financial Statements*

 

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** **

**BROADVISION, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**AND COMPREHENSIVE INCOME (LOSS)**

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

 
| ** **                                                                              | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                              | ** ** | **2005**                               | ** ** | **2004** | ** ** |
|                                                                                    |       |                                   |       |   |   |
| **Revenues:**                                                                           |       |                                   |       |   |   |
| Software licenses                                                                       |       | $                                      | 4,416      |   | $ | 7,840 |   |
| Services                                                                                |       | 11,951                                 |       | 13,049 |   |
| Total revenues                                                                          |       | 16,367                                 |       | 20,889 |   |
|                                                                                    |       |                                   |       |   |   |
| **Cost of revenues:**                                                                   |       |                                   |       |   |   |
| ** **                                                                              |       |                                   |       |   |   |
| Cost of (credit for) software licenses                                                  |       | (57                                    | )          | 578 |   |
| Cost of services                                                                        |       | 5,980                                  |       | 6,277 |   |
|                                                                                    |       |                                   |       |   |   |
| Total cost of revenues                                                                  |       | 5,923                                  |       | 6,855 |   |
|                                                                                    |       |                                   |       |   |   |
| Gross profit                                                                            |       | 10,444                                 |       | 14,034 |   |
|                                                                                    |       |                                   |       |   |   |
| **Operating expenses:**                                                                 |       |                                   |       |   |   |
| Research and development                                                                |       | 4,287                                  |       | 4,888 |   |
| Sales and marketing                                                                     |       | 5,811                                  |       | 6,866 |   |
| General and administrative                                                              |       | 2,535                                  |       | 2,417 |   |
| Restructuring charge (credit)                                                           |       | (704                                   | )          | 570 |   |
| Total operating expenses                                                                |       | 11,929                                 |       | 14,741 |   |
|                                                                                    |       |                                   |       |   |   |
| Operating income (loss)                                                                 |       | (1,485                                 | )          | (707 | ) |
|                                                                                    |       |                                   |       |   |   |
| Interest (expense) income, net                                                          |       | (744                                   | )          | 109 |   |
| Other (expense) income, net                                                             |       | 3,115                                  |       | (133 | ) |
|                                                                                    |       |                                   |       |   |   |
| Income (loss) before provision for income  taxes                                        |       | 886                                    |       | (731 | ) |
|                                                                                    |       |                                   |       |   |   |
| Benefit (provision) for income taxes                                                    |       | 2,032                                  |       | (136 | ) |
|                                                                                    |       |                                   |       |   |   |
| Net income (loss)                                                                       |       | $                                      | 2,918      |   | $ | (867 | ) |
|                                                                                    |       |                                   |       |   |   |
| Basic income (loss) per share                                                           |       | $                                      | 0.09       |   | $ | (0.03 | ) |
| Diluted income (loss) per share                                                         |       | 0.07                                   |       | (0.03 | ) |
| **Shares used in computing:**                                                           |       |                                   |       |   |   |
| Basic shares                                                                            |       | 33,971                                 |       | 33,300 |   |
| Diluted shares                                                                          |       | 39,968                                 |       | 33,300 |   |
|                                                                                    |       |                                   |       |   |   |
| **Comprehensive income (loss):**                                                        |       |                                   |       |   |   |
| Net income (loss)                                                                       |       | $                                      | 2,918      |   | $ | (867 | ) |
|                                                                                    |       |                                   |       |   |   |   |   |
| Other comprehensive gain (loss), net of  tax:  Foreign currency translation adjustments |       | (45                                    | )          | — |   |
| Total comprehensive income (loss)                                                       |       | $                                      | 2,873      |   | $ | (867 | ) |

 

*See Accompanying Notes to CondensedConsolidated Financial Statements*

 

4

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**BROADVISION, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(In thousands; unaudited)**

 
| ** **                                                                             | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                             | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| **Cash flows from operating activities:**                                              |       |                                  |       |   |   |
| Net income (loss)                                                                      |       | $                                     | 2,918      |   | $ | (867 | ) |
| Adjustments to reconcile net income (loss)  to net cash used for operating activities: |       |                                  |       |   |   |
| Depreciation and amortization                                                          |       | 416                                   |       | 1,409 |   |
| Stock-based compensation charge                                                        |       | —                                |       | 15 |   |
| Release of doubtful accounts and reserves                                              |       | (159                                  | )          | (600 | ) |
| Amortization of prepaid royalties                                                      |       | —                                |       | 176 |   |
| Loss (gain) on cost method investments                                                 |       | (1,215                                | )          | 58 |   |
| Loss on sale or abandonment of fixed assets                                            |       | 24                                    |       | — |   |
| Release of income tax reserve                                                          |       | (2,032                                | )          | — |   |
| Gain on revaluation of warrants                                                        |       | (2,517                                | )          | — |   |
| Amortization of discount on debentures                                                 |       | 633                                   |       | — |   |
| Changes in operating assets and  liabilities:                                          |       |                                  |       |   |   |
| Accounts receivable                                                                    |       | 1,789                                 |       | 1,686 |   |
| Prepaids and other                                                                     |       | (277                                  | )          | 1,003 |   |
| Other non-current assets                                                               |       | 88                                    |       | 68 |   |
| Accounts payable and accrued expenses                                                  |       | (2,342                                | )          | (3,040 | ) |
| Restructuring accrual                                                                  |       | (20,886                               | )          | — |   |
| Unearned revenue and deferred maintenance                                              |       | (1,749                                | )          | 96 |   |
| Other noncurrent liabilities                                                           |       | —                                |       | (3,735 | ) |
| Net cash used for operating activities                                                 |       | (25,309                               | )          | (3,731 | ) |
|                                                                                   |       |                                  |       |   |   |
| **Cash flows from investing activities:**                                              |       |                                  |       |   |   |
| Purchase of property and equipment                                                     |       | (57                                   | )          | (144 | ) |
| Transfer from restricted cash                                                          |       | 19,103                                |       | 1,042 |   |
| Purchase of long-term investments                                                      |       | —                                |       | (100 | ) |
| Proceeds from sale of cost method  investments                                         |       | 350                                   |       | — |   |
| Proceeds from dividends                                                                |       | 1,101                                 |       | — |   |
| Net cash provided by investing activities                                              |       | 20,497                                |       | 798 |   |
|                                                                                   |       |                                  |       |   |   |
| **Cash flows from financing activities:**                                              |       |                                  |       |   |   |
| Proceeds from bank line of credit                                                      |       | 20,000                                |       | 78 |   |
| Repayments of bank line of credit and term  debt                                       |       | (20,250                               | )          | (244 | ) |
| Proceeds from issuance of common stock, net                                            |       | 370                                   |       | 803 |   |
| Net cash provided by financing activities                                              |       | 120                                   |       | 637 |   |
| Effect of exchange rates on cash and cash  equivalents                                 |       | 59                                    |       | — |   |
| Net decrease in cash and cash equivalents                                              |       | (4,633                                | )          | (2,296 | ) |
| Cash and cash equivalents at beginning of  period                                      |       | 41,851                                |       | 78,776 |   |
| Cash and cash equivalents at end of period                                             |       | $                                     | 37,218     |   | $ | 76,480 |   |
|                                                                                   |       |                                  |       |   |   |
| **Supplemental disclosures of cash flow  information:**                                |       |                                  |       |   |   |
| Cash paid for interest                                                                 |       | $                                     | 162        |   | $ | 33 |   |
| Cash paid (refunds received) for income  taxes                                         |       | $                                     | (384       | ) | $ | 119 |   |

 

5

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**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Allquarterly data herein is unaudited)**

 

**Note 1.****Organization and Summary ofSignificant Accounting Policies**

 

***Nature of Business***

 

BroadVision, Inc. (collectively with itssubsidiaries, the “Company”) was incorporated in the state of Delaware on May 13,1993 and has been a publicly traded corporation since 1996. BroadVisionsolutions help customers rapidly increase revenues and reduce costs by movinginteractions and transactions to personalized self-service via the web. Ourintegrated self-service application suite—including process, commerce, portaland content–offers rich functionality out of the box, and is easily configuredfor each customer’s e-business environment.

 

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

 

As discussed more fully in Note 3 below, inNovember 2004, the Company entered into a definitive agreement for the privateplacement of up to $20.0 million of convertible debentures to fiveinstitutional investors. The Company issued an initial $16.0 million ofdebentures which will be convertible, at the holders’ option, into common stockat a conversion price of $2.76 per share. The Company is obligated to repay theprincipal amount of the initial $16.0 million of debentures in 15 equal monthlyinstallments of $1.1 million, beginning in June 2005, and payments will likelyincrease to $2.1 million beginning in September 2005.  Payments of principal and interest may bemade in either cash or, upon receipt of stockholder approval and satisfactionof various other conditions set forth in the debentures, shares of theCompany’s common stock. These other conditions include the requirement that theCompany’s registration statement relating to the common shares issuable uponconversion of the debentures be declared effective by the SEC at leastapproximately 60 days prior to the payment due date (and remain effectiveduring such approximately 60-day period) and the requirement that the Company’scommon stock continue to be designated for quotation on the NASDAQ NationalMarket, and delisting or suspension shall not be pending or threatened, for the120-day period prior to the payment due date. Due to unforeseen delays in having its registration statement on FormS-3 declared effective by the SEC, the Company currently anticipates having touse cash to satisfy its payment obligations under the debentures through atleast September 2005. Cash payments to be made during this period are expectedto total approximately $6.1 million.

 

The Company currently expects to fund its short-termworking capital and operating resource expenditure requirements, for at leastthe next twelve months, from its existing cash and cash equivalents resourcesand its anticipated cash flows from subleases. However, these sources could beinadequate for the operation of the Company’s business for various reasons. Thesereasons include, but are not limited to, the following:

 

•      Ifthe Company’s stockholders do not approve the use of common stock for paymentsdue under outstanding debentures at the Company’s annual meeting ofstockholders scheduled for May 24, 2005, then all payments will berequired to be made in cash until approximately 30 days after stockholderapproval is subsequently obtained.

 

•      Ifan event of default occurs under the debentures and is not cured within anyapplicable cure period, the debenture holders could accelerate the due date ofthe debentures such that the entire principal balance, interest and other obligationsbecome immediately due and payable. If an event of default occurs but is curedwithin the applicable cure period, the Company will be required to makepayments in cash for a period of no less than 120 days from the date of thecure of the default.

 

•      Ifthe Company’s registration statement is not declared effective by August 5,2005, then the Company will be required to use cash in excess of the $6.1million of anticipated cash repayments noted above to satisfy its repaymentobligations.

 

The Company’s use of cash, rather than stock, tosatisfy more of the payment obligations under the debentures than the Companypresently anticipates will have a significantly unfavorable effect on theCompany’s liquidity and will likely result in the Company’s cash resourcesfalling below a level that is necessary for the operation of the Company’sbusiness in the fourth quarter of 2005.  In such circumstances, the Company may beunable to continue as a going concern.

 

We currently expect to fund our short-termworking capital and operating resource expenditure requirements, for at leastthe next twelve months, from our existing cash and cash equivalents resourcesand our anticipated cash flows from subleases. However, these sources could beinadequate for the operation of our business for various reasons.  For example, if our stockholders do notapprove the use of our common stock for payments under outstanding debenturesat our annual meeting of stockholders scheduled for May 24, 2005, or if theother terms of the debentures require us to use cash, rather than stock, formore of the debenture payments than we presently anticipate, then our cashresources are likely to fall below a level that is adequate for the operationof our business in the fourth quarter of 2005.

 

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

 

The accompanying consolidated financial statementsinclude the accounts of the Company and its wholly owned subsidiaries. Allsignificant intercompany transactions have been eliminated inconsolidation.  In the Company’s opinion,the consolidated financial statements presented herein include all necessaryadjustments, consisting of normal recurring adjustments, to fairly state theCompany’s financial position, results of operations and cash flows for theperiods indicated.  The preparation ofconsolidated financial statements in conformity with generally acceptedaccounting principles in the United States of America requires management tomake certain assumptions and estimates that affect reported amounts of assetsand liabilities as of the date of the financial statements and the reportedamount of revenues and expenses during the reporting period. Actual resultscould differ from estimates. The financial results and related information asof March 31, 2005 and for the three months ended March 31, 2005 and2004 are unaudited. The consolidated balance sheet at December 31, 2004has been derived from the audited consolidated financial statements as of thatdate but does not necessarily reflect all of the informational disclosurespreviously reported in accordance with generally accepted accounting principlesin the United States of America.

