**UNITED STATES****SECURITIESAND EXCHANGE COMMISSION**

**Washington, DC  20549**

 

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**FORM 10-Q**

 

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| **(Mark One)**                               |
|----------------------------------------------|
|                                         |   |   |
| **ý**                                   | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934** |
|                                         |   |   |
| **For the Quarter ended June 30, 2004** |
| ** **                                   | ** ** | ** ** |
| **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 as specified in itscharter)

 

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

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15 (d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. Yes   ýNo   o

 

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

 

As of August 03, 2004 there were 33,602,320 shares of theRegistrant’s Common Stock issued and outstanding.

 

 

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**BROADVISION, INC. AND SUBSIDIARIESFORM 10-QQuarter Ended June 30, 2004**

 

**TABLE OF CONTENTS**

 
| **PART I.**    | ** ** | **FINANCIAL INFORMATION**                                                                                                      | ** ** |
|----------------|------------|--------------------------------------------------------------------------------------------------------------------------------|------------|
| Item 1.        |       | Financial Statements                                                                                                           |       |
|           |       | Condensed Consolidated Balance Sheets -  June 30, 2004 and December 31, 2003                                         |       |
|           |       | Condensed Consolidated Statements of Operations  and Comprehensive Loss Three and six months ended June 30, 2004 and 2003 |       |
|           |       | Condensed Consolidated Statements of Cash  Flows-Six months ended June 30, 2004 and 2003                                  |       |
|           |       | Notes to Condensed Consolidated Financial  Statements                                                                          |       |
| Item 2.        |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                    |       |
| Item 3.        |       | Quantitative  and Qualitative Disclosures About Market Risk                                                                    |       |
| Item 4.        |       | Controls  and Procedures                                                                                                       |       |
|           |       |                                                                                                                           |       |
| **PART  II.**  | ** ** | **OTHER INFORMATION**                                                                                                          | ** ** |
| Item 1.        |       | Legal Proceedings                                                                                                              |       |
| Item 2.        |       | Changes in Securities and Use of Proceeds                                                                                      |       |
| Item 3.        |       | Defaults Upon Senior Securities                                                                                                |       |
| Item 4.        |       | Submission of Matters to a Vote of Security  Holders                                                                           |       |
| Item 5.        |       | Other  Information                                                                                                             |       |
| Item 6.        |       | Exhibits  and Reports on Form 8-K                                                                                              |       |
|           |       |                                                                                                                           |       |
| **SIGNATURES** |       |

 

2

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**PART I. FINANCIAL INFORMATION**

**Item 1. Financial Statements**

 

**BROADVISION,INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(Inthousands, except per share data)**

 
| ** **                                                                                                                                                                                          | ** ** | **June 30,2004** | ** ** | **December 31,  2003** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                          | ** ** | **(unaudited)**       | ** ** | ** **                  | ** ** |
| **ASSETS**                                                                                                                                                                                          |       |                  |       |                        |       |
| ** **                                                                                                                                                                                          |       |                  |       |                        |       |
| Cash and cash equivalents                                                                                                                                                                           |       | $                     | 66,904     |                        | $          | 78,776 |   |
| Accounts receivable, less allowance for  doubtful accounts and reserves of   $1,972 as of June 30, 2004 and $3,022 as of December 31,  2003                                          |       | 12,522                |       | 15,380                      |       |
| Prepaids and other                                                                                                                                                                                  |       | 4,216                 |       | 5,346                       |       |
|                                                                                                                                                                                                |       |                  |       |                        |       |
| Total current assets                                                                                                                                                                                |       | 83,642                |       | 99,502                      |       |
|                                                                                                                                                                                                |       |                  |       |                        |       |
| Property and equipment, net                                                                                                                                                                         |       | 13,220                |       | 15,400                      |       |
| Restricted cash                                                                                                                                                                                     |       | 22,259                |       | 19,827                      |       |
| Equity investments                                                                                                                                                                                  |       | 1,381                 |       | 1,565                       |       |
| Goodwill                                                                                                                                                                                            |       | 53,421                |       | 53,421                      |       |
| Other intangibles, net                                                                                                                                                                              |       | 3,013                 |       | 3,013                       |       |
| Other assets                                                                                                                                                                                        |       | 1,968                 |       | 2,354                       |       |
|                                                                                                                                                                                                |       |                  |       |                        |       |
| Total assets                                                                                                                                                                                        |       | $                     | 178,904    |                        | $          | 195,082 |   |
|                                                                                                                                                                                                |       |                  |       |                        |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                      |       |                  |       |                        |       |
|                                                                                                                                                                                                |       |                  |       |                        |       |
| Bank borrowings and current portion of  long-term debt                                                                                                                                              |       | $                     | 27,911     |                        | $          | 27,977 |   |
| Accounts payable                                                                                                                                                                                    |       | 8,151                 |       | 9,186                       |       |
| Accrued expenses                                                                                                                                                                                    |       | 32,345                |       | 34,761                      |       |
| Unearned revenue                                                                                                                                                                                    |       | 6,164                 |       | 7,596                       |       |
| Deferred maintenance                                                                                                                                                                                |       | 18,034                |       | 19,234                      |       |
|                                                                                                                                                                                                |       |                  |       |                        |       |
| Total current liabilities                                                                                                                                                                           |       | 92,605                |       | 98,754                      |       |
|                                                                                                                                                                                                |       |                  |       |                        |       |
| Long-term debt, net of current portion                                                                                                                                                              |       | 619                   |       | 969                         |       |
| Other noncurrent liabilities                                                                                                                                                                        |       | 78,869                |       | 87,409                      |       |
|                                                                                                                                                                                                |       |                  |       |                        |       |
| Total liabilities                                                                                                                                                                                   |       | 172,093               |       | 187,132                     |       |
|                                                                                                                                                                                                |       |                  |       |                        |       |
| Commitments and Contingencies (Note 4)                                                                                                                                                              |       |                  |       |                        |       |
|                                                                                                                                                                                                |       |                  |       |                        |       |
| Stockholders’ equity:                                                                                                                                                                          |       |                  |       |                        |       |
| Preferred stock, $0.0001 par value; 10,000  shares authorized; none issued and outstanding                                                                                                          |       | —                |       | —                      |       |
| Common stock, $0.0001 par value; 2,000,000  shares authorized; 33,476 shares issued and outstanding as of June 30,  2004 and 33,198 shares issued and outstanding as of December 31, 2003 |       | 3                     |       | 3                           |       |
| Additional paid-in capital                                                                                                                                                                          |       | 1,213,841             |       | 1,212,671                   |       |
| Accumulated other comprehensive income  (loss), net of tax                                                                                                                                          |       | 1                     |       | (49                         | )          |
| Accumulated deficit                                                                                                                                                                                 |       | (1,207,034            | )          | (1,204,675                  | )          |
| Total stockholders’ equity                                                                                                                                                                     |       | 6,811                 |       | 7,950                       |       |
|                                                                                                                                                                                                |       |                  |       |                        |       |
| Total liabilities and stockholders’ equity                                                                                                                                                     |       | $                     | 178,904    |                        | $          | 195,082 |   |

 

*See Accompanying Notes to CondensedConsolidated Financial Statements*

 

3

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**BROADVISION, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

**AND COMPREHENSIVE LOSS**

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

 
| ** **                                                                                                                                                   | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                                                                                   | ** ** | **2004**                              | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                                                                                                         |       |                                  |       |                                |       |   |   |   |   |
| **Revenues:**                                                                                                                                                |       |                                  |       |                                |       |   |   |   |   |
| Software licenses                                                                                                                                            |       | $                                     | 7,097      |                                | $          | 6,824 |   | $ | 14,937 |   | $ | 14,799 |   |
| Services                                                                                                                                                     |       | 13,031                                |       | 14,981                              |       | 26,080 |   | 31,461 |   |
| Total revenues                                                                                                                                               |       | 20,128                                |       | 21,805                              |       | 41,017 |   | 46,260 |   |
|                                                                                                                                                         |       |                                  |       |                                |       |   |   |   |   |
| **Cost of  revenues:**                                                                                                                                       |       |                                  |       |                                |       |   |   |   |   |
| Cost of software licenses                                                                                                                                    |       | 313                                   |       | 495                                 |       | 891 |   | 883 |   |
| Cost of services                                                                                                                                             |       | 6,302                                 |       | 7,177                               |       | 12,579 |   | 13,735 |   |
| Total cost of revenues                                                                                                                                       |       | 6,615                                 |       | 7,672                               |       | 13,470 |   | 14,618 |   |
|                                                                                                                                                         |       |                                  |       |                                |       |   |   |   |   |
| Gross profit                                                                                                                                                 |       | 13,513                                |       | 14,133                              |       | 27,547 |   | 31,642 |   |
|                                                                                                                                                         |       |                                  |       |                                |       |   |   |   |   |
| **Operating  expenses:**                                                                                                                                     |       |                                  |       |                                |       |   |   |   |   |
| Research and development                                                                                                                                     |       | 4,509                                 |       | 6,063                               |       | 9,397 |   | 12,214 |   |
| Sales and marketing                                                                                                                                          |       | 7,480                                 |       | 6,043                               |       | 14,346 |   | 12,875 |   |
| General and administrative                                                                                                                                   |       | 2,400                                 |       | 2,413                               |       | 4,817 |   | 4,701 |   |
| Goodwill and intangible amortization                                                                                                                         |       | —                                |       | —                              |       | — |   | 887 |   |
| Restructuring charge                                                                                                                                         |       | 679                                   |       | 7,817                               |       | 1,249 |   | 8,852 |   |
| Total operating expenses                                                                                                                                     |       | 15,068                                |       | 22,336                              |       | 29,809 |   | 39,529 |   |
|                                                                                                                                                         |       |                                  |       |                                |       |   |   |   |   |
| Operating loss                                                                                                                                               |       | (1,555                                | )          | (8,203                              | )          | (2,262 | ) | (7,887 | ) |
|                                                                                                                                                         |       |                                  |       |                                |       |   |   |   |   |
| Interest income, net                                                                                                                                         |       | 102                                   |       | 177                                 |       | 211 |   | 592 |   |
| Other income (expense), net                                                                                                                                  |       | (45                                   | )     | 545                                 |       | (178 | ) | 1,206 |   |
|                                                                                                                                                         |       |                                  |       |                                |       |   |   |   |   |
| Loss before provision for income taxes                                                                                                                       |       | (1,498                                | )          | (7,481                              | )          | (2,229 | ) | (6,089 | ) |
|                                                                                                                                                         |       |                                  |       |                                |       |   |   |   |   |
| Benefit/(Provision) for income taxes                                                                                                                         |       | 6                                     |       | (114                                | )          | (130 | ) | (169 | ) |
|                                                                                                                                                         |       |                                  |       |                                |       |   |   |   |   |
| Net loss                                                                                                                                                     |       | $                                     | (1,492     | )                                   | $          | (7,595 | ) | $ | (2,359 | ) | $ | (6,258 | ) |
|                                                                                                                                                         |       |                                  |       |                                |       |   |   |   |   |
| Basic and diluted loss per share                                                                                                                             |       | $                                     | (0.04      | )                                   | $          | (0.23 | ) | $ | (0.07 | ) | $ | (0.19 | ) |
|                                                                                                                                                         |       |                                  |       |                                |       |   |   |   |   |
| **Shares  used in computing:**                                                                                                                               |       |                                  |       |                                |       |   |   |   |   |
| Basic and diluted shares                                                                                                                                     |       | 33,476                                |       | 32,751                              |       | 33,392 |   | 32,599 |   |
|                                                                                                                                                         |       |                                  |       |                                |       |   |   |   |   |
| **Comprehensive  loss:**                                                                                                                                     |       |                                  |       |                                |       |   |   |   |   |
| Net loss                                                                                                                                                     |       | $                                     | (1,492     | )                                   | $          | (7,595 | ) | $ | (2,359 | ) | $ | (6,258 | ) |
| Other comprehensive gain (loss), net of  tax: Unrealized investment gains (losses) less reclassification adjustment  for gains (losses) included in net loss |       | 49                                    |       | (4                                  | )          | 49 |   | (37 | ) |
| Total comprehensive loss                                                                                                                                     |       | $                                     | (1,443     | )                                   | $          | (7,599 | ) | $ | (2,310 | ) | $ | (6,295 | ) |