 

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

 

***Revenue Recognition***

 

*Overview*

 

The Company’s revenue consists of fees for licensesof the Company’s software products, maintenance, consulting services andcustomer training. The Company generally charges fees for licenses of itssoftware products either based on the number of persons registered to use theproduct or based on the number of Central Processing Units (“CPUs”) on themachine on which the product is installed. Licenses for software whereby feescharged are based upon the number of persons registered to use the product aredifferentiated between licenses for development use and licenses for use indeployment of the customer’s website. Licenses for software whereby feescharged are on a per-CPU basis do not differentiate between development anddeployment usage. The Company’s revenue recognition policies are in accordancewith Statement of Position (“SOP”) 97-2, as amended, SOP 98-9 and the SEC’sStaff Accounting Bulletin (“SAB”) No. 101, *Revenue Recognition in Financial Statements*(“SAB101”).

 

6

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*Software License Revenue*

 

The Company licenses its products through its directsales force and indirectly through resellers. In general, software licenserevenues are recognized when a non-cancelable license agreement has been signedand the customer acknowledges an unconditional obligation to pay, the softwareproduct has been delivered, there are no uncertainties surrounding productacceptance, the fees are fixed and determinable and collection is consideredprobable. Delivery is considered to have occurred when title and risk of losshave been transferred to the customer, which generally occurs when mediacontaining the licensed programs is provided to a common carrier. In case ofelectronic delivery, delivery occurs when the customer is given access to thelicensed programs. For products that cannot be used without a licensing key,the delivery requirement is met when the licensing key is made available to thecustomer. If collectibility is not considered probable, revenue is recognizedwhen the fee is collected. Subscription-based license revenues are recognizedratably over the subscription period. The Company enters into resellerarrangements that typically provide for sublicense fees payable to the Companybased upon a percentage of list price. The Company does not grant its resellersthe right of return.

 

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

 

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

 

*Services Revenue*

 

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

 

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

 

***Employee Stock Option and PurchasePlans***

 

The Company accounts for employee stock-based awardsin accordance with the provisions of Accounting Principles Board (“APB”)Opinion 25 (“APB 25”), Financial Accounting Standards Board (“FASB”) InterpretationNo. 44 (“FIN 44”), *Accounting for CertainTransactions Involving Stock Compensation—an Interpretation of APB Opinion 25*,and related interpretations. As such, compensation expense is recorded on thedate of grant only if the current market price of the underlying stock exceededthe exercise price. Pursuant to Statement of Financial Accounting Standards (“SFAS”)123, the Company

 

7

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disclosesthe pro forma effects of using the fair value method of accounting forstock-based compensation arrangements. The Company accounts for equityinstruments issued to non-employees in accordance with the provisions of SFAS123 and Emerging Issues Task Force (“EITF”) 96-18, *Accounting for Equity Instruments That Are Issued to Other ThanEmployees For Acquiring or in Conjunction with Selling Goods or Services.*

 

The Company applies APB 25 and relatedinterpretations when accounting for its stock option and stock purchase plans.In accordance with APB 25, we apply the intrinsic value method in accountingfor employee stock options. Accordingly, the Company generally recognizes nocompensation expense with respect to stock-based awards to employees.

 

During the quarter ended March 31, 2004, theCompany recorded net compensation expense of $15,000. This charge was recordedas a result of granting a third party consultant shares of our commonstock.  The compensation charge wascalculated using the Black-Scholes model. The $15,000 was recorded in sales andmarketing expense.

 

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

 
| ** **                                                                                                                                    | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| Net income (loss) as reported                                                                                                                 |       | $                                      | 2,918      |   | $ | (867 | ) |
| Add: Stock-based employee compensation  expense included in reported net income (loss), net of related tax effects                            |       | —                                 |       | 15 |   |
| Deduct: Total stock-based employee  compensation expense determined under fair value based method for all awards,  net of related tax effects |       | (1,334                                 | )          | (2,814 | ) |
| Pro forma net income (loss)                                                                                                                   |       | $                                      | 1,584      |   | $ | (3,666 | ) |
|                                                                                                                                          |       |                                   |       |   |   |
| Income (loss) per share:                                                                                                                      |       |                                   |       |   |   |
| Basic—as reported                                                                                                                        |       | $                                      | 0.09       |   | $ | (0.03 | ) |
| Basic—pro forma                                                                                                                          |       | $                                      | 0.05       |   | $ | (0.11 | ) |
|                                                                                                                                          |       |                                   |       |   |   |
| Diluted—as reported                                                                                                                      |       | $                                      | 0.07       |   | $ | (0.03 | ) |
| Diluted—pro forma                                                                                                                        |       | $                                      | 0.04       |   | $ | (0.11 | ) |

 

***Earnings PerShare Information***

 

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

 

There were 200,000 shares included in the dilutedshares outstanding during the period ended March 31, 2005.  There were 131,326 potential common sharesexcluded from the determination of diluted net loss per share for the threemonths ended March 31, 2004 as the effect of such shares wasanti-dilutive.

 

8

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| ** **                                                                          | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                          | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| Net income (loss)                                                                   |       | $                                      | 2,918      |   | $ | (867 | ) |
|                                                                                |       |                                   |       |   |   |
| Weighted average common shares outstanding  utilized for basic net loss per share   |       | 33,971                                 |       | 33,300 |   |
| Potential common stock issued for debt                                              |       | 5,797                                  |       | — |   |
| Potential common stock issued for options                                           |       | 200                                    |       | — |   |
| Weighted average common shares outstanding  utilized for diluted net loss per share |       | 39,968                                 |       | 33,300 |   |
| Basic net income (loss) per share                                                   |       | $                                      | 0.09       |   | $ | (0.03 | ) |
| Diluted net income (loss) per share                                                 |       | $                                      | 0.07       |   | $ | (0.03 | ) |

 

***Allowances and Reserves***

 

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

 

***Restructuring***

 

Through March 31, 2005, we have approvedcertain restructuring plans to, among other things, reduce our workforce andconsolidate facilities. Restructuring and asset impairment charges were takento align our cost structure with changing market conditions and to create amore efficient organization. Our restructuring charges are comprised primarilyof: (i) severance and benefits termination costs related to the reductionof our workforce; (ii) lease termination costs and/or costs associatedwith permanently vacating our facilities; (iii) other incremental costsincurred as a direct result of the restructuring plan; and (iv) impairmentcosts related to certain long-lived assets abandoned. We account for each ofthese costs in accordance with SAB No. 100, *Restructuring and Impairment Charges* (“SAB 100”)*.*

 

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

 

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

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

 

*ExcessFacilities Costs*. We account for excess facilities costs asfollows:

 

9

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

•      For exit or disposal activities initiated afterDecember 31, 2002, we account for lease termination and/or abandonmentcosts in accordance with SFAS 146, which requires that a liability for suchcosts be recognized and measured initially at fair value on the cease use dateof the facility.

 

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

 

Inherent in the estimation of the costs related toour restructuring efforts are assessments related to the most likely expectedoutcome of the significant actions to accomplish the restructuring. Indetermining the charges related to the restructurings to date, the majority ofestimates made by management have related to charges for excess facilities. In determiningthe charges for excess facilities, we were required to estimate future subleaseincome, future net operating expenses of the facilities, and brokeragecommissions, among other expenses. The most significant of these estimates haverelated to the timing and extent of future sublease income in which to reduceour lease obligations. We based our estimates of sublease income, in part, onthe opinions of independent real estate experts, current market conditions andrental rates, an assessment of the time period over which reasonable estimatescould be made, the status of negotiations with potential subtenants, and thelocation of the respective facility, among other factors.  The Company hasrecorded the low-end of a range of assumptions modeled for restructuringcharges, in accordance with SFAS No. 5, *Accountingfor Contingencies* (“SFAS 5”). Adjustments to the facilities accrualwill be required if actual lease exit costs or sublease income differ fromamounts currently expected. We will review the status of restructuringactivities on a quarterly basis and, if appropriate, record changes to ourrestructuring obligations in current operations based on management’s mostcurrent estimates.

 

***Legal Matters***

 

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

 

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

 

On January 7,2005, the Company announced that it had reached agreement with the SEC tosettle administrative proceedings in connection with the restatement offinancial results for the third quarter of fiscal 2001. No fines or financialpenalties were associated with the settlement. Without admitting or denying anywrongdoing, the Company consented to the SEC’s entry of an administrative orderthat included findings that it issued a false and misleading earnings pressrelease and misleading quarterly report. The order requires

 

10

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thatthe Company cease and desist from committing or causing violations of specifiedprovisions of the federal securities laws. The SEC found that a formerexecutive in charge of professional services who left BroadVision in 2002 wasresponsible for the improper accounting. The restatement concerned revenuerelated to one software license agreement. Following receipt of payment in fullby the customer, the Company recognized revenue on that agreement in itsentirety in the third quarter of 2001. The Company subsequently determined thatthe revenue should instead be recognized ratably over the four-year life of theagreement, and announced on April 1, 2002 that it was restating thefinancial statements for the third quarter of 2001 to effect this change. TheCompany has been accounting for the revenue ratably in all periods since thethird quarter of 2001.

 

***Concentrations of Credit Risk***

 

Financial assets that potentially subject us tosignificant concentrations of credit risk consist principally of cash, cashequivalents, and trade accounts receivable. The Company maintains its cash andcash equivalents with two separate financial institutions. The Company marketsand sells its products throughout the world and performs ongoing creditevaluations of its customers. The Company maintains reserves for potentialcredit losses. For the quarters ended March 31, 2005 and March 31, 2004,no one customer accounted for more than 10% of total revenue. As of March 31,2005 and December 31, 2004, no customer individually accounted for morethan 10% of accounts receivable.

 

***Foreign Currency Transactions***

 

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

 

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

 

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

 

***Reclassification***

 

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

 

***Fair Value of Financial Instruments***

 

The Company’s financial instruments consist of cashand cash equivalents, restricted cash, equity investments, accounts receivable,accounts payable and debt. The Company does not have any derivative financialinstruments. The Company believes the reported carrying amounts of itsfinancial instruments approximates fair value, based upon the maturities andnature of its cash equivalents, accounts receivable and payable, and based onthe 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

 

11

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impairmentcharges due to continued economic decline and the potential resulting negativeimpact on these companies.

 

***Comprehensive Income (Loss)***

 

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

 

| ** **                      | ** ** | **Foreign  Currency  Translation** | ** ** | **Accumulated Other  Comprehensive  Income (Loss)** | ** ** |
|---------------------------------|------------|------------------------------------|------------|-----------------------------------------------------|------------|
| Balance, December 31, 2004 |       | $                                  | (172       | )                                                   | $          | (172 | ) |
| Net change during period        |       | 45                                 |       | 45                                                  |       |
|                            |       |                               |       |                                                |       |
| Balance, March 31, 2005    |       | (127                               | )          | (127                                                | )          |
|                                 |            |                                    |            |                                                     |            |  |  |

 

***New Accounting Pronouncements***

 

In December 2004, the FASB issued SFAS No. 123(revised 2004), *Share-Based Payment*(“SFAS 123R”), which replaces SFAS 123 and supercedes APB 25. SFAS 123Rrequires all share-based payments to employees, including grants of employeestock options, to be recognized in the financial statements based on their fairvalues beginning with the first interim or annual period beginning after June 15,2005, with early adoption encouraged. On April 14, 2005, the Securitiesand Exchange Commission adopted a new rule that amends the compliancedates for SFAS 123(R). Under the new rule, the Company is required toadopt SFAS 123(R) in the first quarter of fiscal 2006, beginning January 2,2006. The pro forma disclosures previously permitted under SFAS 123 no longerwill be an alternative to financial statement recognition. Under SFAS 123R, wemust determine the appropriate fair value model to be used for valuingshare-based payments, the amortization method for compensation cost and thetransition method to be used at date of adoption. The transition methodsinclude prospective and retroactive adoption options. We have not yetdetermined the method of adoption or the effect of adopting SFAS 123R. We areassessing the requirements of SFAS 123R and expect that its adoption will havea material impact on the Company’s results of operations and earnings (loss)per share.

 

In December 2004,the FASB issued SFAS No. 153, *Exchanges of NonmonetaryAssets, an amendment of APB Opinion No. 29, Accounting for NonmonetaryTransactions* (“SFAS 153”).  SFAS153 eliminates the exception from fair value measurement for nonmonetaryexchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29,*Accounting for Nonmonetary Transactions*,and replaces it with an exception for exchanges that do not have commercialsubstance. SFAS 153 specifies that a nonmonetary exchange has commercialsubstance if the future cash flows of the entity are expected to changesignificantly as a result of the exchange. SFAS 153 is effective for periodsbeginning after June 15, 2005. We do not expect that adoption of SFAS 153will have a material effect on our consolidated financial position,consolidated results of operations, or liquidity.

 

**Note 2.****Selected Balance SheetDetail**

 

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

 

 

| ** **                                      | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                      | ** ** | **(unaudited)**          | ** ** | ** **                  | ** ** |
| Furniture and fixtures                          |       | $                        | 3,901      |                        | $          | 4,036 |   |
| Computers and software                          |       | 48,883                   |       | 49,258                      |       |
| Leasehold improvements                          |       | 6,117                    |       | 6,086                       |       |
|                                            |       | 58,901                   |       | 59,380                      |       |
| Less accumulated depreciation and  amortization |       | (55,733                  | )          | (55,814                     | )          |
|                                            |       | $                        | 3,168      |                        | $          | 3,566 |   |

 

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Accrued expenses consisted of the following (inthousands):

 

| ** **                 | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|----------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                 | ** ** | **(unaudited)**          | ** ** | ** **                  | ** ** |
| Employee benefits          |       | $                        | 1,508      |                        | $          | 1,253 |   |
| Commissions and bonuses    |       | 889                      |       | 1,334                       |       |
| Sales and other taxes      |       | 4,350                    |       | 5,085                       |       |
| Restructuring (See Note 6) |       | 6,648                    |       | 26,292                      |       |
| Other                      |       | 4,466                    |       | 6,781                       |       |
|                       |       | $                        | 17,861     |                        | $          | 40,745 |   |

 

Other noncurrent liabilities consisted of thefollowing (in thousands):

 

| ** **                 | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|----------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                 | ** ** | **(unaudited)**          | ** ** | ** **                  | ** ** |
| Restructuring (See Note 6) |       | $                        | 6,629      |                        | $          | 7,871 |   |
| Other                      |       | 407                      |       | 407                         |       |
|                       |       | $                        | 7,036      |                        | $          | 8,278 |   |

 

**Note 3.****  Bank Borrowings, Long-Term Debt and OtherNon-Current Liabilities**

 
| Bank borrowings and  long-term debt consists of the following (in thousands):                                                      |
|------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                               |   |   |   |   |   |
| ** **                                                                                                                         | ** ** | **March 31, 2005** | ** ** | **December 31, 2004** | ** ** |
| ** **                                                                                                                         | ** ** | **(unaudited)** | ** ** | ** ** | ** ** |
| Convertible debentures, 6% coupon, due in  various maturities beginning in June 2005 (or sooner under certain  circumstances) | ** ** | $ | 12,616 | ** ** | $ | 11,982 | ** ** |
| Bank borrowings                                                                                                                    |   | 20,000 |   | 20,000 |   |
| Term debt                                                                                                                          |   | 776 |   | 1,027 |   |
|                                                                                                                               |   |   |   |   |   |
|                                                                                                                               |   | 33,392 |   | 33,009 |   |
| Less: Current portion of long-term debt                                                                                            |   | (33,116 | ) | (25,566 | ) |
|                                                                                                                               |   |   |   |   |   |
| Long-term debt, net of current portion                                                                                             |   | $ | 276 |   | $ | 7,443 |   |

 

In November 2004, the Company entered into adefinitive agreement for the private placement of up to $20.0 million ofconvertible debentures to five institutional investors. The Company issued aninitial $16.0 million of debentures which will be convertible, at the holders’option, into common stock at a conversion price of $2.76 per share. Thedebentures bear interest at a rate of six percent per annum, and the Company isobligated to repay the principal amount of the initial $16.0 million of debenturesin 15 equal monthly installments of $1.1 million, beginning in June 2005.  Under the terms of the debentures, the monthlyprincipal repayment obligation will increase to $2.1 million beginning in September 2005if the Company’s cash balances as of June 30, 2005 fall below certain definedlevels.  This increase, which is likely, willhave the effect of requiring the Company to repay the principal amount in nineinstallments through February 2006. Payments of principal and interest maybe made in either cash or, upon receipt of stockholder approval andsatisfaction of various other conditions set forth in the debentures, shares ofthe Company’s common stock. Subject to stockholder approval, the Companyintends to use shares of its common stock for payments under the debentures tothe maximum extent permitted by the conditions of the debentures. As a resultof these 

 

13

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conditions,however, the Company anticipates having to use cash to satisfy its payment obligationsthrough at least September 2005. Cash payments to be made during thisperiod are expected to total approximately $6.1 million. 

 

Investors also received warrants to purchaseapproximately 1.7 million shares of the Company’s common stock at a price of$3.58 per share. The warrants will be exercisable beginning six months afterthe closing date, and have a term of five years.  As of March 31, 2005 and December 31,2004, a total of $16.0 million in face value convertible debentures wasoutstanding. These debentures are recorded on the Consolidated Balance Sheet atDecember 31, 2004, at the discounted amount of $12.0 million. The Companyis recording the difference between the face value and discounted amount asadditional interest expense over the estimated life of the debentures.  As of March 31, 2005, the debentureswere recorded at a discounted amount of $12.6 million.  

 

The agreement provides for an additional $4.0million of convertible debentures to be issued to the investors at the optionof the investors or, under certain circumstances, at the Company’s option.

 

In February 2005, the Company renewed andamended its revolving credit facility. The amount available under the revolvingline of credit is $20.0 million. Borrowings under the revolving line of creditare collateralized by all of the Company’s assets and bear interest at the bank’sprime rate (5.75% as of March 31, 2005 and 5.25% as of December 31,2004). As of March 31, 2005 and December 31, 2004, $20.0 millionremaining outstanding under the Company’s revolving credit facility

 

As of March 31, 2005 and December 31,2004, outstanding term debt borrowings were approximately $776,000 and $1.0million, respectively. Borrowings bear interest at the bank’s prime rate (5.75%as of March 31, 2005 and 5.25% as of December 31, 2004) plus up to1.25%. Principal and interest are due in monthly payments through maturitybased on the terms of the facilities. Principal payments of $386,000 are duefor the remainder of 2005, and payments of $390,000 are due thereafter.

 

Commitments totaling $5.2 million and $24.3 millionin the form of standby letters of credit were issued on the Company’s behalffrom financial institutions as of March 31, 2005 and December 31,2004, respectively, primarily in favor of the Company’svarious landlords to secure obligations under the Company’s facilityleases.  Accordingly, $5.2 million and$24.3 million have been presented as restricted cash in the accompanyingCondensed Consolidated Balance Sheets as of March 31, 2005 and December 31,2004, respectively.

 

**Note 4.****Commitments andContingencies**

 

*Warranties and Indemnification*

 

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

 

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

 

*Leases*

 

The Company leases its headquarters facility and itsother facilities under non-cancelable operating lease agreements expiringthrough the year 2010. Under the terms of the agreements, the Company isrequired to pay lease costs, property taxes, insuranceand normal maintenance costs.

 

14

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A summary of total future minimum lease payments asof March 31, 2005, under noncancelable operating lease agreements,including future minimum facilities payments, is as follows (in millions):

 
| **Years Ending December 31,** | ** ** | **Operating  Leases** | ** ** |
|------------------------------------|------------|-----------------------|------------|
| 2005                               |       | $                     | 1.2        |   |
| 2006                               |       | 0.7                   |       |
| 2007                               |       | 0.5                   |       |
| 2008                               |       | 0.3                   |       |
| 2009 and thereafter                |       | 0.4                   |       |
|                               |       |                  |       |
| Total minimum lease payments       |       | $                     | 3.1        |   |

 

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

 

*Standby Letter of Credit Commitments*

 

As of March 31, 2005, the Company had $5.2million of outstanding commitments in the form of standby letters of credit, primarilyin favor of the Company’s various landlords to secure obligations under theCompany’s facility leases.

 

*Legal Proceedings*

 

The Company is subject to various claims and legalactions arising in the ordinary course of business. In the opinion of management,after consultation with legal counsel, the ultimate disposition of thesematters is not expected to have a material effect on the Company’s business,financial condition or results of operations. Although management currentlybelieves that the outcome of these outstanding legal proceedings, claims andlitigation involving the Company will not have a material adverse effect on itsbusiness, results of operations or financial condition, litigation isinherently uncertain, and there can be no assurance that existing or futurelitigation will not have a material adverse effect on the Company’s business,results of operations or financial condition.

 

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

 

On January 7,2005, the Company announced that it had reached agreement with the SEC tosettle administrative proceedings in connection with the restatement offinancial results for the third quarter of fiscal 2001. No fines or financialpenalties were associated with the settlement. Without admitting or denying anywrongdoing, the Company consented to the SEC’s entry of an administrative orderthat included findings that it issued a false and misleading earnings pressrelease and misleading quarterly report. The order requires that the Companycease and desist from committing or causing violations of specified provisionsof the federal securities laws. The SEC found that a former executive in chargeof professional services who left BroadVision in 2002 was responsible for theimproper accounting. The restatement concerned revenue related to one softwarelicense agreement. Following receipt of payment in full by the customer, theCompany recognized revenue on that agreement in its entirety in the thirdquarter of 2001. The Company subsequently determined that the revenue shouldinstead be recognized ratably over the four-year life of the agreement, andannounced on April 1, 2002 that it was restating the financial statementsfor the third quarter of 2001 to effect

 

15

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thischange. The Company has been accounting for the revenue ratably in all periodssince the third quarter of 2001.

 

**Note 5.****Geographic, Segment and SignificantCustomer Information**

 

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

 

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

 
| ** **          | ** ** | **Three months ended  March 31,** | ** ** |
|---------------------|------------|----------------------------------------|------------|
| ** **          | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| Software licenses   |       | $                                      | 4,416      |   | $ | 7,840 |   |
| Consulting services |       | 5,147                                  |       | 4,911 |   |
| Maintenance         |       | 6,804                                  |       | 8,138 |   |
| Total revenues      |       | $                                      | 16,367     |   | $ | 20,889 |   |
|                     |            |                                        |            |  |  |  |  |  |  |

 

TheCompany sells its products and provides services worldwide through a directsales force and through a channel of independent distributors, VARs and ASPs.In addition, the licenses of the Company’s products are promoted throughindependent professional consulting organizations known as systems integrators.The Company provides services worldwide through its BroadVision Global ServicesOrganization and indirectly through distributors, VARs, ASPs and systemsintegrators.