 

*See Accompanying Notes to CondensedConsolidated Financial Statements*

 

4

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**BROADVISION, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(In thousands; unaudited)**

 
| ** **                                                                    | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                    | ** ** | **2004**                           | ** ** | **2003** | ** ** |
| **Cash flows from  operating activities:**                                    |       |                               |       |   |   |
| Net loss                                                                      |       | $                                  | (2,359     | ) | $ | (6,258 | ) |
| Adjustments to reconcile net loss to net  cash used for operating activities: |       |                               |       |   |   |
| Depreciation and amortization                                                 |       | 2,309                              |       | 6,897 |   |
| Credit for doubtful accounts and reserves                                     |       | (562                               | )          | (43 | ) |
| Amortization of prepaid royalties                                             |       | 355                                |       | 726 |   |
| Gain on disposal of assets                                                    |       | (96                                | )          | (48 | ) |
| Unrealized (gain) loss on investments                                         |       | (50                                | )          | 37 |   |
| Loss on cost method investments                                               |       | 284                                |       | 50 |   |
| Amortization of other intangible assets                                       |       | —                             |       | 887 |   |
| Stock-based compensation charge                                               |       | (15                                | )          | 49 |   |
| Changes in operating assets and  liabilities:                                 |       |                               |       |   |   |
| Accounts receivable                                                           |       | 3,421                              |       | 8,569 |   |
| Prepaids and other                                                            |       | 775                                |       | 3,373 |   |
| Accounts payable and accrued expenses                                         |       | (3,068                             | )          | (17,025 | ) |
| Unearned revenue and deferred maintenance                                     |       | (2,632                             | )          | (10,652 | ) |
| Other noncurrent assets                                                       |       | 387                                |       | 328 |   |
| Other noncurrent liabilities                                                  |       | (8,540                             | )          | 4496 |   |
| Net cash used for operating activities                                        |       | (9,791                             | )          | (8,614 | ) |
|                                                                          |       |                               |       |   |   |
| **Cash flows from  investing activities:**                                    |       |                               |       |   |   |
| Purchase of property and equipment                                            |       | (318                               | )          | (127 | ) |
| Transfer to restricted cash                                                   |       | (2,432                             | )          | (57 | ) |
| Proceeds from sale of assets                                                  |       | —                             |       | 186 |   |
| Purchase of long-term investments                                             |       | (100                               | )          | (2,729 | ) |
| Sales/maturity of long-term investments                                       |       | —                             |       | 3,403 |   |
| Purchase of short-term investments                                            |       | —                             |       | (2,917 | ) |
| Sales/maturity of short-term investments                                      |       | —                             |       | 22,586 |   |
| Net cash (used in) provided by investing  activities                          |       | (2,850                             | )          | 20,345 |   |
|                                                                          |       |                               |       |   |   |
| **Cash flows from  financing activities:**                                    |       |                               |       |   |   |
| Proceeds from issuance of common stock, net                                   |       | 1,185                              |       | 394 |   |
| Proceeds from borrowings, net                                                 |       | 76                                 |       | 1,991 |   |
| Repayments of borrowings                                                      |       | (492                               | )          | (730 | ) |
| Net cash provided by financing activities                                     |       | 769                                |       | 1,655 |   |
|                                                                          |       |                               |       |   |   |
| Net increase (decrease) in cash and cash  equivalents                         |       | (11,872                            | )          | 13,386 |   |
| Cash and cash equivalents at beginning of  period                             |       | 78,776                             |       | 77,386 |   |
| Cash and cash equivalents at end of period                                    |       | $                                  | 66,904     |   | $ | 90,772 |   |
|                                                                          |       |                               |       |   |   |
| **Supplemental  disclosures of cash flow information:**                       |       |                               |       |   |   |
| Cash paid for interest                                                        |       | $                                  | 52         |   | $ | 78 |   |
| Cash paid for income taxes                                                    |       | $                                  | 194        |   | $ | 829 |   |

 

*See Accompanying Notes to CondensedConsolidated Financial Statements*

 

5

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**BROADVISION, INC. AND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

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

**Note 1.****          Organizationand Summary of Significant Accounting Policies**

 

***Natureof Business***

 

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

 

***Basis of Presentation and Use of Estimates***

 

The accompanying consolidated financialstatements include the accounts of the Company and its wholly-ownedsubsidiaries. All significant 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 results could differ from estimates.  The financial results and related informationas of June 30, 2004 and for the three and six months ended June 30, 2004 and2003 are unaudited. The consolidated balance sheet at December 31, 2003 hasbeen derived from the audited consolidated financial statements as of that datebut does not necessarily reflect all of the informational disclosurespreviously reported in accordance with generally accepted accounting principlesin the United States of America.

 

Theaccompanying condensed consolidated financial statements should be read inconjunction with the consolidated financial statements and notes theretoincluded with the Company’s Form 10-K and other documents that have been filedwith the Securities and Exchange Commission (“SEC”). The results of theCompany’s operations for the interim periods presented are not necessarilyindicative of operating results for the full fiscal year or any future periods.

 

***Revenue Recognition***

 

*Overview*

 

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

 

*Software License Revenue*

 

The Company licenses its products through its direct sales force andindirectly through resellers. In general, software license revenues arerecognized 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, thefees are fixed and determinable and collection is considered probable. Deliveryis 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 beused without a licensing key, the delivery requirement is met when thelicensing key is made available to the customer. If collectibility is notconsidered probable, revenue is recognized when the fee is collected.Subscription-based license revenues are recognized ratably over thesubscription period. The Company enters into reseller arrangements thattypically provide for sublicense fees payable to the Company based upon apercentage of list price. The Company does not grant its resellers the right ofreturn.

 

6

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

 

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

 

*Services Revenue*

 

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

 

The Company’s consulting services, which consist of consulting,maintenance and training, are delivered through the BroadVision Global Services(“BVGS”) organization.  Services that theCompany provides are not essential to the functionality of the software.  The Company records reimbursement from itscustomers for out-of-pocket expenses as an increase to services revenues.

 

***Employee StockOption and Purchase Plans***

 

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

 

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

 

During the six months ended June 30, 2004and 2003, the Company recorded net compensation (income) expense of ($15,000)and $49,000, respectively.  The chargeswere calculated using the Black-Scholes model and recorded in sales andmarketing expense.

 

We have determined pro forma informationregarding net income and earnings per share as if we had accounted for employeestock options under the fair value method as required by SFAS No. 123, *Accounting for Stock Compensation*. Thefair value of these stock-based awards to employees was estimated using theBlack-Scholes option pricing model. Had compensation cost for our stock optionplan and employee stock purchase plan been determined consistent withSFAS 123, our reported net loss and net loss per share would have beenchanged to the amounts indicated below (in thousands except per share data):

 
| ** **                                                                                                                                    | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **2004**                              | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net loss as reported                                                                                                                          |       | $                                     | (1,492     | )                                   | $          | (7,595 | ) | $ | (2,359 | ) | $ | (6,258 | ) |
| Add: Stock-based compensation expense  included in reported net loss, net of related tax effects                                              |       | —                                |       | —                              |       | (15 | ) | 49 |   |
| Deduct: Total stock-based employee  compensation expense determined under fair value based method for all awards,  net of related tax effects |       | (3,487                                | )          | (3,055                              | )          | (5,258 | ) | (3,432 | ) |
| Pro forma net loss                                                                                                                            |       | $                                     | (4,979     | )                                   | $          | (10,650 | ) | $ | (7,632 | ) | $ | (9,641 | ) |
|                                                                                                                                          |       |                                  |       |                                |       |   |   |   |   |
| Loss per share:                                                                                                                               |       |                                  |       |                                |       |   |   |   |   |
| Basic—as reported                                                                                                                        |       | $                                     | (0.04      | )                                   | $          | (0.23 | ) | $ | (0.07 | ) | $ | (0.19 | ) |
| Basic—pro forma                                                                                                                          |       | $                                     | (0.15      | )                                   | $          | (0.33 | ) | $ | (0.23 | ) | $ | (0.30 | ) |
|                                                                                                                                          |       |                                  |       |                                |       |   |   |   |   |
| Diluted—as reported                                                                                                                      |       | $                                     | (0.04      | )                                   | $          | (0.23 | ) | $ | (0.07 | ) | $ | (0.19 | ) |
| Diluted—pro forma                                                                                                                        |       | $                                     | (0.15      | )                                   | $          | (0.33 | ) | $ | (0.23 | ) | $ | (0.30 | ) |

 

7

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***Earnings Per ShareInformation***

 

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

 

There were 3,583,252 and 3,112,506 potential common shares excludedfrom the determination of diluted net loss per share for the three and sixmonths ended June 30, 2004, respectively, as the effect of such shares isanti-dilutive. There were 3,494,570 and 3,739,788 potential common sharesexcluded from the determination of diluted net loss per share for the three andsix months ended June 30, 2003, respectively, as the effect of such sharesis anti-dilutive.

 
| ** **                                                                          | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                          | ** ** | **2004**                              | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net loss                                                                            |       | $                                     | (1,492     | )                                   | $          | (7,595 | ) | $ | (2,359 | ) | $ | (6,258 | ) |
|                                                                                |       |                                  |       |                                |       |   |   |   |   |
| Weighted average common shares outstanding  utilized for basic net loss per share   |       | 33,476                                |       | 32,751                              |       | 33,392 |   | 32,599 |   |
| Potential common shares                                                             |       | —                                |       | —                              |       | — |   | — |   |
| Weighted average common shares outstanding  utilized for diluted net loss per share |       | 33,476                                |       | 32,751                              |       | 33,392 |   | 32,599 |   |
| Basic net loss per share                                                            |       | $                                     | (0.04      | )                                   | $          | (0.23 | ) | $ | (0.07 | ) | $ | (0.19 | ) |
| Diluted net loss per share                                                          |       | $                                     | (0.04      | )                                   | $          | (0.23 | ) | $ | (0.07 | ) | $ | (0.19 | ) |

 

***Allowances and Reserves***

 

Occasionally, the Company’s customers experience financial difficultyafter the Company records the revenue but before payment has been received. TheCompany maintains allowances for doubtful accounts for estimated lossesresulting from the inability of its customers to make required payments. TheCompany’s normal payment terms are 30 to 90 days from invoice date. If thefinancial condition of the Company’s customers was to deteriorate, resulting inan impairment of their ability to make payments, additional allowances may berequired.

 

***Restructuring***

 

Through June 30, 2004, we have approved certain restructuringplans to, among other things, reduce our workforce and consolidate facilities.Restructuring and asset impairment charges were taken to align our coststructure with changing market conditions and to create a more efficientorganization. Our restructuring charges comprise primarily: (i) severanceand benefits termination costs related to the reduction of our workforce;(ii) lease termination costs and/or costs associated with permanentlyvacating our facilities; (iii) other incremental costs incurred as adirect result of the restructuring plan; and (iv) impairment costs relatedto certain long-lived assets abandoned. We account for each of these costs inaccordance with Staff Accounting Bulletin No. 100, *Restructuring and Impairment Charges.*

 

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

 

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

 

8

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

 

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

 

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

 

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

 

•                  For exit ordisposal activities initiated after December 31, 2002, we account forlease termination and/or abandonment costs in accordance with SFAS No. 146,which requires that a liability for such costs be recognized and measuredinitially at fair value on the cease use date of the facility.

 

Severance and termination costs and excess facilities costs we recordunder these provisions are not associated with nor do they benefit continuingactivities.