 

Disaggregatedfinancial information regarding the Company’s geographic revenues andlong-lived assets is as follows (in thousands):

 
| ** **     | ** ** | **Three months ended  March 31,** | ** ** |
|----------------|------------|----------------------------------------|------------|
| ** **     | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| ** **     | ** ** | **(unaudited)**                        | ** ** | **(unaudited)** | ** ** |
| Revenues:      |       |                                   |       |   |   |
| Americas       |       | $                                      | 8,638      |   | $ | 9,651 |   |
| Europe         |       | 5,918                                  |       | 10,093 |   |
| Asia/Pacific   |       | 1,811                                  |       | 1,145 |   |
| Total revenues |       | $                                      | 16,367     |   | $ | 20,889 |   |

 
| ** **              | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **              | ** ** | **(unaudited)**          | ** ** | ** **                  | ** ** |
| Long-Lived Assets:      |       |                     |       |                        |       |
| Americas                |       | $                        | 59,985     |                        | $          | 60,312 |   |
| Europe                  |       | 386                      |       | 531                         |       |
| Asia/Pacific            |       | 513                      |       | 527                         |       |
| Total long-lived assets |       | $                        | 60,884     |                        | $          | 61,370 |   |

 

During the three months ended March 31, 2005and 2004, no single customer accounted for more than 10% of the Company’srevenues.

 

**Note 6.****Restructuring Charges**

 

Through March 31, 2005, the Company hasapproved certain restructuring plans to, among other things, reduce itsworkforce and consolidate facilities. Restructuring and asset impairment chargeshave been

 

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takento align our cost structure with changing market conditions and to create amore efficient organization. Our restructuring charges have been comprisedprimarily of: (i) severance and benefits termination costs related to thereduction of our workforce; (ii) lease termination costs and/or costsassociated with permanently vacating our facilities; (iii) otherincremental costs incurred as a direct result of the restructuring plan; and (iv) impairmentcosts related to certain long-lived assets abandoned. We account for each ofthese costs in accordance with SAB 100, *Restructuringand Impairment Charges.*

 

For each of the periods presented herein,restructuring charges consist solely of:

 

•      *Severance and TerminationBenefits*— These costs represent severance, payroll taxes and COBRAbenefits related to restructuring plans implemented prior to the daterecognized.

 

•      *Excess Facilities*— These costsrepresent future minimum lease payments related to excess and abandoned spaceunder lease, net of estimated sublease income and planned company occupancy.

 

As of March 31, 2005, the total restructuringaccrual of $13.3 million consisted of the following (in millions): 

 

| ** **                | ** ** | **Current** | ** ** | **Non-Current** | ** ** | **Total** | ** ** |
|---------------------------|------------|-------------|------------|-----------------|------------|-----------|------------|
| Severance and Termination |       | $           | 0.6        |            | $          | —    |       | $ | 0.6 |   |
| Excess Facilities         |       | 6.1         |       | 6.6             |       | 12.7      |       |
|                      |       |        |       |            |       |      |       |
| Total                     |       | $           | 6.7        |            | $          | 6.6       |       | $ | 13.3 |   |

 

The Company estimates that the $600,000 severanceand termination accrual will be paid in full by December 31, 2005. We expectto pay the excess facilities amounts related to restructured or abandonedleased space as follows (in millions): 

 

| **Years ending December 31,**               | ** ** | **Total future  minimum  payments** | ** ** |
|--------------------------------------------------|------------|-------------------------------------|------------|
| 2005                                             |       | $                                   | 5.6        |   |
| 2006                                             |       | 5.3                                 |       |
| 2007                                             |       | 0.8                                 |       |
| 2008                                             |       | 0.4                                 |       |
| 2009 and thereafter (through  October 2010) |       | 0.6                                 |       |
|                                             |       |                                |       |
| Total minimum facilities payments                |       | $                                   | 12.7       |   |

 

Of this excess facilities accrual, $5.6 millionrelates to payments due in fiscal 2005 under existing leases and leasetermination agreements, and $7.1 million relates to future minimum leasepayments, fees and expenses, net of estimated sublease income and plannedcompany occupancy.

 

The following table summarizes the activity relatedto the restructuring plans initiated subsequent to December 31, 2002, andaccounted for in accordance with FAS 146 (in thousands):

 

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| ** **                                           | ** ** | **Accrued  restructuring  costs  beginning** | ** ** | **Amounts  charged to  restructuring  costs  and other** | ** ** | **Amounts paid  or written off** | ** ** | **Accrued  restructuring  costs, ending** | ** ** |
|------------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------|------------|-------------------------------------------|------------|
| **Quarter Ended March 31, 2005**                |       |                                         |       |                                                     |       |                             |       |                                      |       |
| Lease cancellations and commitments                  |       | $                                            | 21,824     |                                                     | $          | (631                             | )          | $                                         | (17,347    | ) | $ | 3,846 |   |
| Termination payments to employees and  related costs |       | 365                                          |       | (95                                                      | )          | (155                             | )          | 115                                       |       |
|                                                 |       | $                                            | 22,189     |                                                     | $          | (726                             | )          | $                                         | (17,502    | ) | $ | 3,961 |   |
|                                                 |       |                                         |       |                                                     |       |                             |       |                                      |       |
| **Quarter Ended March 31, 2004**                |       |                                         |       |                                                     |       |                             |       |                                      |       |
| Lease cancellations and commitments                  |       | $                                            | 21,683     |                                                     | $          | —                           |       | $                                         | —     |   | $ | 21,683 |   |
| Termination payments to employees and  related costs |       | 242                                          |       | 318                                                      |       | (465                             | )          | 95                                        |       |
|                                                 |       | $                                            | 21,925     |                                                     | $          | 318                              |       | $                                         | (465       | ) | $ | 21,778 |   |

 

The following table summarizes the activity relatedto the restructuring plans initiated on or prior to December 31, 2002, andaccounted for in accordance with EITF 94-3 (in thousands):

 
| ** **                                           | ** ** | **Accrued  restructuring  costs,  beginning** | ** ** | **Amounts  charged to  restructuring   costs  and other** | ** ** | **Amounts paid  or written off** | ** ** | **Accrued  restructuring  costs, ending** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------|------------|-----------------------------------------------------------|------------|----------------------------------|------------|-------------------------------------------|------------|
| **Quarter Ended March 31, 2005**                |       |                                          |       |                                                      |       |                             |       |                                      |       |
| Lease cancellations and commitments                  |       | $                                             | 11,515     |                                                      | $          | 22                               |       | $                                         | (2,666     | ) | $ | 8,871 |   |
| Termination payments to employees and  related costs |       | 459                                           |       | —                                                    |       | (14                              | )          | 445                                       |       |
|                                                 |       | $                                             | 11,974     |                                                      | $          | 22                               |       | $                                         | (2,680     | ) | $ | 9,316 |   |
| **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                                       |       |
|                                                 |       | $                                             | 83,455     |                                                      | $          | 252                              |       | $                                         | (4,986     | ) | $ | 78,721 |   |

 

As mentioned above, the Company has based its excessfacilities accrual, in part, upon estimates of future sublease income. TheCompany has used the following factors, among others, in making such estimates:opinions of independent real estate experts, current market conditions andrental rates, an assessment of the time period over which reasonable estimatescould be made, the status of negotiations with potential subtenants, and thelocation of the respective facilities. The Company has recorded the low-end ofa range of assumptions modeled for restructuring charges, in accordance withSFAS 5.  Adjustments to the facilitiesaccrual will be required if actual sublease income differs from amountscurrently expected. The Company will review the status of restructuringactivities on a quarterly basis and, if appropriate, record changes to ourrestructuring obligations in current operations based on management’s mostcurrent estimates.

 

**Note 7.****Goodwill and OtherIntangible Assets**

 

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

 

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

 

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The Companyconcluded that, based upon the market value of its stock in relation to theCompany’s net book value at March 31, 2005 and December 31, 2004,there was no additional impairment of goodwill warranted.

 

The process of evaluating the potential impairmentof goodwill is highly subjective and requires significant judgment. Inestimating the fair value of the Company, the Company made estimates andjudgments about future revenues and cash flows. The Company’s forecasts werebased on assumptions that are consistent with the plans and estimates theCompany is using to manage the business. Changes in these estimates couldchange the Company’s conclusion regarding impairment of goodwill andpotentially result in a non-cash goodwill impairment charge for all or aportion of the goodwill balance at March 31, 2005.

 

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

 

**Note 8.****  Warrants**

 

As of March 31, 2005, the following warrants to purchase theCompany’s common stock were outstanding:

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

 

The warrant issued in connection with thereal estate transaction has a term of five years and is exercisable beginningin August 2005.  The warrant issuedin connection with the convertible debentures also has a term of five years andis exercisable beginning in May 2005.

 

In accordance with EITF 00-19, *Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock,*the warrants have been included as ashort-term**liability and were originally valued at fair value on the date ofissuance.  The warrants are revalued eachperiod until and unless the warrants are exercised.  For the three-month period ended March 31,2005, the Company recorded gains related to the revaluation of warrants to thelandlord and debenture holders of $753,000 and $1.8 million, respectively.  These gains are included as a component of Restructuring Charges and ofOther Income (Expense), net, respectively, in the accompanying CondensedConsolidated Statements of Operations. If the warrants are exercised prior to their termination, their carryingvalue will be transferred to equity.

 

**Item 2.****Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

 

*This report on Form 10-Qcontains forward-looking statements within the meaning of Section 27A ofthe Securities Act of 1933, as amended, and within the meaning of Section 21Eof the Securities Exchange Act of 1934, as amended, which are subject to the “safeharbor” created by those sections. These forward-looking statements aregenerally identified by words such as “expect,” “anticipate,” “intend,” “believe,”“hope,” “assume,” “estimate,” “plan,” “will” and other similar words andexpressions.**These forward-lookingstatements involve risks and uncertainties that could cause our actual resultsto differ materially from those expressed or implied in the forward-lookingstatements as a result of certain factors, including those described herein andin the Company’s most recently filed Annual Report on Form 10-K and otherdocuments filed with the SEC. We undertake no obligation to publicly releaseany revisions to the forward-looking statements or to reflect events andcircumstances after the date of this document.*

 

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**Overview**

 

BroadVision solutions help customers rapidlyincrease revenues and reduce costs by moving interactions and transactions topersonalized self service via the web. Our integrated self-service applicationsuite—including process, commerce, portal and content—offers rich functionalityout of the box, and is easily configured for each customer’s e-businessenvironment.

 

Over 1,000 customers—including U.S. Air Force,Lockheed Martin, Netikos, Circuit City, Wal*Mart, Iberia L.A.E. andVodafone—have licensed BroadVision solutions to power and personalize theirmission-critical web initiatives.

 

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

 

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

 

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

 

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

 

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

 

**Recent Events**

 

In November 2004, we entered into a definitiveagreement for the private placement of up to $20.0 million of convertibledebentures to five institutional investors. We issued an initial $16.0 millionof debentures, which will be convertible, at the holders’ option, into commonstock at a conversion price of $2.76 per share. The debentures bear interest ata rate of six percent per annum, and we are obligated to repay the principalamount of the initial $16.0 million of debentures in 15 equal monthlyinstallments of $1.1 million,

 

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beginningin June 2005. Under the terms of the debentures, our monthly principalrepayment obligation will increase to $2.1 million beginning in September 2005if our cash balances as of June 30, 2005 fall below certain defined levels.  This increase, which is likely, will have theeffect of requiring us to repay the principal amount in nine installmentsthrough February 2006. Payments of principal and interest may be made ineither cash or, upon receipt of stockholder approval and satisfaction ofvarious other conditions set forth in the debentures, shares of our commonstock. Subject to stockholder approval, we intend to use shares of our commonstock for payments under the debentures to the maximum extent permitted by theconditions of the debentures. As a result of these conditions, however, weanticipate having to use cash to satisfy our payment obligations through atleast September 2005. Cash payments to be made during this period areexpected to total approximately $6.1 million. The agreement provides for anadditional $4.0 million of convertible debentures to be issued to the investorsat the option of the investors or, under certain circumstances, at our option.Investors also received warrants to purchase approximately 1.7 million sharesof our common stock at a price of $3.58 per share. The warrants will beexercisable beginning six months after the closing date, and have a term offive years.

 

We have various credit facilities with a commerciallender, which include term debt in the form of notes payable, a revolving lineof credit and an equipment line of credit. In February 2005, we enteredinto a renewed and amended loan and security agreement with the lender. Theagreement requires us to maintain certain levels of unrestricted cash and cashequivalents (excluding equity investments), and to maintain certain levels ondeposit with the lender. At March 31, 2005 and December 31, 2004,$20.0 million was outstanding under the line of credit. Borrowings under theline of credit are collateralized by all of our assets and bear interest at thebank’s prime rate. Interest is due monthly and principal is due at theexpiration in February 2006.

 

During the third and fourth quarters of 2004, wereached agreements with certain landlords to extinguish approximately $155.0million of future real estate obligations. We made cash payments of $20.7million in 2004, and an additional cash payment of $21.9 million in the firstquarter of 2005.  In addition, we issuedto one of the landlords a five-year warrant to purchase approximately 700,000shares of our common stock at an exercise price of $5.00 per share, exercisablebeginning in August 2005.

 

As a component of the settlement of one of theprevious leases, we have a residual lease obligation beginning in 2007 ofapproximately $9.1 million. We may make an additional cash payment of $4.5million if we exercise an option to terminate this residual real estateobligation prior to the lease term, which commences in January 2007. Thisoption to terminate the residual lease obligation, discounted to net presentvalue, is accounted for in accordance with SFAS 146 and is part of thenon-current restructuring accrual of $6.6 million as of March 31, 2005.

 

**Critical Accounting Policies**

 

This management’s discussion and analysis of ourfinancial condition and results of operations is based upon our condensedconsolidated financial statements, which have been prepared in accordance withgenerally accepted accounting principles in the United States of America. Inpreparing these financial statements, we are required to make estimates andjudgments that affect the reported amounts of assets, liabilities, revenues andexpenses, and related disclosures of contingent assets and liabilities. On anongoing basis, we evaluate our estimates, including those related to doubtfulaccounts, product returns, investments, goodwill and intangible assets, incometaxes and restructuring, as well as contingencies and litigation. We base ourestimates on historical experience and on various other assumptions that we believeare reasonable, the results of which form the basis for making judgments aboutthe carrying values of assets and liabilities that are not readily apparentfrom other sources. Actualresultsmay differ from these estimates using different assumptions or conditions. Webelieve the following critical accounting policies reflect the more significantjudgments and estimates used in the preparation of our consolidated financialstatements.

 

*Revenue Recognition*

 

*Overview*— Our revenueconsists of fees for licenses of our software products, maintenance, consultingservices and customer training. We generally charge fees for licenses of oursoftware products

 

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

 

*Software License Revenue*

 

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

 

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

 

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

 

*Services Revenue*

 

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

 

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

 

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*Allowances and Reserves*

 

Occasionally, our customers experience financialdifficulty after we record the revenue but before we are paid. We maintainallowances for doubtful accounts for estimated losses resulting from theinability of our customers to make required payments. Our normal payment termsare 30 to 90 days from invoice date. If the financial condition of ourcustomers were to deteriorate, resulting in an impairment of their ability tomake payments, additional allowances may be required.

 

*Impairment Assessments*

 

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

 

Pursuant to SFAS 142, we are required to testgoodwill for impairment upon adoption and annually or more often if events orchanges in circumstances indicate that the asset might be impaired. While therewas no accounting charge to record upon adoption, at September 30, 2002,we concluded that, based on the existence of impairment indicators, including adecline in our market value, we would be required to test goodwill forimpairment. SFAS 142 provides for a two-stage approach to determining whetherand by how much goodwill has been impaired. Since we haveonly one reporting unit for purposes of applying SFAS 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, 2005 and December 31,2004 and, therefore, no additional impairment was warranted.

 

The process of evaluating the potential impairmentof goodwill is highly subjective and requires significant judgment. Inestimating our fair value, we made estimates and judgments about futurerevenues and cash flows. Our forecasts were based on assumptions that areconsistent with the plans and estimates we are using to manage our business.Changes in these estimates could change our conclusion regarding impairment ofgoodwill and potentially result in a non-cash goodwill impairment charge, forall or a portion of the goodwill balance at March 31, 2005. For long-livedassets, accounting standards dictate that assets become impaired when theundiscounted future cash flows expected to be generated by them are less thantheir carrying amounts. When that occurs, the affected assets are written downto their estimated fair value.

 

*Deferred Tax Assets*

 

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

 

*Accounting for Stock-Based Compensation*

 

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

 

During the three months ended March 31, 2004,the Company recorded compensation expense of $15,000 as a result of grantingcommon stock to a third party consultant. These charges were calculated basedupon the market value of the underlying stock.

 

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

 
| ** **                                                                                                                                    | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| Net income (loss) as reported                                                                                                                 |       | $                                      | 2,918      |   | $ | (867 | ) |
| Add: Stock-based employee compensation  expense included in reported net income (loss), net of related tax effects                            |       | —                                 |       | 15 |   |
| Deduct: Total stock-based employee  compensation expense determined under fair value based method for all awards,  net of related tax effects |       | (1,334                                 | )          | (2,814 | ) |
| Pro forma net loss                                                                                                                            |       | $                                      | 1,584      |   | $ | (3,666 | ) |
|                                                                                                                                          |       |                                   |       |   |   |
| Income (loss) per share:                                                                                                                      |       |                                   |       |   |   |
| Basic—as reported                                                                                                                        |       | $                                      | 0.09       |   | $ | (0.03 | ) |
| Basic—pro forma                                                                                                                          |       | $                                      | 0.05       |   | $ | (0.11 | ) |
|                                                                                                                                          |       |                                   |       |   |   |
| Diluted—as reported                                                                                                                      |       | $                                      | 0.07       |   | $ | (0.03 | ) |
| Diluted—pro forma                                                                                                                        |       | $                                      | 0.04       |   | $ | (0.11 | ) |

 

*Restructuring Charges*

 

Through March 31, 2005, we have approvedrestructuring plans to, among other things, reduce our workforce andconsolidate facilities. Restructuring and asset impairment charges were takento align our cost structure with changing market conditions and to create amore efficient organization. Our restructuring charges are comprised primarilyof: (i) severance and benefits termination costs related to the reductionof our workforce; (ii) lease termination costs and/or costs associatedwith permanently vacating our facilities; (iii) other incremental costsincurred as a direct result of the restructuring plan; and (iv) impairmentcosts related to certain long-lived assets abandoned. We account for each ofthese costs in accordance with SAB 100*.*

 

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

 

•      For exit or disposal activities initiated onor prior to December 31, 2002, we account for costs in accordance withEITF 94-3.  Accordingly, we 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.

•      For exit or disposal activities initiatedafter December 31, 2002, we account for costs in accordance with SFAS146.  SFAS 146 requires that a liabilityfor a cost associated with an exit or disposal activity be recognized andmeasured initially at fair value only when the liability is incurred.

 

*ExcessFacilities Costs*. We account for excess facilities costs asfollows:

 

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

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

 

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

 

Inherent in the estimation of the costs related toour restructuring efforts are assessments related to the most likely expectedoutcome of the significant actions to accomplish the restructuring. Indetermining the charges related to the restructurings to date, the majority ofestimates made by management have related to charges for excess facilities. Indetermining the charges for excess facilities, we were required to estimatefuture sublease income, future net operating expenses of the facilities, andbrokerage commissions, among other expenses. The most significant of theseestimates have related to the timing and extent of future sublease income inwhich to reduce our lease obligations. We based our estimates of subleaseincome, in part, on the opinions of independent real estate experts, currentmarket conditions and rental rates, an assessment of the time period over whichreasonable estimates could be made, the status of negotiations with potentialsubtenants, and the location of the respective facility, among other factors.The Company has recorded the low-end of a range of assumptions modeled forrestructuring charges, in accordance with SFAS 5.  Adjustments to the facilities accrual will berequired if actual lease exit costs or sublease income differ from amountscurrently expected. We will review the status of restructuring activities on aquarterly basis and, if appropriate, record changes to our restructuringobligations in current operations based on management’s most current estimates.

 

As of March 31, 2005, the total restructuringaccrual of $13.3 million consisted of the following (in millions): 

 

| ** **                | ** ** | **Current** | ** ** | **Non-Current** | ** ** | **Total** | ** ** |
|---------------------------|------------|-------------|------------|-----------------|------------|-----------|------------|
| Severance and Termination |       | $           | 0.6        |            | $          | —    |       | $ | 0.6 |   |
| Excess Facilities         |       | 6.1         |       | 6.6             |       | 12.7      |       |
|                      |       |        |       |            |       |      |       |
| Total                     |       | $           | 6.7        |            | $          | 6.6       |       | $ | 13.3 |   |

 

We estimate that the $600,000 severance andtermination accrual will be paid in full by December 31, 2005. We expectto pay the excess facilities amounts related to restructured or abandonedleased space as follows (in millions): 

 

| **Years ending December 31,**               | ** ** | **Total future  minimum  payments** | ** ** |
|--------------------------------------------------|------------|-------------------------------------|------------|
| 2005                                             |       | $                                   | 5.6        |   |
| 2006                                             |       | 5.3                                 |       |
| 2007                                             |       | 0.8                                 |       |
| 2008                                             |       | 0.4                                 |       |
| 2009 and thereafter (through  October 2010) |       | 0.6                                 |       |
|                                             |       |                                |       |
| Total minimum facilities payments                |       | $                                   | 12.7       |   |

 

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Of this excess facilities accrual, $5.6 millionrelates to payments due in fiscal 2005 under existing leases and leasetermination agreements, and $7.1 million relates to future minimum leasepayments, fees and expenses, net of estimated sublease income and plannedcompany occupancy.

 

The following table summarizes the activity relatedto the restructuring plans initiated subsequent to December 31, 2002, andaccounted for in accordance with FAS 146 (in thousands):

 
| ** **                                           | ** ** | **Accrued  restructuring  costs  beginning** | ** ** | **Amounts  charged to  restructuring  costs  and other** | ** ** | **Amounts paid  or written off** | ** ** | **Accrued  restructuring  costs, ending** | ** ** |
|------------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------|------------|-------------------------------------------|------------|
| **Quarter Ended March 31, 2005**                |       |                                         |       |                                                     |       |                             |       |                                      |       |
| Lease cancellations and commitments                  |       | $                                            | 21,824     |                                                     | $          | (631                             | )          | $                                         | (17,347    | ) | $ | 3,846 |   |
| Termination payments to employees and  related costs |       | 365                                          |       | (95                                                      | )          | (155                             | )          | 115                                       |       |
|                                                 |       | $                                            | 22,189     |                                                     | $          | (726                             | )          | $                                         | (17,502    | ) | $ | 3,961 |   |
|                                                 |       |                                         |       |                                                     |       |                             |       |                                      |       |
| **Quarter Ended March 31, 2004**                |       |                                         |       |                                                     |       |                             |       |                                      |       |
| Lease cancellations and commitments                  |       | $                                            | 21,683     |                                                     | $          | —                           |       | $                                         | —     |   | $ | 21,683 |   |
| Termination payments to employees and  related costs |       | 242                                          |       | 318                                                      |       | (465                             | )          | 95                                        |       |
|                                                 |       | $                                            | 21,925     |                                                     | $          | 318                              |       | $                                         | (465       | ) | $ | 21,778 |   |

 

The following table summarizes the activity relatedto the restructuring plans initiated on or prior to December 31, 2002, andaccounted for in accordance with EITF 94-3 (in thousands):

 
| ** **                                           | ** ** | **Accrued  restructuring  costs,  beginning** | ** ** | **Amounts  charged to  restructuring  costs  and other** | ** ** | **Amounts paid  or written off** | ** ** | **Accrued  restructuring  costs, ending** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------|------------|-------------------------------------------|------------|
| **Quarter Ended March 31, 2005**                |       |                                          |       |                                                     |       |                             |       |                                      |       |
| Lease cancellations and commitments                  |       | $                                             | 11,515     |                                                     | $          | 22                               |       | $                                         | (2,666     | ) | $ | 8,871 |   |
| Termination payments to employees and  related costs |       | 459                                           |       | —                                                   |       | (14                              | )          | 445                                       |       |
|                                                 |       | $                                             | 11,974     |                                                     | $          | 22                               |       | $                                         | (2,680     | ) | $ | 9,316 |   |
| **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                                       |       |
|                                                 |       | $                                             | 83,455     |                                                     | $          | 252                              |       | $                                         | (4,986     | ) | $ | 78,721 |   |

 

As mentioned above, we have based our excessfacilities accrual, in part, upon estimates of future sublease income. We haveused the following factors, among others, in making such estimates: opinions ofindependent real estate experts, current market conditions and rental rates, anassessment of the time period over which reasonable estimates could be made,the status of negotiations with potential subtenants, and the location of therespective facilities. We recorded the low-end of a range of assumptionsmodeled for restructuring charges, in accordance with SFAS 5.  Adjustments to the facilities accrual will berequired if actual sublease income differs from amounts currently expected. Wewill review the status of restructuring activities on a quarterly basis and, ifappropriate, record changes to our restructuring obligations in currentoperations based on management’s most current estimates.