 

Inherent in the estimation of the costs related to our restructuringefforts are assessments related to the most likely expected outcome of thesignificant actions to accomplish the restructuring. In determining the chargesrelated to the restructurings to date, the majority of estimates made bymanagement have related to charges for excess facilities.  In determining the charges for excessfacilities, we were required to estimate future sublease income, future netoperating expenses of the facilities, and brokerage commissions, among otherexpenses. The most significant of these estimates have related to the timingand extent of future sublease income in which to reduce our lease obligations.  We based our estimates of sublease income, inpart, on the opinions of independent real estate experts, current marketconditions and rental rates, an assessment of the time period over whichreasonable estimates could be made, the status of negotiations with potential subtenants,and the location of the respective facility, among other factors.  The Company has recorded the low-end of arange of assumptions modeled for restructuring charges, in accordance with SFASNo. 5, Accounting for Contingencies. Adjustments to the facilities accrual will be required if actual leaseexit costs or sublease income differ from amounts currently expected. We willreview the status of restructuring activities on a quarterly basis and, ifappropriate, record changes to our restructuring obligations in currentoperations based on management’s most current estimates.

 

***Legal Matters***

 

The Company’s current estimated range of liability related to pendinglitigation is based on claims for which it is probable that a liability hasbeen incurred and the Company can estimate the amount and range of loss. TheCompany has recorded the minimum estimated liability related to those claims,where there is a range of loss. Because of the uncertainties related to boththe determination of the probability of an unfavorable outcome and the amountand range of loss in the event of an unfavorable outcome, the Company is unableto make a reasonable estimate of the liability that could result from theremaining pending litigation. As additional information becomes available, theCompany will assess the potential liability related to its pending litigationand revise its estimates, if necessary. Such revisions in the Company’sestimates of the potential liability could materially impact the Company’sresults of operations and financial position.

 

***Concentrationsof Credit Risk***

 

Financial assets that potentially subject usto significant concentrations of credit risk consist principally of cash, cashequivalents, short-term investments, and trade accounts receivable. The Companymaintains its cash and cash equivalents and short-term investments with fourseparate financial institutions. The Company markets and sells its productsthroughout the world and performs ongoing credit evaluations of its customers.The Company maintains reserves for potential credit losses.  For the three and six month periods endedJune 30, 2004 and 2003, no single customer accounted for more than 10% of totalrevenue.  At June 30, 2004, no singlecustomer accounted for more than 10% of accounts receivable.

 

***Equity Investment***

 

InJanuary 2000, the Company entered into a limited partnership agreementwith a venture capital firm under which it is obligated to contribute capitalbased upon the periodic funding requirements. The total capital commitment is $2.0 million, of which approximately$1.2 million has been contributed through June 30, 2004.  The remaining amounts will be contributed infuture periods based upon the capital requirements of the fund.

 

9

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***Foreign Currency Transactions***

 

The functional currency of the Company’sforeign subsidiaries is the U.S. dollar. Foreign exchange gains and lossesresulting from the remeasurement of foreign currency assets and liabilities areincluded in other income (expense), net in the Condensed ConsolidatedStatements of Operations.

 

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

 

The Company periodically assesses theimpairment of long-lived assets in accordance with the provisions of SFASNo. 144. The Company assesses the impairment of goodwill and identifiableintangible assets in accordance with SFAS No. 141, Business Combinationsand SFAS No. 142, Goodwill and Other Intangible Assets.  The Company adopted the provisions of SFASNo. 144 as of January 1, 2002.

 

***Fair Value of Financial Instruments***

 

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

 

***New Accounting Pronouncements***

 

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

 

In May 2003, the FASB issued SFAS 150, “Accounting forCertain Financial Instruments with Characteristics of both Liabilities and Equity.”SFAS 150 requires that certain financial instruments, which under previousguidance were accounted for as equity, must now be accounted for asliabilities. The financial instruments affected include mandatorily redeemablestock, certain financial instruments that require or may require the issuer tobuy back some of its shares in exchange for cash or other assets and certainobligations that can be settled with shares of stock. SFAS 150 iseffective for all financial instruments entered into or modified afterMay 31, 2003, and otherwise is effective at the beginning of the firstinterim period beginning after June 15, 2003. The adoption ofSFAS 150 has not had a material impact on our consolidated financialposition, results of operations or cash flows.

 

In November 2003, the EITF issued EITF No. 03-6 “ParticipatingSecurities and the Two-Class Method under FASB Statement No. 128,” whichprovides for a two-class method of calculating earnings per share computationsthat relate to certain securities that would be considered to be participatingin conjunction with certain common stock rights. This guidance would beapplicable to the Company starting with the third quarter beginningJuly 1, 2004. The Company is currently evaluating the potential impact ofthis pronouncement on its financial statements.

 

10

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**Note 2.****          Selective Balance SheetDetail**

 

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

 
| ** **                                      | ** ** | **June 30,  2004** | ** ** | **December 31,   2003** | ** ** |
|-------------------------------------------------|------------|-------------------------|------------|------------------------------|------------|
| ** **                                      | ** ** | **(unaudited)**         | ** ** | ** **                   | ** ** |
| Furniture and fixtures                          |       | $                       | 8,998      |                         | $          | 8,030 |   |
| Computers and software                          |       | 48,179                  |       | 49,041                       |       |
| Leasehold improvements                          |       | 20,848                  |       | 20,842                       |       |
|                                            |       | 78,025                  |       | 77,913                       |       |
| Less accumulated depreciation and  amortization |       | (64,805                 | )          | (62,513                      | )          |
|                                            |       | $                       | 13,220     |                         | $          | 15,400 |   |

 

Accrued expenses consisted of the following (in thousands):

 
| ** **                 | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|----------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                 | ** ** | **(unaudited)**         | ** ** | ** **                  | ** ** |
| Employee benefits          |       | $                       | 1,911      |                        | $          | 1,511 |   |
| Commissions and bonuses    |       | 1,207                   |       | 1,519                       |       |
| Sales and other taxes      |       | 7,364                   |       | 7,983                       |       |
| Restructuring (See Note 6) |       | 16,991                  |       | 18,549                      |       |
| Other                      |       | 4,872                   |       | 5,199                       |       |
|                       |       | $                       | 32,345     |                        | $          | 34,761 |   |

 

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

 
| ** **                 | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|----------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                 | ** ** | **(unaudited)**         | ** ** | ** **                  | ** ** |
| Restructuring (See Note 6) |       | $                       | 78,477     |                        | $          | 86,831 |   |
| Other                      |       | 392                     |       | 578                         |       |
|                       |       | $                       | 78,869     |                        | $          | 87,409 |   |

 

**Note 3.****          Commercial CreditFacilities**

 

The Company has various credit facilities with a commercial lenderwhich include term debt in the form of notes payable, a revolving line ofcredit and an equipment line of credit.

 

As of June 30, 2004 and December 31, 2003, outstanding termdebt borrowings were approximately $1.5 million and $1.9 million,respectively.  Borrowings bear interestbetween the bank’s prime rate (4.00% as of June 30, 2004 andDecember 31, 2003) and the bank’s prime rate (4.00% as of June 30,2004 and December 31, 2003) plus 1.25%. Principal and interest are due inmonthly payments through maturity based on the terms of the facilities.Principal payments of $488,000 are due through the remainder of 2004, $611,000due in 2005, and a final payment of $357,000 due in 2006.

 

The Company maintains a $27.3 million revolving line of credit, whichis collateralized by all of the Company’s assets and under whichborrowings bear interest at the bank’s prime rate. Interest is due monthly andprincipal is due at expiration in February 2005. The amended and restatedloan and security agreement requires the Company to maintain certain levels incash and cash equivalents, short-term investments and long-term investments(excluding equity investments). Additionally, the amended and restated loan andsecurity agreement requires the Company to maintain certain levels on depositwith its commercial lender.  At bothJune 30, 2004 and December 31, 2003, $27.0 million was outstandingunder the line of credit.

 

As of June 30, 2004, the Company was not incompliance with the profitability and financial covenants of its commercialcredit facilities.  Subsequently, theCompany received a waiver from the bank regarding non-compliance.  As described in Note 8, subsequent to June30, 2004, the Company reached agreements with certain landlords to extinguishsome real estate leases, and as a result the Company is also renegotiating withthe commercial lender to modify the terms of the line of credit.

 

During the first fiscal quarter of 2004, theCompany entered into a $500,000 equipment line of credit with the commerciallender.  Such line of credit is securedby all of the Company’s assets and under which borrowings bear interest at thebanks prime rate (4.00% as of June 30, 2004) plus .75%.  Principal payments are due in 36 monthlypayments.   Principal payments of $12,858are due through the remainder 2004, $25,715 due in 2005 and 2006, and a finalpayment of $8,572 due in 2007.  As ofJune 30, 2004, $72,860 was outstanding under the equipment loan.

 

Commitments totaling $22.3 million and $19.8million in the form of standby letters of credit were issued on the Company’sbehalf from financial institutions as of June 30, 2004 and December 31, 2003,respectively, primarily in favor of the Company’s various landlords to secureobligations under the Company’s facility leases.  Accordingly, $22.3 million and $19.8 millionhave been 

 

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presented as restricted cash in the accompanying Condensed ConsolidatedBalance Sheets as of June 30, 2004and December 31, 2003, respectively.

 

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

 

***Warranties and Indemnification***

 

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

 

The Company has agreements whereby it indemnifies its officers anddirectors for certain events or occurrences while the officer is, or was,serving in such capacity. The term of the indemnification period is for so longas such officer or director is subject to an indemnifiable event by reason ofthe fact that such person was serving in such capacity. The maximum potentialamount of future payments the Company could be required to make under theseindemnification agreements is unlimited; however, the Company has a directorand officer insurance policy that limits its exposure and enables the Companyto recover a portion of any future amounts paid. As a result of the Company’sinsurance policy coverage, the Company believes the estimated fair value ofthese indemnification agreements is insignificant. Accordingly, the Company hasno liabilities recorded for these agreements as of either June 30, 2004 orDecember 31, 2003. The Company assesses the need for an indemnificationreserve on a quarterly basis and there can be no guarantee that anindemnification reserve will not become necessary in the future.

 

***Leases***

 

TheCompany leases its headquarters facility and its other facilities undernon-cancelable operating lease agreements expiring through the year 2013. Underthe terms of the agreements, the Company is required to pay lease costs,property taxes, insurance and normal maintenance costs.

 

Asummary of total future minimum lease payments as of June 30, 2004, undernoncancelable operating lease agreements is as follows (in millions):

 
| **Years  Ending December 31,** | ** ** | **Operating  Leases** | ** ** |
|-------------------------------------|------------|-----------------------|------------|
| 2004                                |       | $                     | 11.6       |   |
| 2005                                |       | 23.3                  |       |
| 2006                                |       | 21.2                  |       |
| 2007                                |       | 18.7                  |       |
| 2008                                |       | 14.6                  |       |
| 2009 and thereafter                 |       | 75.0                  |       |
|                                |       |                  |       |
| Total minimum lease payments        |       | $                     | 164.4      |   |

 

As of June 30, 2004, the Company has accrued$94.9 million of estimated future facilities costs as a restructuring accrual(see Note 6). The estimated sublease income netted against the restructuringaccrual consists of the following (unaudited, in millions):

 
| Sublease income to be received under non-cancelable  sublease agreements signed prior to June 30, 2004 |   | $    | 17.7   |   |
|-------------------------------------------------------------------------------------------------------------|--------|------|--------|--------|
| Estimated sublease income for sublease  agreements yet to be negotiated                                     |   | 27.6 |   |
| Total estimated sublease income                                                                             |   | $    | 45.3   |   |

 

Subsequent to June, 30 2004, the Company reached agreements withcertain landlords to extinguish approximately $143 million of future excessreal estate obligations, See Note 8.