 

***Legal Matters***

 

Our current estimated range of liability related topending litigation is based on claims for which it is probable that a liabilityhas been incurred and we can estimate the amount and range of loss. We haverecorded the minimum estimated liability related to those claims, where thereis a range of loss. Because of the uncertainties related to both thedetermination of the probability of an unfavorable outcome and the amount andrange of loss in the event of an unfavorable outcome, we are unable to make areasonable estimate of the liability that could result from the remainingpending litigation. As additional information becomes available, we will assessthe potential liability related to its pending litigation and revise ourestimates, if necessary. Such revisions in our estimates of the potentialliability could materially impact our results of operations and financialposition.

 

On June 10, 2004, MetLife filed a complaint inthe Superior Court of the State of California, County of Los Angeles, naming usas a defendant. The complaint alleged that we were liable for unlawful detainerof

 

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premisesleased from the plaintiff. The plaintiff thereafter filed a First AmendedComplaint alleging that we no longer held possession of the premises but was inbreach of the lease. In February 2005, MetLife reached agreement with usand executed documents regarding a settlement of the pending lawsuit underwhich we will pay MetLife an aggregate of $1.9 million in consideration fortermination of the lease, dismissal of the lawsuit and in full settlement ofapproximately $3.1 million of past and future lease obligations. The first ofthree installment payments was made in February 2005, with the second duein May 2005 and the third due in September 2005.

 

On January 7,2005, we announced that we had reached agreement with the SEC to settleadministrative proceedings in connection with the restatement of our financialresults for the third quarter of fiscal 2001. No fines or financial penaltieswere associated with the settlement. Without admitting or denying anywrongdoing, we consented to the SEC’s entry of an administrative order thatincluded findings that we issued a false and misleading earnings press releaseand misleading quarterly report. The order requires that we cease and desistfrom committing or causing violations of specified provisions of the federalsecurities laws. The SEC found that a former executive in charge ofprofessional services who left BroadVision in 2002 was responsible for theimproper accounting. The restatement concerned revenue related to one softwarelicense agreement. Following receipt of payment in full by the customer, werecognized revenue on that agreement in its entirety in the third quarter of2001. We subsequently determined that the revenue should instead be recognizedratably over the four-year life of the agreement, and announced on April 1,2002 that we were restating our financial statements for the third quarter of2001 to effect this change. We have been accounting for the revenue ratably inall periods since the third quarter of 2001.

 

***Results of Operations***

 

*Revenues*

 

*Total revenues* decreased 22% during the quarter ended March 31,2005 to $16.4 million as compared to $20.9 million for the quarter ended March 31,2004.  A summary of our revenues by geographic region is as follows(dollars in thousands, unaudited):

 
| ** **          | ** ** | **Software  Licenses** | ** ** | **%**  | ** ** | **Services** | ** ** | **%**  | ** ** | **Total** | ** ** | **%**  | ** ** |
|---------------------|------------|------------------------|------------|--------|------------|--------------|------------|--------|------------|-----------|------------|--------|------------|
| Three Months Ended: |       |                   |       |   |       |         |       |   |       |      |       |   |       |
|                |       |                   |       |   |       |         |       |   |       |      |       |   |       |
| March 31, 2005 |       |                   |       |   |       |         |       |   |       |      |       |   |       |
| Americas            |       | $                      | 1,914      |   | 43         | %            | $          | 6,724  |       | 56        | %          | $      | 8,638      |   | 53 | % |
| Europe              |       | 1,706                  |       | 39     |       | 4,212        |       | 35     |       | 5,918     |       | 36     |       |
| Asia Pacific        |       | 796                    |       | 18     |       | 1,015        |       | 9      |       | 1,811     |       | 11     |       |
| Total               |       | $                      | 4,416      |   | 100        | %            | $          | 11,951 |       | 100       | %          | $      | 16,367     |   | 100 | % |
|                |       |                   |       |   |       |         |       |   |       |      |       |   |       |
| 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 | % |

 

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

 

*Software license revenues* decreased 44% during the quarter ended March 31,2005 to $4.4 million as compared to $7.8 million for the quarter ended March 31,2004. License revenue in the Americas and Europe declined due to softeningdemand for enterprise software applications. Asia Pacific revenue increased due to a single large license transactionthat occurred in the first quarter of fiscal 2005 that did not occur in thefirst quarter of fiscal 2004.

 

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*Services revenues* consisting of consulting revenues, customertraining revenues and maintenance revenues decreased 8% during the quarterended March 31, 2005 to $12.0 million as compared to $13.0 million for thequarter ended March 31, 2004.  Thisdecrease was attributable to lower maintenance revenue, which decreased 16% forthe three months ended March 31, 2005 to $6.8 million as compared to $8.1million for the three months ended March 31, 2004.  Maintenance revenue decreased due to adecline in customer licenses and certain existing customers declining therenewal of annual maintenance services.

 

*Cost of Revenues*

 

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

 

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

 
| ** **                                 | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------|------------|----------------------------------------|------------|
| ** **                                 | ** ** | **2005**                               | ** ** | **%** | ** ** | **2004** | ** ** | **%** | ** ** |
| Cost of (credit for) software licenses (1) |       | $                                      | (57        | ) | (1 | )% | $ | 578 |   | 7 | % |
| Cost of services (2)                       |       | 5,980                                  |       | 50 |   | 6,277 |   | 48 |   |
|                                       |       |                                   |       |   |   |   |   |   |   |
| Total cost of revenues (3)                 |       | $                                      | 5,923      |   | 36 | % | $ | 6,855 |   | 33 | % |

 

----

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

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

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

 

*Cost of (credit for) softwarelicenses* decreased inabsolute dollar terms during the quarter ended March 31, 2005 to $(57,000)as compared to $578,000 for the quarter ended March 31, 2004. Thisdecrease was primarily due to a credit recorded in the most recent quarter dueto a vendor settlement and declining royalty obligations.

 

*Cost of services* decreased 5% in absolute dollar terms duringthe quarter ended March 31, 2005 to $6.0 million as compared to $6.3million for the quarter ended March 31, 2004. This decline wasattributable to lower consulting headcount in Europe and the Middle Eastregions and lower customer support headcount in the Americas.  This was partially offset by an increase inconsulting spending in the Americas.

 

*Operating Expenses and Other Income, net*

 

Operating expenses consists of the following:

 

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

•      *Sales and marketingexpenses* consist primarilyof salaries, employee-related benefit costs, commissions and other incentivecompensation, travel and entertainment and marketing

 

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program-related expenditures such as collateral materials,trade shows, public relations, advertising, and creative services.

•      *General and administrativeexpenses* consist primarilyof salaries, employee-related benefit costs, provisions and credits related touncollectible accounts receivable and professional service fees.

•       *Other intangibleamortization* representscosts to amortize other intangible assets, generally on a straight-line basis.As described in Note 7 in the Notes to Condensed Consolidated FinancialStatements, as of January 1, 2002, we no longer amortize goodwill or theassembled workforce as we have identified the assembled workforce as anintangible asset which does not meet the criteria of a recognizable intangibleasset as defined by SFAS142.

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

 

A summary of operating expenses is set forth in thefollowing table. The percentage of expenses is calculated based on totalrevenues (dollars in thousands, unaudited):

 
| ** **                     | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------|------------|---------------------------------------|------------|
| ** **                     | ** ** | **2005**                              | ** ** | **%** | ** ** | **2004** | ** ** | **%** | ** ** |
| Research and development       |       | $                                     | 4,287      |   | 26 | % | $ | 4,888 |   | 23 | % |
| Sales and marketing            |       | 5,811                                 |       | 36 |   | 6,866 |   | 33 |   |
| General and administrative     |       | 2,535                                 |       | 15 |   | 2,417 |   | 12 |   |
| Restructuring charges (credit) |       | (704                                  | )          | (4 | ) | 570 |   | 3 |   |
| Total operating expenses       |       | $                                     | 11,929     |   | 73 | % | $ | 14,741 |   | 71 | % |

 

*Research and development expenses* decreased 12% during the quarter ended March 31,2005 to $4.3 million as compared to $4.9 million for the quarter ended March 31,2004. The decrease in research and development expenses was primarilyattributable to reduced headcount as a result of natural attrition and loweroverhead allocations.

 

*Sales and marketing expenses* decreased 15% during the quarter ended March 31,2005 to $5.8 million as compared to $6.9 million for the quarter ended March 31,2004. The decrease was primarily attributable to turnover in the salesorganization combined with lower commissions on lower license revenue.  Partially offsetting these declines wasincreased marketing campaign spending.

 

*General and administrativeexpenses* increased 5%during the quarter ended March 31, 2005 to $2.5 million as compared to$2.4 million for the quarter ended March 31, 2004, due to increasedcontractor costs related to finance special projects.  This was offset by a reduction in accountingfees related to the Sarbanes-Oxley Act of 2002.

 

*Restructuringcharges.*****Through March 31,2005, the Company has approved restructuring plans to, among other things,reduce its workforce and consolidate facilities. Restructuring and assetimpairment charges were taken to align the Company’s cost structure withchanging market conditions and to create a more efficient organization. Ourrestructuring charges are comprised primarily of: (i) severance andbenefits termination costs related to the reduction of our workforce; (ii) leasetermination costs and/or costs associated with permanently vacating ourfacilities; (iii) other incremental costs incurred as a direct result ofthe restructuring plan; and (iv) impairment costs related to certainlong-lived assets abandoned. We account for each of these costs in accordancewith SAB 100*.*

 

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

 

| ** **                      | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------|------------|----------------------------------------|------------|
| ** **                      | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| Excess Facilities               |       | $                                      | (609       | ) | $ | 252 |   |
| Severance and Termination Costs |       | (95                                    | )          | 318 |   |
| Total                           |       | $                                      | (704       | ) | $ | 570 |   |

 

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The excess facilities credit for the three-monthsended March 31, 2005 related primarily to an adjustment of $753,000 tofair value of the warrant issued to a previous landlord as part of a leasesettlement in 2004.  The excessfacilities charge for the three-months ended March 31, 2004, primarilyrelated to the adjustment of accrued interest on excess facilities obligationsthat were discounted under SFAS 146.  Theseverance and termination costs for both periods reflect adjusted severance,payroll taxes and COBRA benefits related to restructuring plans implementedprior to the end of the period. The Company recorded these charges at thelow-end of a range of assumptions modeled for the restructuring charges, inaccordance with SFAS 5.  Adjustments tothe restructuring accruals will be made in future periods, if necessary, basedupon the then current actual events and circumstances.

 

*Interest income, net*for the three months ended March 31,2005 was an expense of $744,000 as compared to income of $109,000 for the threemonths ended March 31, 2004. Interest expense increased during the firstquarter of 2005 due to the debentures issued in November 2004.  Interest income has declined year-over-yeardue to lower cash balances and lower interest rates being earned on investedfunds.

 

*Other (expense) income, net,*for the three months ended March 31,2005 was a net income of $3.1 million as compared to expenses of $133,000 forthe three months ended March 31, 2004. The increase in income in the firstquarter of 2005 was primarily due to a $1.4 million gain on the disposition ofequity investments, and a $1.8 million gain on the revaluing of common stockwarrants for warrants issued in connection with the debenture offering in November 2004to fair value as of March 31, 2005.