 

***Equity Investment***

 

InJanuary 2000, the Company entered into a limited partnership agreementwith a venture capital firm under which it is obligated to contribute capitalbased upon the periodic funding requirements. The total capital commitment is $2.0 million, of which $1.2 million hasbeen contributed through June 30, 2004. The remaining $0.8 million will be contributed in future periods basedupon the capital requirements of the fund.

 

***Reclassification***

 

Certainreclassifications have been made to prior year balances in order to conform tothe current period presentation.  These 

 

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reclassificationsdo not have an effect on BroadVision’s consolidated financial condition,results of operation or cash flows.

 

***Standby Letter of Credit Commitments***

 

As of June 30, 2004, the Company had $22.3 million of outstandingcommitments in the form of standby letters of credit, primarily in favor of theCompany’s various landlords to secure obligations under the Company’s facilityleases.

 

***Legal Proceedings***

 

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

 

**Note 5.****          Geographic, Segment andSignificant Customer Information**

 

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

 

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

 
| ** **          | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|---------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **          | ** ** | **2004**                              | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| Software licenses   |       | $                                     | 7,097      |                                | $          | 6,824 |   | $ | 14,937 |   | $ | 14,799 |   |
| Consulting services |       | 5,182                                 |       | 5,876                               |       | 10,094 |   | 12,347 |   |
| Maintenance         |       | 7,849                                 |       | 9,105                               |       | 15,986 |   | 19,114 |   |
| Total revenues      |       | $                                     | 20,128     |                                | $          | 21,805 |   | $ | 41,017 |   | $ | 46,260 |   |

 

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

 

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

 
| ** **    | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|---------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **    | ** ** | **2004**                              | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **    | ** ** | **(unaudited)**                       | ** ** | **(unaudited)**                     | ** ** | **(unaudited)** | ** ** | **(unaudited)** | ** ** |
| Revenues:     |       |                                  |       |                                |       |   |   |   |   |
| Americas      |       | $                                     | 8,851      |                                | $          | 10,370 |   | $ | 18,487 |   | $ | 23,678 |   |
| Europe        |       | 8,982                                 |       | 9,648                               |       | 19,080 |   | 17,969 |   |
| Asia/Pacific  |       | 2,295                                 |       | 1,787                               |       | 3,450 |   | 4,613 |   |
| Total Company |       | $                                     | 20,128     |                                | $          | 21,805 |   | $ | 41,017 |   | $ | 46,260 |   |

 
| ** **         | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|--------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **         | ** ** | **(unaudited)**         | ** ** | ** **                  | ** ** |
| Long-Lived Assets: |       |                    |       |                        |       |
| Americas           |       | $                       | 70,332     |                        | $          | 73,016 |   |
| Europe             |       | 514                     |       | 537                         |       |
| Asia/Pacific       |       | 591                     |       | 636                         |       |
| Total Company      |       | $                       | 71,437     |                        | $          | 74,189 |   |

 

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During the three and six month periods endedJune 30, 2004 and 2003, no single customer accounted for more than 10% ofthe Company’s revenues.

 

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

 

Through June 30, 2004, the Company has approved certainrestructuring plans to, among other things, reduce its workforce andconsolidate facilities. Restructuring and asset impairment charges have beentaken to align our cost structure with changing market conditions and to createa more efficient organization. Our restructuring charges comprise primarily:(i) severance and benefits termination costs related to the reduction ofour workforce; (ii) lease termination costs and/or costs associated withpermanently vacating our facilities; (iii) other incremental costsincurred as a direct result of the restructuring plan; and (iv) impairmentcosts related to certain long-lived assets abandoned. We account for each ofthese costs in accordance with Staff Accounting Bulletin No. 100, *Restructuring and Impairment Charges.*

 

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

 

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

 

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

 

As of June 30, 2004, the total restructuring accrual was$95.5 million under EITF 94-3 and FAS 146, consisting of thefollowing (in millions):

 
| ** **                | ** ** | **Current** | ** ** | **Non-Current** | ** ** | **Total** | ** ** |
|---------------------------|------------|-------------|------------|-----------------|------------|-----------|------------|
| Severance and Termination |       | $           | 0.6        |            | $          | —    |       | $ | 0.6 |   |
| Excess Facilities         |       | 16.4        |       | 78.5            |       | 94.9      |       |
| Total                     |       | $           | 17.0       |            | $          | 78.5      |       | $ | 95.5 |   |

 

The Company estimates that the $0.6 million severance and terminationaccrual will be paid in full by March 31, 2005.  We expect to pay the excess facilitiesamounts related to restructured or abandoned leased space as follows (inmillions):

 
| **Years  Ending December 31,**              | ** ** | ** ** | ** ** |
|--------------------------------------------------|------------|------------|------------|
| 2004                                             |       | $          | 8.6        |   |
| 2005                                             |       | 15.2       |       |
| 2006                                             |       | 13.8       |       |
| 2007                                             |       | 13.1       |       |
| 2008                                             |       | 6.9        |       |
| 2009 and thereafter (through  October 2013) |       | 37.3       |       |
|                                             |       |       |       |
| Total minimum lease payments                     |       | $          | 94.9       |   |

 

Of this excess facilities accrual, $78.0 million relates to futureminimum lease payments, net of estimated sublease income and planned companyoccupancy, and the remaining $16.9 million relates to estimated allowances,fees and expenses.  Actual future cashrequirements may differ materially from the accrual at June 30, 2004,particularly if actual sublease income is significantly different fromprospective estimates.

 

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

 
| ** **                                           | ** ** | **Accrued  restructuring costs  at Mar. 31, 2004** | ** ** | **Amounts charged to  restructuring costs  and other** | ** ** | **Amounts paid  or written off** | ** ** | **Accrued  restructuring  costs at June 30,  2004** | ** ** |
|------------------------------------------------------|------------|---------------------------------------------------------|------------|--------------------------------------------------------|------------|----------------------------------|------------|----------------------------------------------------------|------------|
| **Three Months Ended  June 30, 2004**           |       |                                                    |       |                                                   |       |                             |       |                                                     |       |
| Lease cancellations and commitments                  |       | $                                                       | 21,683     |                                                   | $          | —                           |       | $                                                        | —     |   | $ | 21,683 |   |
| Termination payments to employees and  related costs |       | 95                                                      |       | 158                                                    |       | (89                              | )          | 164                                                      |       |
| Write-off on disposal of assets and related  costs   |       | —                                                  |       | —                                                 |       | —                           |       | —                                                   |       |
|                                                 |       | $                                                       | 21,778     |                                                   | $          | 158                              |       | $                                                        | (89        | ) | $ | 21,847 |   |

 

14

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| ** **                                           | ** ** | **Accrued  restructuring costs  at Dec. 31, 2003** | ** ** | **Amounts charged to  restructuring costs  and other** | ** ** | **Amounts paid  or written off** | ** ** | **Accrued  restructuring  costs at June 30,  2004** | ** ** |
|------------------------------------------------------|------------|---------------------------------------------------------|------------|--------------------------------------------------------|------------|----------------------------------|------------|----------------------------------------------------------|------------|
| **Six Months Ended  June 30, 2004**             |       |                                                    |       |                                                   |       |                             |       |                                                     |       |
| Lease cancellations and commitments                  |       | $                                                       | 21,683     |                                                   | $          | —                           |       | $                                                        | —     |   | $ | 21,683 |   |
| Termination payments to employees and  related costs |       | 242                                                     |       | 476                                                    |       | (554                             | )          | 164                                                      |       |
| Write-off on disposal of assets and related  costs   |       | —                                                  |       | —                                                 |       | —                           |       | —                                                   |       |
|                                                 |       | $                                                       | 21,925     |                                                   | $          | 476                              |       | $                                                        | (554       | ) | $ | 21,847 |   |

 

The following table summarizes the activity related to therestructuring 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 reversed  to restructuring  costs and other** | ** ** | **Amounts paid  or written off** | ** ** | **Accrued  restructuring  costs, ending** | ** ** |
|------------------------------------------------------|------------|----------------------------------------------|------------|--------------------------------------------------------|------------|---------------------------------------------------------|------------|----------------------------------|------------|-------------------------------------------|------------|
|                                                 |       |                                         |       |                                                   |       |                                                    |       |                             |       |                                      |       |
| **Three Months Ended  June 30, 2003**           |       |                                         |       |                                                   |       |                                                    |       |                             |       |                                      |       |
| Lease cancellations and commitments                  |       | $                                            | 88,905     |                                                   | $          | 7,445                                                   |       | $                                | —     |                                      | $          | (7,134 | ) | $ | 89,216 |   |
| Termination payments to employees and related  costs |       | 1,113                                        |       | 398                                                    |       | —                                                  |       | (511                             | )          | 1,000                                     |       |
| Write-off on disposal of assets and related  costs   |       | 32                                           |       | (26                                                    | )          | —                                                  |       | 34                               |       | 40                                        |       |
|                                                 |       | $                                            | 90,050     |                                                   | $          | 7,817                                                   |       | $                                | —     |                                      | $          | (7,611 | ) | $ | 90,256 |   |
|                                                 |       |                                         |       |                                                   |       |                                                    |       |                             |       |                                      |       |
| **Three Months Ended  June 30, 2004**           |       |                                         |       |                                                   |       |                                                    |       |                             |       |                                      |       |
| Lease cancellations and commitments                  |       | $                                            | 78,292     |                                                   | $          | 521                                                     |       | $                                | —     |                                      | $          | (5,620 | ) | $ | 73,193 |   |
| Termination payments to employees and  related costs |       | 429                                          |       | —                                                 |       | —                                                  |       | —                           |       | 429                                       |       |
| Write-off on disposal of assets and related  costs   |       | —                                       |       | —                                                 |       | —                                                  |       | —                           |       | —                                    |       |
|                                                 |       | $                                            | 78,721     |                                                   | $          | 521                                                     |       | $                                | —     |                                      | $          | (5620 | ) | $ | 73,622 |   |
|                                                 |       |                                         |       |                                                   |       |                                                    |       |                             |       |                                      |       |
| ** **                                           | ** ** | **Accrued  restructuring costs,  beginning** | ** ** | **Amounts charged to  restructuring costs  and other** | ** ** | **Amounts reversed  to restructuring  costs and other** | ** ** | **Amounts paid  or written off** | ** ** | **Accrued  restructuring  costs, ending** | ** ** |
|                                                 |       |                                         |       |                                                   |       |                                                    |       |                             |       |                                      |       |
| **Six Months Ended  June 30, 2003**             |       |                                         |       |                                                   |       |                                                    |       |                             |       |                                      |       |
| Lease cancellations and commitments                  |       | $                                            | 94,691     |                                                   | $          | 8,618                                                   |       | $                                | —     |                                      | $          | (14,093 | ) | $ | 89,216 |   |
| Termination payments to employees and  related costs |       | 1,425                                        |       | 260                                                    |       | —                                                  |       | (685                             | )          | 1,000                                     |       |
| Write-off on disposal of assets and related  costs   |       | 79                                           |       | (26                                                    | )          | —                                                  |       | (13                              | )          | 40                                        |       |
|                                                 |       | $                                            | 96,195     |                                                   | $          | 8,852                                                   |       | $                                | —     |                                      | $          | (14,791 | ) | $ | 90,256 |   |
|                                                 |       |                                         |       |                                                   |       |                                                    |       |                             |       |                                      |       |
| **Six Months Ended  June 30, 2004**             |       |                                         |       |                                                   |       |                                                    |       |                             |       |                                      |       |
| Lease cancellations and commitments                  |       | $                                            | 83,026     |                                                   | $          | 773                                                     |       | $                                | —     |                                      | $          | (10,606 | ) | $ | 73,193 |   |
| Termination payments to employees and  related costs |       | 429                                          |       | —                                                 |       | —                                                  |       | —                           |       | 429                                       |       |
| Write-off on disposal of assets and related  costs   |       | —                                       |       | —                                                 |       | —                                                  |       | —                           |       | —                                    |       |
|                                                 |       | $                                            | 83,455     |                                                   | $          | 773                                                     |       | $                                | —     |                                      | $          | (10,606 | ) | $ | 73,622 |   |

 

15

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

 
| Sublease income to be received under  non-cancelable sublease agreements signed prior to June 30, 2004 |   | $    | 17.7   |   |
|-------------------------------------------------------------------------------------------------------------|--------|------|--------|--------|
| Estimated sublease income for sublease  agreements yet to be negotiated                                     |   | 27.6 |   |
| Total estimated sublease income                                                                             |   | $    | 45.3   |   |

 

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

 

Subsequent to June 30, 2004, the Company reached agreements withcertain landlords to extinguish approximately $143 million of net future realestate obligations.  See note 8.