 

*IncomeTaxes*. During the quarter ended March 31,2005, we recorded a tax benefit of $2.0 million as compared to a tax expense of$136,000 for quarter ended March 31, 2004. The tax benefit from the firstquarter of fiscal 2005 was primarily due to the reversal of certain income taxaccruals determined during the first quarter to be no longer required. For thequarter ended March 31, 2004, tax expense of $76,000 relates to incometaxes in foreign jurisdictions that are not available to credit against USincome taxes. The remaining $60,000 was attributable to state franchise taxes.

 

*Liquidity and Capital Resources (in thousands)*

 
| ** **                | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|---------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                | ** ** | **(unaudited)**          | ** ** | ** **                  | ** ** |
| Cash and cash equivalents |       | $                        | 37,218     |                        | $          | 41,851 |   |
| Restricted cash           |       | $                        | 5,153      |                        | $          | 24,256 |   |
| Working capital (deficit) |       | $                        | (22,164    | )                           | $          | (18,136 | ) |
| Working capital ratio     |       | 0.72                     |       | 0.82                        |       |

 

As of March 31, 2005, cash, cash equivalents,and restricted cash and investments totaled $42.4 million, which represents adecrease of $23.7 million as compared to a balance of $66.1 million on December 31,2004. This decrease was attributable to net cash used for operations andpayment of lease settlement obligations during the quarter.

 

In November 2004, weentered into a definitive agreement for the private placement of up to $20.0million of convertible debentures to five institutional investors. We issued aninitial $16.0 million of debentures, which will be convertible, at the holders’option, into common stock at a conversion price of $2.76 per share. Thedebentures bear interest at a rate of six percent per annum, and we areobligated to repay the principal amount of the initial $16.0 million ofdebentures in 15 equal monthly installments of $1.1 million, beginning in June 2005.Under the terms of the debentures, our monthly principal repayment obligationwill increase to $2.1 million beginning in September 2005 if our cashbalances as of June 2005 fall below certain defined levels.  This increase, which is likely, will have theeffect of requiring us to repay the principal amount in nine installmentsthrough February 2006. Payments of principal and interest may be made ineither cash or, upon receipt of stockholder approval and satisfaction ofvarious other conditions set forth in the debentures, shares of our commonstock. These conditions include, among others, the requirement that theregistration statement relating to our common shares issuable upon conversionof our debentures be declared effective by the SEC for a period of no fewerthan approximately sixty days prior to the repayment due date and therequirement that our common stock continue to be traded on an eligiblemarket.  Subject to stockholder approvaland the satisfaction of these other conditions we intend to use shares of ourcommon stock for payments under the debentures to the maximum extent permittedby the conditions of the debentures. Due to unforeseen delays in having ourRegistration Statement declared effective by the SEC  we anticipate having to use cash tosatisfy our payment obligations through at least September 2005. Cashpayments to be made during this period are expected to total approximately $6.1million. The agreement provides for an additional $4.0 million of convertibledebentures to be issued to the investors at the option of the investors or,under certain circumstances, at our option. Investors also received warrants topurchase approximately 1.7 million shares of our common stock at a price of$3.58 per share. The warrants will be exercisable beginning six months afterthe closing date, and have a term of five years.

 

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On May 9,2005, by agreement between us and the holders of a majority of the debentures,one of the agreements governing the debentures was amended to extend by 120days the time within which we are required to obtain effectiveness of aregistration statement covering the resale of the shares of our common stockthat may be issued in respect of the debentures.

 

We have various credit facilities with a commerciallender which include term debt in the form of notes payable, a revolving lineof credit and an equipment line of credit. In February 2005, we enteredinto a renewed and amended loan and security agreement with the lender. Theagreement requires us to maintain certain levels of unrestricted cash and cashequivalents (excluding equity investments), and to maintain certain levels ondeposit with the lender. At March 31, 2005 and December 31, 2004,$20.0 million was outstanding under the line of credit. Borrowings under theline of credit are collateralized by all of our assets and bear interest at thebank’s prime rate. Interest is due monthly and principal is due at theexpiration in February 2006.

 

During the third and fourth quarters of 2004, wereached agreements with certain landlords to extinguish approximately $155.0million of future real estate obligations. We made cash payments of $20.7million in 2004 and additional cash payments of $21.9 million in the firstquarter of 2005.  In addition, we issuedto one of the landlords a five-year warrant to purchase approximately 700,000shares of our common stock at an exercise price of $5.00 per share, exercisablebeginning in August 2005.

 

As a component of the settlement of one of theprevious leases, we have a residual lease obligation beginning in 2007 ofapproximately $9.1 million. We may make an additional cash payment of $4.5million if we exercise an option to terminate this residual real estate obligationprior to the commencement of the lease term (January 2007). This option toterminate the residual lease obligation is accounted for in accordance withSFAS 146 and is part of the restructuring credit of $23.5 million recorded inthe year ended December 31, 2004.

 

Commitments totaling $5.2 million and $24.3 millionin the form of standby letters of credit were issued on our behalf fromfinancial institutions as of March 31, 2005 and December 31, 2004,respectively, primarily infavorof our various landlords to secure obligations under our facility leases. Accordingly, $5.2 million and $24.3 million have been presented asrestricted cash in the accompanying Condensed Consolidated Balance Sheets at March 31,2005 and December 31, 2004, respectively.

 

Our exposure to market risk for changes in interestrates relates primarily to our investment portfolio. We had no derivativefinancial instruments as of March 31, 2005 and December 31, 2004. Weplace our investments in instruments that meet high credit quality standardsand the amount of credit exposure to any one issue, issuer and type ofinstrument is limited.  Our interest rate risk related to borrowingshistorically has been minimal as interest expense related to adjustable rateborrowings has been immaterial for the three months ended March 31, 2005and 2004.

 

*Cash Provided By (Used For) Operating Activities*

 

Cash used for operating activities was $25.3 millionfor the three months ended March 31, 2005. The primary reason for the netcash used by operating activities was due to the payment of accrued liabilitiesrelated to restructuring of $20.9 million, offset by net income of $2.9million.  Other significant adjustmentsto reconcile net income to cash used for operating activities included thenon-cash gain on sale of cost method investments of $1.2 million, the non-cashrelease of income tax reserves of $2.0 million, and the gain on revaluation ofwarrants to fair value of $2.5 million. Cash used for operating activities was $3.7 million for the three monthsended March 31, 2004. The primary reason for the net cash used foroperating activities was due to the net loss of $867,000 and decreases inaccrued expenses and non-current liabilities, primarily related to excessfacilities costs.  Partially offsetting these uses of cash were $1.4million of non-cash depreciation and amortization expense and a decrease inaccounts receivable of $1.7 million due to lower revenue.

 

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*Cash Provided By Investing Activities*

 

Cash provided by investing activities was$20.5 million for the three months ended March 31, 2005 and wasprimarily due to transfers from restricted cash of $19.1 million and proceedsfrom dividends of $1.1 million.  Cashprovided by investing activities was $798,000 for the three months ended March 31,2004 and was primarily due to transfers from restricted cash.  Capitalexpenditures were $57,000 and $144,000 during the three months ended March 31,2005 and 2004, respectively.  Our capital expenditures consisted ofpurchases of operating resources to manage our operations and consistedprimarily of computer hardware and software.

 

*Cash Provided By Financing Activities*

 

Cash provided by financing activities was $120,000for the three months ended March 31, 2005, consisting of $370,000 inproceeds from the issuance of common stock offset by $250,000 used forrepayment of borrowings, net of new borrowings.  Cash provided byfinancing activities was $637,000 for the three months ended March 31,2004, consisting of $803,000 in proceeds from the issuance of common stockoffset by $166,000 used for repayment of borrowings, net of new borrowings.

 

*Leases and Other Contractual Obligations*

 

We lease our headquarters facility and our otherfacilities under non-cancelable operating lease agreements expiring through theyear 2010. Under the terms of the agreements, we are required to pay leasecosts, property taxes, insurance and normalmaintenance costs.

 

We expect to incur significant operating expensesfor the foreseeable future in order to execute our business plan. A summary oftotal future minimum lease payments as of March 31, 2005, undernoncancelable operating lease agreements, is as follows (in millions):

 

| **Years ending December 31,**               | ** ** | **Total future  minimum  payments** | ** ** |
|--------------------------------------------------|------------|-------------------------------------|------------|
| 2005                                             |       | $                                   | 1.2        |   |
| 2006                                             |       | 0.7                                 |       |
| 2007                                             |       | 0.5                                 |       |
| 2008                                             |       | 0.3                                 |       |
| 2009 and thereafter (through  October 2010) |       | 0.4                                 |       |
|                                             |       |                                |       |
| Total minimum facilities payments                |       | $                                   | 3.1        |   |

 

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

 

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

 
| Less than 1 year |   | $      | 3.2    |   |
|------------------|--------|--------|--------|--------|
| 1-3 years        |   | 1.0    |   |
| 4-5 years        |   | — |   |
| Over 5 years     |   | 1.0    |   |
| Total            |   | $      | 5.2    |   |

 

Restricted cash represents collateral for theseletters of credit.

 

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

 

We currently expect to fund our short-term workingcapital and operating resource expenditure requirements, for at least the nexttwelve months, from our existing cash and cash equivalents resources, ouranticipated cash flows from operations and anticipated cash flows fromsubleases. However, these sources could be inadequate for the operation of ourbusiness for various reasons.  Thesereasons include, but are not limited to, the following:

 

•      Ifthe Company’s stockholders do not approve the use of common stock for paymentsdue under outstanding debentures at the Company’s annual meeting ofstockholders scheduled for May 24, 2005, then all payments will berequired to be made in cash until approximately 30 days after stockholderapproval is subsequently obtained.

 

•      Ifan event of default occurs under the debentures and is not cured within anyapplicable cure period, the debenture holders could accelerate the due date ofthe debentures such that the entire principal balance, interest and otherobligation become immediately due and payable. If an event of default occurs but is cured within the applicable cureperiod, the Company will be required to make payments in cash for a period ofno less than 120 days from the date of the cure of the default.

 

•      Ifthe Company is not declared effective by August 5, 2005, then the Companywill be required to use cash in excess of the $6.1 million of anticipated cashrepayments noted above to satisfy its repayment obligations.

 

Such circumstances will have a significantlyunfavorable effect on the Company’s liquidity and will likely result in theCompany’s cash resources falling below a level that is necessary for theoperation of the Company’s business in the fourth quarter of 2005.   In such circumstances, the Company may beunable to continue as a going concern.

 

*Factors That May Affect Future Operating Results*

 

Our capital resources could be inadequate for theoperation of our business for various reasons. For example, if our stockholders do not approve the use of common stock forpayments under our outstanding debentures, or if the other terms of thedebentures require us to use cash, rather than stock, for more of the debenturepayments than we presently anticipate, then our cash resources are likely tofall below a level that is adequate for the operation of our business in thefourth quarter of 2005.  We may need toraise additional funds in the future to repay outstanding indebtedness, fundoperations, develop new technologies, respond to competitive pressures, acquirecomplementary businesses or for other reasons. We may seek to raise additional funds through private or public sales ofsecurities, strategic relationships, bank debt, financing under leasingarrangements or otherwise.  If additionalfunds are raised through the issuance of equity securities, the percentageownership of our stockholders will be reduced, stockholders may experienceadditional dilution or such equity securities may have rights, preferences orprivileges senior to those of the holders of our common stock.  There can be no assurance that additionalfinancing will be available on acceptable terms, if at all.  If adequate funds are not available or arenot available on acceptable terms, we may be unable to develop our products,take advantage of future opportunities or respond to competitive pressures orunanticipated requirements, which could have a material adverse effect on ourbusiness, financial condition or future operating results.