 

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

 

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

 
| ** **                          | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|-------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                          | ** ** | **(unaudited)**         | ** ** | ** **                  | ** ** |
| Goodwill                            |       | $                       | 437,206    |                        | $          | 437,206 |   |
| Less: Accumulated amortization |       | (383,785                | )          | (383,785                    | )          |
| Goodwill, net                       |       | 53,421                  |       | 53,421                      |       |
|                                |       |                    |       |                        |       |
| Other intangibles                   |       | 22,732                  |       | 22,732                      |       |
| Less: Accumulated amortization |       | (19,719                 | )          | (19,719                     | )          |
| Other intangibles, net              |       | 3,013                   |       | 3,013                       |       |
|                                     |            |                         |            |                             |            |  |  |

 

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

 

Pursuant to SFAS No. 142, the Company is required to test itsgoodwill for impairment upon adoption and annually or more often if events orchanges in circumstances indicate that the asset might be impaired. While therewas no accounting charge to record upon adoption, at September 30, 2002,the Company concluded that, based on the existence of impairment indicators,including a decline in its market value, it would be required to test goodwillfor impairment. SFAS No. 142 provides for a two-stage approach todetermining whether and by how much goodwill has been impaired. Since theCompany has only one reporting unit for purposes of applying SFAS No. 142,the first stage requires a comparison of the fair value of the Company to itsnet book value. If the fair value is greater, then no impairment is deemed tohave occurred. If the fair value is less, then the second stage must becompleted to determine the amount, if any, of actual impairment. The Companycompleted the first stage and has determined that its fair value atSeptember 30, 2002 exceeded its net book value on that date, and as aresult, no impairment of goodwill was recorded in the consolidated financialstatements. The Company obtained an independent appraisal of fair value tosupport its conclusion. Additionally, the Company concluded that, based uponthe market value of its stock in relation to the Company’s net book value atJune 30, 2004 and December 31, 2003, there was no additionalimpairment of goodwill warranted.

 

The process of evaluating the potential impairment of goodwill ishighly subjective and requires significant judgment. In estimating the fairvalue of the Company, the Company made estimates and judgments about futurerevenues and cash flows. The Company’s forecasts were based on assumptions thatare consistent with the plans and estimates the Company is using to manage thebusiness. Changes in these estimates could change the Company’s conclusionregarding impairment of goodwill and potentially result in a non-cash goodwillimpairment charge for all or a portion of the goodwill balance at June 30,2004.

 

Upon adoption of SFAS No. 142, on January 1, 2002, theCompany no longer amortizes goodwill. Additionally, upon adoption of SFASNo. 141 and 142, the Company no longer amortizes its non-technology basedintangible asset, or assembled workforce. The remaining other intangible assetshave been fully amortized as of June 30, 2004.

 

**Note8.  Subsequent Events**

 

During July and August 2004, the Company reached agreements withcertain landlords to extinguish approximately $143 million of future excessreal estate obligations.  In theaggregate, the settlements involve current and future cash payments by theCompany of approximately $37.2 million, the issuance of a warrant to purchaseapproximately 700,000 shares of our common stock at an exercise price of $5.00per share after a one year period, and a residual obligation of approximately6% of the obligation prior to termination.

 

The Company has made or will make cashpayments of $19.1 million in its current third fiscal quarter, and anadditional cash payment of $18.1 million in January 2005.  In addition, the Company may make a furthercash payment of $4.5 million thereafter if it exercises an option to terminatethe residual real estate obligation.  Inconnection with these agreements, the Company expects to record a restructuringgain of approximately $24 million in the quarter ending September 30, 2004.

 

Additional information about thesetransactions are included in the Company’s Current Report on Form 8-K filedconcurrently with this Quarterly Report on Form 10-Q.

 

16

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

 

*This report on Form 10-Q containsforward-looking statements within the meaning of Section 27A of theSecurities 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“safe harbor” 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 wordsand expressions. These forward-looking statements involve risks anduncertainties that could cause our actual results to differ materially fromthose expressed or implied in the forward-looking statements as a result ofcertain factors, including those described herein and in the Company’s mostrecently filed Annual Report on Form 10-K and other documents filed with theSecurities and Exchange Commission.  Weundertake no obligation to publicly release any revisions to theforward-looking statements or to reflect events and circumstances after thedate of this document.*

 

**Overview**

 

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

 

As of June 30, 2004, more than 1,000 companies and governmententities around the globe are using our applications to power and personalizetheir mission-critical web initiatives.

 

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

 

**Recent Events**

 

We renewed and amended our revolving credit facility inFebruary 2004. Borrowings under the revolving line of credit arecollateralized by all of our assets and bear interest at the bank’s prime rate.Interest is due monthly and principal is due at expiration inFebruary 2005. The amended and restated loan and security agreementrequires us to maintain certain levels in cash and cash equivalents, short-terminvestments and long-term investments (excluding equity investments). Additionally,the amended and restated loan and security agreement requires us to maintaincertain levels on deposit with our commercial lender.  As of June 30, 2004, we were notin compliance with the profitability and financial covenants of the commercialcredit facilities.  Subsequently, wereceived a waiver from the bank regarding non-compliance.  Although the bank has provided this waiver,the Company is not in compliance with certain financial covenants in the SVBFacility and, as a result, cannot borrow under the SVB Facility.  The bank and the Company have agreed inprinciple to amend the SVB Facility, subject to the execution of a definitiveamendment, to modify the financial covenants and reduce the borrowing limit thereunder from $27 million to $15 million. The Company believes that it will comply with the new financialcovenants.  At both June 30, 2004 andDecember 31, 2003, $27.0 million was outstanding under the line of credit.

 

During July and August 2004, the Company reached agreements withcertain landlords to extinguish approximately $143 million of future excessreal estate obligations.  In theaggregate, the settlements involve current and future cash payments by theCompany of approximately $37.2 million, the issuance of a warrant to purchaseapproximately 700,000 shares of our common stock at an exercise price of $5.00per share after a one year period, and a residual obligation of approximately6% of the obligation prior to termination.

 

The Company has made or will make cash payments of $19.1 million in itscurrent third fiscal quarter, and an additional cash payment of $18.1 millionin January 2005.  In addition, theCompany may make a further cash payment of $4.5 million thereafter if itexercises an option to terminate the residual real estate obligation.  In connection with these agreements, theCompany expects to record a restructuring gain of approximately $24 million inthe quarter ending September 30, 2004.

 

**Critical Accounting Policies**

 

This management’s discussion and analysis of our financial conditionand results of operations is based upon our condensed consolidated financialstatements, which have been prepared in accordance with generally acceptedaccounting principles in the United States of America. In preparing thesefinancial statements, we are required to make estimates and judgments thataffect the reported amounts of assets, liabilities, revenues and expenses, andrelated disclosures of contingent assets and liabilities. On an ongoing basis,we evaluate our estimates, including those related to doubtful accounts,product returns, investments, goodwill and intangible assets, income taxes andrestructuring, as well as contingencies and litigation. We base our estimateson historical experience and on various other assumptions that we believe arereasonable, the results of which form the basis for making judgments about thecarrying values of assets and liabilities that are not readily apparent fromother sources. Actual results may differ from these estimates using differentassumptions or conditions. We believe the following critical accountingpolicies reflect the more significant judgments and estimates used in thepreparation of our consolidated financial statements.

 

***Revenue Recognition***

 

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

 

17

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*Software License Revenue*

 

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

 

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

 

We record unearned revenue for software license agreements when cashhas been received from the customer and the agreement does not qualify for revenuerecognition under our revenue recognition policy. We record 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 training revenues arerecognized as such services are performed. Maintenance revenues, which includerevenues bundled with software license agreements that entitle the customers totechnical support and future unspecified enhancements to our products, aredeferred and recognized ratably over the related agreement period, generallytwelve months.

 

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

 

***Allowances and Reserves***

 

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

 

***Impairment Assessments***

 

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

 

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

 

18

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as of June 30, 2004 and December 31, 2003 and, therefore, noadditional impairment was warranted.

 

The process of evaluating the potential impairment of goodwill ishighly subjective and requires significant judgment. In estimating our fairvalue, we made estimates and judgments about future revenues and cash flows.Our forecasts were based on assumptions that are consistent with the plans andestimates we are using to manage our business. Changes in these estimates couldchange our conclusion regarding impairment of goodwill and potentially resultin a non-cash goodwill impairment charge, for all or a portion of the goodwillbalance at June 30, 2004. For long-lived assets, accounting standardsdictate that assets become impaired when the undiscounted future cash flowsexpected to be generated by them are less than their carrying amounts. Whenthat occurs, the affected assets are written down to their estimated fairvalue.

 

***Deferred Tax Assets***

 

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

 

***Accounting for Stock-BasedCompensation***

*** ***

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

 

During thethree month periods ended June 30, 2004 and 2003, the Company did not recordcompensation expense as a result of granting common stock to a third partyconsultant. During the six months ended June 30, 2004, and 2003, the Companyrecorded compensation expense of ($15,000) and $49,000 as a result of grantingcommon stock to third party consultants. The charge was calculated as the fair market value of the stockdetermined by the stock price of the underlying stock.

 

We havedetermined pro forma information regarding net loss and net loss per share asif we had accounted for employee stock options under the fair value method asrequired by SFAS Number 123, *Accounting forStock Compensation*. 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 No. 123, the Company’sreported net income (loss) and net income (loss) per share would have beenchanged to the amounts indicated below (in thousands, except per share data):

 

19

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| ** **                                                                                                                                    | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **2004**                         | ** ** | **2003**                       | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net loss as reported                                                                                                                          |       | $                                | (1,492     | )                              | $          | (7,595 | ) | $ | (2,359 | ) | $ | (6,258 | ) |
| Add: Stock-based employee compensation  expense included in reported net loss, net of related tax effects                                     |       | —                           |       | —                         |       | (15 | ) | 49 |   |
| Deduct: Total stock-based employee  compensation expense determined under fair value based method for all awards,  net of related tax effects |       | (3,487                           | )          | (3,055                         | )          | (5,258 | ) | (3,432 | ) |
| Pro forma net loss                                                                                                                            |       | $                                | (4,979     | )                              | $          | (10,650 | ) | $ | (7,632 | ) | $ | (9,641 | ) |
|                                                                                                                                          |       |                             |       |                           |       |   |   |   |   |
| Loss per share:                                                                                                                               |       |                             |       |                           |       |   |   |   |   |
| Basic—as reported                                                                                                                        |       | $                                | (0.04      | )                              | $          | (0.23 | ) | $ | (0.07 | ) | $ | (0.19 | ) |
| Basic—pro forma                                                                                                                          |       | $                                | (0.15      | )                              | $          | (0.33 | ) | $ | (0.23 | ) | $ | (0.30 | ) |
|                                                                                                                                          |       |                             |       |                           |       |   |   |   |   |
| Diluted—as reported                                                                                                                      |       | $                                | (0.04      | )                              | $          | (0.23 | ) | $ | (0.07 | ) | $ | (0.19 | ) |
| Diluted—pro forma                                                                                                                        |       | $                                | (0.15      | )                              | $          | (0.33 | ) | $ | (0.23 | ) | $ | (0.30 | ) |

 

***Restructuring Charges***

 

Through June 30, 2004, the Company has approved certain restructuringplans to, among other things, reduce its workforce and consolidate facilities.Restructuring and asset impairment charges have been taken to align our coststructure with changing market conditions and to create a more efficientorganization. Our restructuring charges have been comprised primarily of:(i) severance and benefits termination costs related to the reduction ofour workforce; (ii) lease termination costs and/or costs associated withpermanently vacating our facilities; (iii) other incremental costs incurredas a direct result of the restructuring plan; and (iv) impairment costsrelated to certain long-lived assets abandoned. We account for each of thesecosts in accordance with Staff Accounting Bulletin No. 100, *Restructuring and Impairment Charges.*

 

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

 

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

 

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

 

As of June 30, 2004, the total restructuringaccrual was $95.5 million under EITF 94-3 and FAS 146, consisting ofthe following (in millions):

 

20

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| ** **                | ** ** | **Current** | ** ** | **Non-  Current** | ** ** | **Total** | ** ** |
|---------------------------|------------|-------------|------------|-------------------|------------|-----------|------------|
| Severance and Termination |       | $           | 0.6        |              | $          | —    |       | $ | 0.6 |   |
| Excess Facilities         |       | 16.4        |       | 78.5              |       | 94.9      |       |
| Total                     |       | $           | 17.0       |              | $          | 78.5      |       | $ | 95.5 |   |

 

The Company estimates that the $0.6 million severance and terminationaccrual will be paid in full by March 31, 2005. We expect to pay the excess facilities amounts related to restructuredor abandoned leased space as follows (in millions):

 
| **Years  Ending December 31,**        | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|------------|------------|
| 2004                                       |       | $          | 8.6        |   |
| 2005                                       |       | 15.2       |       |
| 2006                                       |       | 13.8       |       |
| 2007                                       |       | 13.1       |       |
| 2008                                       |       | 6.9        |       |
| 2009 and thereafter (through October 2013) |       | 37.3       |       |
| Total minimum lease payments               |       | $          | 94.9       |   |

 

Of this excess facilities accrual, $78.0million relates to future minimum lease payments, net of estimated subleaseincome and planned company occupancy, and the remaining $16.9 million relatesto estimated allowances, fees and expenses. Actual future cash requirements may differ materially from the accrualat June 30, 2004, particularly if actual sublease income is significantlydifferent from prospective estimates.

 

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

 
| ** **                                           | ** ** | **Accrued  restructuring costs  at Mar. 31, 2004** | ** ** | **Amounts charged to  restructuring costs  and other** | ** ** | **Amounts paid  or written off** | ** ** | **Accrued  restructuring  costs at June 30,  2004** | ** ** |
|------------------------------------------------------|------------|---------------------------------------------------------|------------|--------------------------------------------------------|------------|----------------------------------|------------|-----------------------------------------------------|------------|
| **Three Months Ended June 30, 2004**                 |       |                                                    |       |                                                   |       |                             |       |                                                |       |
| Lease cancellations and commitments                  |       | $                                                       | 21,683     |                                                   | $          | —                           |       | $                                                   | —     |   | $ | 21,683 |   |
| Termination payments to employees and  related costs |       | 95                                                      |       | 158                                                    |       | (89                              | )          | 164                                                 |       |
| Write-off on disposal of assets and related  costs   |       | —                                                  |       | —                                                 |       | —                           |       | —                                              |       |
|                                                 |       | $                                                       | 21,778     |                                                   | $          | 158                              |       | $                                                   | (89        | ) | $ | 21,847 |   |

 

21

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| ** **                                           | ** ** | **Accrued  restructuring costs  at Dec. 31, 2003** | ** ** | **Amounts charged to  restructuring costs  and other** | ** ** | **Amounts paid  or written off** | ** ** | **Accrued  restructuring  costs at June 30,  2004** | ** ** |
|------------------------------------------------------|------------|---------------------------------------------------------|------------|--------------------------------------------------------|------------|----------------------------------|------------|-----------------------------------------------------|------------|
| **Six Months Ended June 30, 2004**                   |       |                                                    |       |                                                   |       |                             |       |                                                |       |
| Lease cancellations and commitments                  |       | $                                                       | 21,683     |                                                   | $          | —                           |       | $                                                   | —     |   | $ | 21,683 |   |
| Termination payments to employees and  related costs |       | 242                                                     |       | 476                                                    |       | (554                             | )          | 164                                                 |       |
| Write-off on disposal of assets and related  costs   |       | —                                                  |       | —                                                 |       | —                           |       | —                                              |       |
|                                                 |       | $                                                       | 21,925     |                                                   | $          | 476                              |       | $                                                   | (554       | ) | $ | 21,847 |   |

 

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

 
| ** **                                           | ** ** | **Accrued  restructuring costs,  beginning** | ** ** | **Amounts charged to  restructuring costs  and other** | ** ** | **Amounts reversed  to restructuring  costs and other** | ** ** | **Amounts paid  or written off** | ** ** | **Accrued  restructuring  costs, ending** | ** ** |
|------------------------------------------------------|------------|----------------------------------------------|------------|--------------------------------------------------------|------------|---------------------------------------------------------|------------|----------------------------------|------------|-------------------------------------------|------------|
|                                                 |       |                                         |       |                                                   |       |                                                    |       |                             |       |                                      |       |
| **Three Months Ended June 30, 2003**                 |       |                                         |       |                                                   |       |                                                    |       |                             |       |                                      |       |
| Lease cancellations and commitments                  |       | $                                            | 88,905     |                                                   | $          | 7,445                                                   |       | $                                | —     |                                      | $          | (7,134 | ) | $ | 89,216 |   |
| Termination payments to employees and  related costs |       | 1,113                                        |       | 398                                                    |       | —                                                  |       | (511                             | )          | 1,000                                     |       |
| Write-off on disposal of assets and related  costs   |       | 32                                           |       | (26                                                    | )          | —                                                  |       | 34                               |       | 40                                        |       |
|                                                 |       | $                                            | 90,050     |                                                   | $          | 7,817                                                   |       | $                                | —     |                                      | $          | (7,611 | ) | $ | 90,256 |   |
|                                                 |       |                                         |       |                                                   |       |                                                    |       |                             |       |                                      |       |
| **Three Months Ended June 30, 2004**                 |       |                                         |       |                                                   |       |                                                    |       |                             |       |                                      |       |
| Lease cancellations and commitments                  |       | $                                            | 78,292     |                                                   | $          | 521                                                     |       | $                                | —     |                                      | $          | (5,620 | ) | $ | 73,193 |   |
| Termination payments to employees and  related costs |       | 429                                          |       | —                                                 |       | —                                                  |       | —                           |       | 429                                       |       |
| Write-off on disposal of assets and related  costs   |       | —                                       |       | —                                                 |       | —                                                  |       | —                           |       | —                                    |       |
|                                                 |       | $                                            | 78,721     |                                                   | $          | 521                                                     |       | $                                | —     |                                      | $          | (5620 | ) | $ | 73,622 |   |

 
| ** **                                           | ** ** | **Accrued  restructuring costs,  beginning** | ** ** | **Amounts charged to  restructuring costs  and other** | ** ** | **Amounts reversed  to restructuring  costs and other** | ** ** | **Amounts paid  or written off** | ** ** | **Accrued  restructuring  costs, ending** | ** ** |
|------------------------------------------------------|------------|----------------------------------------------|------------|--------------------------------------------------------|------------|---------------------------------------------------------|------------|----------------------------------|------------|-------------------------------------------|------------|
|                                                 |       |                                         |       |                                                   |       |                                                    |       |                             |       |                                      |       |
| **Six Months Ended June 30, 2003**                   |       |                                         |       |                                                   |       |                                                    |       |                             |       |                                      |       |
| Lease cancellations and commitments                  |       | $                                            | 94,691     |                                                   | $          | 8,618                                                   |       | $                                | —     |                                      | $          | (14,093 | ) | $ | 89,216 |   |
| Termination payments to employees and  related costs |       | 1,425                                        |       | 260                                                    |       | —                                                  |       | (685                             | )          | 1,000                                     |       |
| Write-off on disposal of assets and related  costs   |       | 79                                           |       | (26                                                    | )          | —                                                  |       | (13                              | )          | 40                                        |       |
|                                                 |       | $                                            | 96,195     |                                                   | $          | 8,852                                                   |       | $                                | —     |                                      | $          | (14,791 | ) | $ | 90,256 |   |
|                                                 |       |                                         |       |                                                   |       |                                                    |       |                             |       |                                      |       |
| **Six Months Ended June 30, 2004**                   |       |                                         |       |                                                   |       |                                                    |       |                             |       |                                      |       |
| Lease cancellations and commitments                  |       | $                                            | 83,026     |                                                   | $          | 773                                                     |       | $                                | —     |                                      | $          | (10,606 | ) | $ | 73,193 |   |
| Termination payments to employees and  related costs |       | 429                                          |       | —                                                 |       | —                                                  |       | —                           |       | 429                                       |       |
| Write-off on disposal of assets and related  costs   |       | —                                       |       | —                                                 |       | —                                                  |       | —                           |       | —                                    |       |
|                                                 |       | $                                            | 83,455     |                                                   | $          | 773                                                     |       | $                                | —     |                                      | $          | (10,606 | ) | $ | 73,622 |   |

 

22

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

 
| Sublease income to be received under  non-cancelable sublease agreements signed prior to June 30, 2004 |   | $    | 17.7   |   |
|--------------------------------------------------------------------------------------------------------|--------|------|--------|--------|
| Estimated sublease income for sublease  agreements yet to be negotiated                                |   | 27.6 |   |
| Total estimated sublease income                                                                        |   | $    | 45.3   |   |

 

The Company has recorded the low-end of arange of assumptions modeled for restructuring charges, in accordance with SFASNo. 5, *Accounting for Contingencies*.  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.

 

Subsequent to June 30, 2004, the Companyreached agreements with certain landlords to extinguish approximately $143million of net future excess real estate obligations.  See note 8

 

23

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***Legal Matters***

 

The Company is party to various litigationmatters in the normal course of its business. For each pending matter for which the Company can estimate the amountand range of potential loss, the minimum estimated liability has been recorded.For the remaining matters, the Company is unable to make a reasonable estimateof the liability that could result because of the uncertainties related to boththe determination of the probability of an unfavorable outcome and the amountand range of loss in the event of an unfavorable outcome.  As additional information becomes available,the Company will assess the potential liability related to its pendinglitigation and revise its estimates, if necessary. Such revisions in theCompany’s estimates of the potential liability could materially impact theCompany’s results of operations and financial position.