 

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

 

Significant fluctuations in future quarterlyoperating results may be caused by many factors including, among others, thetiming of introductions or enhancements of products and services by us or ourcompetitors, market acceptance of new products, the mix of our products sold,changes in pricing policies by us or our competitors, our ability to retaincustomers, changes in our sales incentive plans, budgeting cycles of ourcustomers, customer order deferrals in anticipation of new products orenhancements by us or our competitors, nonrenewal of maintenance agreements,product life cycles, changes in strategy, seasonal trends, the mix ofdistribution channels through which our products are sold, the mix ofinternational and domestic sales, the rate at which new sales people becomeproductive, changes in the level of operating expenses to support projectedgrowth and general economic conditions. We anticipate that a significantportion of our revenues will be derived from a limited number of orders, andthe timing of receipt and fulfillment of any such orders is expected to causematerial fluctuations in our operating results, particularly on a quarterlybasis. Due to the foregoing factors, quarterly revenues and operating resultsare difficult to forecast, and we

 

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believethat period-to-period comparisons of our operating results will not necessarilybe meaningful and should not be relied upon as any indication of futureperformance. It is likely that our future quarterly operating results from timeto time will not meet the expectations of market analysts or investors, whichmay have an adverse effect on the price of our common stock.

 

We are continuing efforts to reduce and control ourexpense structure. We believe strict cost containment and expense reductionsare essential to achieving positive cash flow and profitability. A number offactors could preclude us from successfully bringing costs and expenses in linewith our revenues, including unplanned uses of cash, the inability toaccurately forecast business activities and further deterioration of ourrevenues. If we are not able to effectively reduce our costs and achieve anexpense structure commensurate with our business activities and revenues, wemay have inadequate levels of cash for operations or for capital requirements,which could significantly harm our ability to operate our business.

 

We renewed and amended our revolving credit facilityduring the first quarter of fiscal 2005. The facility is secured bysubstantially all of our owned assets. The primary financial covenant under thefacility obligates us to maintain certain levels of available cash, cashequivalents, short-term investments and long-term investments (excluding equityinvestments). Falling below such levels would be an event of default for whichthe bank may, among other things, accelerate the payment of the facility.

 

Our success depends largely on the skills,experience and performance of key personnel. If we lose one or more keypersonnel, our business could be harmed. Our future success depends on ourability to continue attracting and retaining highly skilled personnel. We maynot be successful in attracting, assimilating and retaining qualified personnelin the future. Furthermore, the significant downturn in our businessenvironment had a negative impact on our operations. We are currentlyrestructuring our operations and have taken actions to reduce our workforce andimplement other cost containment activities. These actions could lead todisruptions in our business, reduced employee morale and productivity,increased attrition and problems with retaining existing employees andrecruiting future employees and increased financial costs.

 

Some of these risks and uncertainties relate to therapidly evolving nature of the markets in which we operate. These relatedmarket risks include, among other things, the evolution of the online commercemarket, the dependence of online commerce on the development of the Internetand its related infrastructure, the uncertainty pertaining to widespreadadoption of online commerce and the risk of government regulation of theInternet. Other risks and uncertainties relate to our ability to, among otherthings, successfully implement our marketing strategies, respond to competitivedevelopments, continue to develop and upgrade our products and technologiesmore rapidly than our competitors, and commercialize our products and servicesby incorporating these enhanced technologies. There can be no assurance that wewill succeed in addressing any or all of these risks.

 

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

 

**Item 3.****  Quantitative andQualitative Disclosures About Market Risk**

 

Our exposure to market risk for changes in interestrates relates primarily to our investment portfolio. We had no derivativefinancial instruments as of March 31, 2005 and December 31, 2004. Weplace our investments in instruments that meet high credit quality standardsand the amount of credit exposure to any one issue, issuer and type ofinstrument is limited.  Our interest rate risk related to borrowingshistorically has been minimal as interest expense related to adjustable rateborrowings has been immaterial for the three months ended March 31, 2005and 2004.

 

During the first quarter of fiscal 2005, we drewdown $20.0 million on our revolving line of credit.  Interest is payablemonthly at the bank’s prime rate with a floor minimum of 4.25% (5.75% annuallyas of

 

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March 31, 2005) andprincipal is due in full in February 2006.  Additionally, we have twooutstanding term loans and an equipment line of credit as of March 31,2005.  Interest on those loans are at the bank’sprime rate (5.75% as of March 31, 2005) and prime rate plus 1.25%.

 

***Cash and Cash Equivalents***

 

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

 

Our cash, and cash equivalents, at cost, whichapproximates fair value, consisted of the following as of March 31, 2005(in thousands, unaudited)

 
| ** **                        | ** ** | **Fair value** | ** ** |
|-----------------------------------|------------|----------------|------------|
| Cash and certificates of deposits |       | $              | 33,450     |   |
| Money market                      |       | 8,921          |       |
| Total cash and equivalents        |       | $              | 42,371     |   |

 

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

 

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

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

 

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

 

***Concentrations of Credit Risk***

 

Financial assets that potentially subject us tosignificant concentrations of credit risk consist principally of cash, cashequivalents, and trade accounts receivable. We maintain our cash and cashequivalents with two separate financial institutions. We market and sell ourproducts throughout the world and perform ongoing credit evaluations of ourcustomers. We maintain reserves for potential credit losses. For the threemonths ended March 31, 2005, no one customer accounted for more than 10%of total revenue.  For the three months ended March 31, 2005, no onecustomer accounted for more than 10% of accounts receivable.

 

***Fair Value of Financial Instruments***

 

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

 

***Foreign Currency***

 

We license our products and maintain significantoperations in foreign countries. Fluctuations in the value of foreigncurrencies, principally the Euro, relative to the United States dollar have impactedour operating results in the past and may do so in the future. We expect thatinternational license, maintenance

 

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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.

 

***Equity Investments***

 

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

 

The total fair value of our cost method long-termequity investments in public and non-public companies as of March 31, 2005was $338,000. There were not any “other than temporarywrite-down” during the three months ended March 31, 2005 related tolong-term equity investments.

 

**ITEM 4.****  Controls andProcedures**

 

Our Chief Executive Officer and our Chief FinancialOfficer are responsible for establishing and maintaining “disclosure controlsand procedures” (as defined in the rules promulgated under the SecuritiesExchange Act of 1934, as amended) for our company. Based on their evaluation ofour disclosure controls and procedures (as defined in the rules promulgatedunder the Securities Exchange Act of 1934), our Chief Executive Officer and ourChief Financial Officer concluded that our disclosure controls and procedureswere effective as of March 31, 2005, the end of the period covered by thisreport.

 

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

 

Wereported three material weaknesses as of December 31, 2004.  During the three-month period ended March 31,2005, in part to remediate those weaknesses, we implemented the followingchanges in our internal control over financial reporting that have materiallyaffected, or are reasonably likely to materially affect, our internal controlover financial reporting.  We:

 

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

 

•      promoted an experienced member of our financestaff to the position of Director of Accounting overseeing all North Americangeneral accounting activities;

 

•      made enhancements to account reconciliationsto provide more thorough account analyses;

 

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

 

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

 

•      strengthened controls to ensure that thedirector of treasury reviews cash accounts on a monthly basis for completeness;

 

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

 

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Webelieve the corrective steps described herein enable management to concludethat the internal controls over our financial reporting are effective.  We will continue our efforts to identify, assess and correct any additional materialweaknesses in internal controls that may arise.

 

***Limitations on the Effectiveness ofControls***

 

Our management, including our Chief ExecutiveOfficer and Chief Financial Officer, does not expect that our disclosurecontrols and procedures or our internal controls will prevent all error andfraud. A control system, no matter how well conceived and operated, can provideonly reasonable, not absolute, assurance that the objectives of the controlsystem are met. Further, the design of a control system must reflect the factthat there are resource constraints, and the benefits of controls must beconsidered relative to their costs. Because of the inherent limitations in allcontrol systems, no evaluation of controls can provide absolute assurance thatall control issues and instances of fraud, if any, within the company have beendetected. These inherent limitations include the realities that judgments indecision-making can be faulty, and that breakdowns can occur because of simpleerror or mistake. Additionally, controls can be circumvented by the individualacts of some persons, by collusion of two or more people, or by managementoverride of the controls. The design of any system of controls also is based inpart upon certain assumptions about the likelihood of future events, and therecan be no assurance that any design will succeed in achieving its stated goalsunder all potential future conditions; over time, controls may becomeinadequate because of changes in conditions, or the degree of compliance withthe policies or procedures may deteriorate. Because of the inherent limitationsin a cost-effective control system, misstatements due to error or fraud mayoccur and not be detected. Our disclosure controls and procedures are designedto provide reasonable assurance of achieving their objectives, and our ChiefExecutive Officer and the Chief Financial Officer have concluded that thesecontrols and procedures are effective at the “reasonable assurance” level.

 

**PART II.****  OTHER INFORMATION**

 

**Item 1.****Legal Proceedings**

 

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

 

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

 

On January 7,2005, the Company announced that it had reached agreement with the SEC tosettle administrative proceedings in connection with the restatement offinancial results for the third quarter of fiscal 2001. No fines or financialpenalties were associated with the settlement. Without admitting or denying anywrongdoing, the Company consented to the SEC’s entry of an administrative orderthat included findings that it issued a false and misleading earnings pressrelease and misleading quarterly report. The order requires that the Companycease and desist from committing or causing violations of specified provisionsof the

 

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federalsecurities laws. The SEC found that a former executive in charge ofprofessional services who left BroadVision in 2002 was responsible for theimproper accounting. The restatement concerned revenue related to one softwarelicense agreement. Following receipt of payment in full by the customer, theCompany recognized revenue on that agreement in its entirety in the thirdquarter of 2001. The Company subsequently determined that the revenue shouldinstead be recognized ratably over the four-year life of the agreement, andannounced on April 1, 2002 that it was restating the financial statementsfor the third quarter of 2001 to effect this change. The Company has beenaccounting for the revenue ratably in all periods since the third quarter of2001.

 

**Item 2.****Changes in Securities andUse of Proceeds**

Not applicable.

 

**Item 3.****Defaults UponSenior Securities**

Not applicable.

 

**Item 4.****Submission of Matters to aVote of Security Holders**

Not applicable.

 

**Item 5.****Other Information**

Not applicable.

 

**Item 6.****Exhibits**

 

**(a) Exhibits**

 

 
| **Exhibits** | ** ** | **Description**                                                                                                                                          |
|--------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1  (1)     |       | Amended  and Restated Certificate of Incorporation.                                                                                                      |
| 3.2  (2)     |       | Certificate  of Amendment of Certificate of Incorporation.                                                                                               |
| 3.3  (3)     |       | Amended  and Restated Bylaws.                                                                                                                            |
| 4.1  (1)     |       | References  are hereby made to Exhibits 3.1 to 3.2.                                                                                                      |
| 4.5  (4)     |       | Amended  and Restated Registration Rights Agreement dated April 5, 2005, among the  Company and certain investors listed on Exhibit A thereto.      |
| 4.6          |       | Amendment  to Amended and Restated Registration Rights Agreement dated May 9, 2005                                                                  |
| 31.1         |       | Certification  of the Chief Executive Officer of BroadVision.                                                                                            |
| 31.2         |       | Certification  of the Chief Financial Officer of BroadVision.                                                                                            |
| 32.1         |       | Certification  of the Chief Executive Officer and Chief Financial Officer of BroadVision  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |

 

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(1)   Incorporated by reference to the Company’sRegistration Statement on Form S-1 filed on April 19, 1996 as amendedby Amendment No. 1 filed on May 9, 1996, Amendment No. 2 filedon May 29, 1996 and Amendment No. 3 filed on June 17, 1996.

 

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

 

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

 

(4)   Incorporated by reference to the Company’sCurrent Report on Form 8-K filed on April 6, 2005.

 

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**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, 2005 | By:    | /s/  Pehong Chen                                                                             |   |
|                     |   | Pehong  Chen                                                                                 |
|                     |   | Chairman  of the Board, President and Chief Executive Officer (Principal  Executive Officer) |
|                     |   |
| Date:  May 10, 2005 | By:    | /s/  William E. Meyer                                                                        |   |
|                     |   | William  E. Meyer                                                                            |
|                          |        |                                                                                              |  |  |

 

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