 

***Results of Operations***

 

*Revenues*

 

*Total revenues*decreased 8% during the quarter ended June 30, 2004 to $20.1 million ascompared to $21.8 million for the quarter ended June 30, 2003.  Total revenues decreased 11% during the sixmonths ended June 30, 2004 to $41.0 million as compared to $46.3 millionfor the six months ended June 30, 2003.  A summary of our revenues by geographic region is as follows (dollars inthousands, unaudited):

 
| ** **          | ** ** | **Software  Licenses** | ** ** | **%**  | ** ** | **Services** | ** ** | **%**  | ** ** | **Total** | ** ** | **%**  | ** ** |
|---------------------|------------|------------------------|------------|--------|------------|--------------|------------|--------|------------|-----------|------------|--------|------------|
| Three Months Ended: |       |                   |       |   |       |         |       |   |       |      |       |   |       |
|                |       |                   |       |   |       |         |       |   |       |      |       |   |       |
| June 30, 2004  |       |                   |       |   |       |         |       |   |       |      |       |   |       |
| Americas            |       | $                      | 2,011      |   | 28         | %            | $          | 6,840  |       | 52        | %          | $      | 8,851      |   | 44 | % |
| Europe              |       | 3,817                  |       | 54     |       | 5,165        |       | 40     |       | 8,982     |       | 45     |       |
| Asia Pacific        |       | 1,269                  |       | 18     |       | 1,026        |       | 8      |       | 2,295     |       | 11     |       |
| Total               |       | $                      | 7,097      |   | 100        | %            | $          | 13,031 |       | 100       | %          | $      | 20,128     |   | 100 | % |
|                |       |                   |       |   |       |         |       |   |       |      |       |   |       |
| June 30, 2003  |       |                   |       |   |       |         |       |   |       |      |       |   |       |
| Americas            |       | $                      | 2,426      |   | 36         | %            | $          | 7,944  |       | 53        | %          | $      | 10,370     |   | 48 | % |
| Europe              |       | 3,403                  |       | 50     |       | 6,246        |       | 42     |       | 9,648     |       | 44     |       |
| Asia Pacific        |       | 995                    |       | 14     |       | 791          |       | 5      |       | 1,787     |       | 8      |       |
| Total               |       | $                      | 6,824      |   | 100        | %            | $          | 14,981 |       | 100       | %          | $      | 21,805     |   | 100 | % |
|                |       |                   |       |   |       |         |       |   |       |      |       |   |       |
| Six Months Ended:   |       |                   |       |   |       |         |       |   |       |      |       |   |       |
|                |       |                   |       |   |       |         |       |   |       |      |       |   |       |
| June 30, 2004  |       |                   |       |   |       |         |       |   |       |      |       |   |       |
| Americas            |       | $                      | 4,600      |   | 31         | %            | $          | 13,886 |       | 53        | %          | $      | 18,487     |   | 45 | % |
| Europe              |       | 8,711                  |       | 58     |       | 10,370       |       | 40     |       | 19,080    |       | 47     |       |
| Asia Pacific        |       | 1,626                  |       | 11     |       | 1,824        |       | 7      |       | 3,450     |       | 8      |       |
| Total               |       | $                      | 14,937     |   | 100        | %            | $          | 26,080 |       | 100       | %          | $      | 41,017     |   | 100 | % |
|                |       |                   |       |   |       |         |       |   |       |      |       |   |       |
| June 30, 2003  |       |                   |       |   |       |         |       |   |       |      |       |   |       |
| Americas            |       | $                      | 6,821      |   | 46         | %            | $          | 16,856 |       | 54        | %          | $      | 23,678     |   | 51 | % |
| Europe              |       | 5,088                  |       | 34     |       | 12,882       |       | 41     |       | 17,969    |       | 39     |       |
| Asia Pacific        |       | 2,890                  |       | 20     |       | 1,723        |       | 5      |       | 4,613     |       | 10     |       |
| Total               |       | $                      | 14,799     |   | 100        | %            | $          | 31,461 |       | 100       | %          | $      | 46,260     |   | 100 | % |

 

24

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

 

*Software license revenues*increased 4% during the quarter ended June 30,2004 to $7.1 million as compared to $6.8 million for the quarter ended June 30, 2003.  Software license revenue increased 1% duringthe six months ended June 30, 2004 to $14.9 million as compared to $14.8million for the six months ended June 30, 2003.

 

Americas license revenues decreased 17% for the three months ended June 30, 2004 to $2.0 million ascompared to $2.4 million for the three months ended June 30, 2003. Americas license revenues decreased 32% for the six months ended June 30, 2004 to $4.6 million ascompared to $6.8 million for the six months ended June 30, 2003. Americas license revenues declined in both periods due to a decline inlicense transactions and related revenue from new customers.

 

European license revenues increased 12% for the three months ended June 30, 2004 to $3.8 million ascompared to $3.4 million for the three months ended June 30, 2003. European license revenues increased 71% for the six months ended June 30, 2004 to $8.7 million ascompared to $5.1 million for the six months ended June 30, 2003. European license revenue increased for both periods mainly due to alarger number of follow-on licenses with European customers that are expandingthe use of our technology.

 

Asia Pacific license revenue increased for the three months endedJune 30, 2004 as compared to the three months ended June 30, 2003 dueto an increased focus on sales in this region, which included adding headcountwithin the sales department.  AsiaPacific license revenue declined for the six months ended June 30, 2004 ascompared to the six months ended June 30, 2004 primarily due to a singlelarge license transaction that did not recur in fiscal 2004.

 

*Services revenues*consisting of consulting revenues, customer training revenues, maintenancerevenues and consulting / training expense revenue decreased 13% during thequarter ended June 30, 2004to $13.0 million as compared to $15.0 million for the quarter ended June 30, 2003.  Services revenues decreased 17% during thesix months ended June 30, 2004 to $26.1 million as compared to $31.5million for the six months ended June 30, 2003.

 

Consulting services revenues decreased 12% for the three months ended June 30, 2004 to $5.2 million ascompared to $5.9 million for the three months ended June 30, 2003. Consulting services revenues decreased 18% for the six months ended June 30, 2004 to $10.1 million ascompared to $12.3 million for the six months ended June 30, 2003.  Thedeclines in both periods are attributable to recent declines in licensetransactions and related revenues from new customers.

 

Maintenance revenues decreased 14% for the three months ended June 30, 2004 to $7.8 million ascompared to $9.1 million for the three months ended June 30, 2003. Maintenance revenues decreased 16% for the six months ended June 30, 2004 to $16.0 million ascompared to $19.1 million for the six months ended June 30, 2003.  Thedeclines in both periods were primarily due to certain existing customersdeclining the renewal of annual maintenance services.

 

*Cost of Revenues*

 

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

 

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

 
| ** **                    | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                    | ** ** | **2004**                             | ** ** | **%**                              | ** ** | **2003** | ** ** | **%** | ** ** | **2004** | ** ** | **%** | ** ** | **2003** | ** ** | **%** | ** ** |
| Cost of software licenses (1) |       | $                                    | 313        |                               | 4          | % | $ | 495 |   | 7 | % | $ | 891 |   | 6 | % | $ | 883 |   | 6 | % |
| Cost of services (2)          |       | 6,302                                |       | 48                                 |       | 7,177 |   | 48 |   | 12,579 |   | 48 |   | 13,735 |   | 44 |   |
| Total cost of revenues (3)    |       | $                                    | 6,615      |                               | 33         | % | $ | 7,672 |   | 35 | % | $ | 13,470 |   | 33 | % | $ | 14,618 |   | 32 | % |

 

25

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----

(1)                                  Percentagesare calculated based on total software license revenues for the periodindicated

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

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

 

*Cost of softwarelicenses* decreased 3% as a percentage of softwarelicense revenues during the three months ended June 30, 2004 to 4% ascompared to 7% for three months ended June 30, 2003.  The cost of software licenses remainedconstant at 6% of software license revenues during the six months endedJune 30, 2004 as compared the six months ended June 30, 2003. Weexpect our expenses related to cost of software licenses to match the licenserevenue we generate and expect that the percentage of cost of software licensesto license revenue will remain at approximately 6% in the future.

 

*Cost of services*as a percentage of revenue remained between 44% and 48% of services revenue forboth the three and six months ended June 30, 2004 and June 30,2003.  We will continue to monitor andadjust our cost of services expenses relative to the services revenue wegenerate.

 

*Operating Expensesand Other Income, net*

 

Operating expenses consists of the following:

 

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

 

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

 

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

 

•                    *Other intangible amortization* representscosts to amortize other intangible assets, generally on a straight-line basis.As described in Note 7 in the Notes to Consolidated Financial Statements,as of January 1, 2002, we no longer amortize goodwill or the assembled workforceas we have identified the assembled workforce as an intangible asset which doesnot meet the criteria of a recognizable intangible asset as defined bySFAS 142.

 

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

 

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

 
| ** **                           | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                           | ** ** | **2004**                             | ** ** | **% (1)**                          | ** ** | **2003** | ** ** | **% (1)** | ** ** | **2004** | ** ** | **% (1)** | ** ** | **2003** | ** ** | **% (1)** | ** ** |
| Research and development             |       | $                                    | 4,509      |                               | 22         | % | $ | 6,063 |   | 28 | % | $ | 9,397 |   | 23 | % | $ | 12,214 |   | 26 | % |
| Sales and marketing                  |       | 7,480                                |       | 37                                 |       | 6,043 |   | 28 |   | 14,346 |   | 35 |   | 12,875 |   | 28 |   |
| General and administrative           |       | 2,400                                |       | 12                                 |       | 2,413 |   | 11 |   | 4,817 |   | 12 |   | 4,701 |   | 10 |   |
| Goodwill and intangible amortization |       | —                               |       | —                             |       | — |   | — |   | — |   | — |   | 887 |   | 2 |   |
| Restructuring charge                 |       | 679                                  |       | 3                                  |       | 7,817 |   | 36 |   | 1,249 |   | 3 |   | 8,852 |   | 19 |   |
| Impairment of assets                 |       | —                               |       | —                             |       | — |   | — |   | — |   | — |   | — |   | — |   |
| Total operating expenses             |       | $                                    | 15,068     |                               | 75         | % | $ | 22,336 |   | 102 | % | $ | 29,809 |   | 73 | % | $ | 39,529 |   | 85 | % |

 

26

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----

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

 

*Research anddevelopment expenses* decreased 26% during the quarterended June 30, 2004 to $4.5 million as compared to $6.1 million for thequarter ended June 30, 2003.   Research and development decreased 23% during the six months endedJune 30, 2004 to $9.4 million as compared to $12.2 million for the sixmonths ended June 30, 2003.  Thedecrease for both periods was primarily attributable to lower depreciationcosts for fully depreciated assets and headcount reductions as a result of ourcost-cutting efforts.  Partiallyoffsetting these declines were incremental engineering and quality assurancespending in the first quarter of fiscal 2004 related to the launch of theCompany’s BroadVision Process product and a $531,000 non-recurring credit inthe first quarter of fiscal 2003 related to a renegotiated contract fortelecommunications services.

 

*Sales and marketingexpenses* increased 25% during the quarter endedJune 30, 2004 to $7.5 million as compared to $6.0 million for the quarterended June 30, 2003.  Sales andmarketing increased 11% during the six months ended June 30, 2004 to $14.3million as compared to $12.9 million for the six months ended June 30,2003.  The increase during the three monthperiod was attributable completion of our Energizing E-Business World Tour thatincluded events in 12 cities.  Theincrease for the six month period was due to the rollout of BroadVision’slatest product, BroadVision Process, completion of the Energizing E-BusinessWorld Tour and a one time credit in the first quarter of 2003 for $259,000related to a renegotiated telecommunications service contract.

 

*General andadministrative expenses* were $2.4 million for bothquarters ended June 30, 2004 and June 30, 2003. General andadministrative expenses increased 2% during the six months ended June 30,2004 to $4.8 million as compared to $4.7 million for the six months endedJune 30, 2003.  The increase duringthe six month period was due to higher accounting costs related to theimplementation of certain provisions of the Sarbanes-Oxley Act of 2002 and a$130,000 non-recurring credit in the first quarter of fiscal 2003 related to arenegotiated telecommunications service contract.  Partially offsetting these increases was a$300,000 reduction in required reserves for uncollectible accounts receivable.

 

*Other intangible amortization.*    As described in Note 7 in the Notes to theCondensed Consolidated Financial Statements above, we no longer amortizegoodwill on the assembled workforce as we have identified the assembledworkforce as an intangible asset which does not meet the criteria ofrecognizable intangible asset as defined by SFAS No. 142.  The remaining other intangible assets havebeen fully amortized as of June 30, 2004. We periodically assess goodwill and other intangibles for impairment asdiscussed in Note 7 of Notes to the Condensed Consolidated FinancialStatements.  The remaining intangibleassets that are being amortized are a result of the acquisition of Interleaf,Inc. that was completed in April of 2000. We have accounted for the acquisition as a purchase businesscombination.  It is possible that we maycontinue to expand our business through acquisitions and internaldevelopment.  Any additional acquisitionsor impairment of goodwill and other purchased intangibles could result inadditional merger and acquisition related expenses.

 

*Restructuring charges**.***** ** Through June 30, 2004, the Company hasapproved restructuring plans to, among other things, reduce its workforce andconsolidate facilities. Restructuring and asset impairment charges were takento align the Company’s cost structure with changing market conditions and tocreate a more efficient organization. Our restructuring charges comprise primarily:(i) severance and benefits termination costs related to the reduction ofour workforce; (ii) lease termination costs and/or costs associated withpermanently vacating our facilities; (iii) other incremental costsincurred as a direct result of the restructuring plan; and (iv) impairmentcosts related to certain long-lived assets abandoned. We account for each ofthese costs in accordance with Staff Accounting Bulletin No. 100, *Restructuring and Impairment Charges.*

 

Restructuring charges consisted of the following (in thousands):

 
| ** **          | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **          | ** ** | **2004**                              | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| Facilities          |       | $                                     | 521        |                                | $          | 7,445 |   | $ | 773 |   | $ | 8,618 |   |
| Severance and other |       | 158                                   |       | 372                                 |       | 476 |   | 234 |   |
| Total               |       | $                                     | 679        |                                | $          | 7,817 |   | $ | 1,249 |   | $ | 8,852 |   |

 

The excess facilities charge for the threemonths ended June 30, 2004, related to interest on excess facilitiesobligations that were discounted under SFAS 146.  Similar charges will be recorded in futureperiods through the term of the underlying leases (October 2013).  The excess facilities charge for thethree-month period ended June 30, 2003, related to adjustments tounderlying sublease assumptions.  Theseverance and termination costs for both periods reflectseverance, payroll taxes and COBRA benefits related to restructuring plans

 

27

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implemented prior to the end of the period.  The Company recorded these charges at thelow-end of a range of assumptions modeled for the restructuring charges, in accordancewith SFAS No. 5, *Accounting forContingencies*. Adjustments to the restructuring accruals will bemade in future periods, if necessary, based upon the then current actual eventsand circumstances.

 

*Interest income, net*decreased42% to $102,000 for the three months ended June 30, 2004 as compared to $177,000 for the three monthsended June 30, 2003.  Interest income decreased 64% during the sixmonths ended June 30, 2004 to $211,000 as compared to $592,000 for the sixmonths ended June 30, 2003.  Interestincome has declined year-over-year due to lower cash balances and lowerinterest rates being earned on invested funds.

 

*Other( income) expense, net*for the three months ended June 30, 2004 we recorded other expense of $46,000as compared to other income of $545,000 for the three months ended June 30,2003.  During the six months ended June30, 2004 we recorded other expense of $178,000 as compared to income of $1.2million for the six months ended June 30, 2003. The decrease for both periods was primarily due to losses on the sale offixed assets as well as foreign currency gains in the six months ending June30, 2003 and foreign currency losses in the six months ending June 30, 2004.

 

*Income taxes.*  During the three months ended June 30, 2004,we recorded a tax benefit of $6,000 as compared to a tax expense of $114,000for the three months ended June 30, 2003. During the six months ended June 30, 2004 we recorded a tax expense of$130,000 as compared to a tax expense of $169,000 for the six months ended June30, 2003.  Amounts consist primarily ofestimates for income taxes in our foreign jurisdictions.

 

**Liquidity and Capital Resources**

 

**Overview**

 

As of June 30,2004, cash, cash equivalents, and restricted cash totaled $89.2 million, whichrepresents a decrease of $9.4 million as compared to a balance of $98.6 millionon December 31, 2003. This decrease was primarily attributable to net cash usedfor operations.

 
| ** **                | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|---------------------------|------------|-------------------------|------------|-----------------------------|------------|
|                      |       |                    |       |                        |       |
| Cash and cash equivalents |       | $                       | 66,904     |                        | $          | 78,776 |   |
| Restricted cash           |       | $                       | 22,259     |                        | $          | 19,827 |   |
| Working capital (deficit) |       | $                       | (8,963     | )                           | $          | 747 |   |
| Working capital ratio     |       | 0.9                     |       | 1.0                         |       |

 

We had various credit facilities with a commercial lender that includea revolving line of credit and an equipment line of credit.

 

As of June 30, 2004 and December 31, 2003,outstanding term debt borrowings were approximately $1.5 million and $1.9million, respectively.  Borrowings bearinterest between the bank’s prime rate (4.00% as of June 30, 2004 and December31, 2003) and the bank’s prime rate (4.00% as of June 30, 2004 and December 31, 2003) plus 1.25%.Principal and interest are due in monthly payments through maturity based onthe terms of the facilities.  Principalpayments of $488,000 are due through the remainder of 2004, $611,000 due in2005, and a final payment of $357,000 due in 2006.

 

We maintained a $27.3 million revolving line of credit, which iscollateralized by all of our assets and under which borrowings bear interest atthe bank’s prime rate. Interest is due monthly and principal is due atexpiration in February 2005. The amended and restated loan and securityagreement requires us to maintain certain levels in cash and cash equivalents,short-term investments and long-term investments (excluding equity investments).Additionally, the amended and restated loan and security agreement requires usto maintain certain levels on deposit with our commercial lender.  At both June 30, 2004 andDecember 31, 2003, $27.0 million was outstanding under the line of credit.

 

As of June 30, 2004, we were not in compliance withthe profitability and financial covenants of our commercial creditfacilities.  Subsequently, we received awaiver from the bank regarding non-compliance.

 

During the first quarter of 2004, we entered into a $500,000 equipmentline of credit with the commercial lender. Such line of credit is secured by all of our assets and under whichborrowings bear interest at the banks prime rate (4.00% as of June 30,2004) plus .75%.  Principal payments aredue in 36 monthly payments.  Principalpayments of $12,858 are due through the remainder 2004, $25,715 due in 2005 and2006, and a final payment of $8,572 due in 2007.  As of June 30, 2004, $72,860 was outstanding under the equipmentloan.

 

Commitments totaling $22.3 million and $19.8 million in the form ofstandby letters of credit were issued on our behalf from financial institutionsas of June 30, 2004 and December 31, 2003,respectively, primarily in favor of our various landlords to secure obligationsunder our facility leases.  Accordingly,$22.3 million and $19.8 million have been presented as restrictedcash in the accompanying Condensed Consolidated Balance Sheets at June 30, 2004 andDecember 31, 2003, respectively.

 

28

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Our exposureto market risk for changes in interest rates relates primarily to ourinvestment portfolio. We had no derivative financial instruments as ofJune 30, 2004 and December 31, 2003. We place our investments ininstruments that meet high credit quality standards and the amount of creditexposure to any one issue, issuer and type of instrument is limited.  Our interest rate risk related to borrowingshistorically has been minimal as interest expense related to borrowings hasbeen immaterial for the three and six months ended June 30, 2004 and 2003.

 

*Cash Flows from Operating Activities*

 

Cash used for operating activities was $9.8 million for the six monthsended June 30, 2004. This use of cash was primarily due to the net loss of$2.4 million and decreases in accrued expenses and non-current liabilities,primarily related to excess facilities costs. Partially offsetting these uses of cash were $2.3 million of non-cashdepreciation and amortization expense and a decrease in accounts receivable of$3.4 million due to reduced revenue.  Netcash used for operating activities during the six months ended June 30, 2003 was primarily dueto the net loss of $6.3 million, decreases in accounts payable and accruedexpenses of $12.6 million, and a decrease in unearned revenue and deferredmaintenance of $10.7 million.  Offsetting these uses of cash was $8.5 million of non-cash items, suchas depreciation expense, amortization of prepaid royalties, and amortization ofintangibles, a decrease in accounts receivable of $8.6 million and a decreasein prepaids and other assets of $3.4 million.

 

*Cash Flows from Investing Activities*

 

Cash used by investing activities was $2.9 million for the sixmonths ended June 30, 2004and was primarily due to transfers to restricted cash.  Cash provided by investing activities was$20.3 million for the six months ended June 30,2003, and was primarily due to net sales/maturities of investments of $22.6million.  Capital expenditures were$318,000 and $127,000 during the six months ended June 30, 2004 and 2003, respectively.  Our capital expenditures consisted ofpurchases of operating resources to manage our operations and consistedprimarily of computer hardware and software.

 

*Cash Flows from Financing Activities*

 

Cash provided by financing activities was $769,000 for the six monthsended June 30, 2004, consisting of $1.2 million in proceeds from theissuance of common stock and $416,000 for repayment of borrowings, net of newborrowings.  Cash provided by financingactivities was $1.7 million for the six months ended June 30, 2003,consisting of $394,000 in proceeds from the issuance of common stock inaddition to $1.3 million for new borrowings net of repayments of borrowings.

 

**Leases and Other Contractual Obligations**

 

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

 

We expect to incur significant operating expenses for the foreseeablefuture in order to execute our business plan. A summary of total future minimumlease payments as of June 30, 2004, under non-cancelable operating leaseagreements, together with amounts included in restructuring reserves is asfollows (in millions):

 
| **Years  Ending December 31,** | ** ** | **Operating  Leases** | ** ** |
|-------------------------------------|------------|-----------------------|------------|
| 2004                                |       | $                     | 11.6       |   |
| 2005                                |       | 23.3                  |       |
| 2006                                |       | 21.2                  |       |
| 2007                                |       | 18.7                  |       |
| 2008                                |       | 14.6                  |       |
| 2009 and thereafter                 |       | 75.0                  |       |
|                                |       |                  |       |
| Total minimum lease payments        |       | $                     | 164.4      |   |

 

As of June 30, 2004, we have accrued $94.9 million ofestimated future facilities costs as a restructuring accrual. See Note 6 in theNotes to Condensed Consolidated Financial Statements.  The estimated sublease income netted againstthe restructuring accrual consists of the following (unaudited, in millions):

 

29

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| Sublease income to be received under  non-cancelable sublease agreements signed prior to June 30, 2004 |   | $    | 17.7   |   |
|-------------------------------------------------------------------------------------------------------------|--------|------|--------|--------|
| Estimated sublease income for sublease  agreements yet to be negotiated                                     |   | 27.6 |   |
| Total estimated sublease income                                                                             |   | $    | 45.3   |   |

 

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

 
| Less than 1 year |   | $      | 5,223  |   |
|------------------|--------|--------|--------|--------|
| 1-3 years        |   | 548    |   |
| 4-5 years        |   | 1,088  |   |
| Over 5 years     |   | 15,404 |   |
| Total            |   | $      | 22,263 |   |

 

Restricted cash represents collateral for these letters of credit.

 

During July and August 2004,the Company reached agreements with certain landlords to extinguishapproximately $143 million of future excess real estate obligations.  In the aggregate, the settlements involvecurrent and future cash payments by the Company of approximately $37.2 million,the issuance of a warrant to purchase approximately 700,000 shares of ourcommon stock at an exercise price of $5.00 per share after a one year period,and a residual obligation of approximately 6% of the obligation prior totermination.

 

The Companyhas made or will make cash payments of $19.1 million in its current thirdfiscal quarter, and an additional cash payment of $18.1 million in January2005.  In addition, the Company may makea further cash payment of $4.5 million thereafter if it exercises an option toterminate the residual real estate obligation. In connection with these agreements, the Company expects to record arestructuring gain of approximately $24 million in the quarter ending September30, 2004.

 

Additionalinformation about these transactions are included in the Company’s CurrentReport on Form 8-K filed concurrently with this Quarterly Report on Form 10-Q.

 

**Factors That May Affect Future Liquidity**

 

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

 

We currently expect to fund our short-term working capital andoperating resource expenditure requirements, for at least the next twelvemonths, from our existing cash and cash equivalents and short-term investmentresources, our anticipated cash flows from operations and anticipated cashflows from subleases. However, we could experience unforeseen circumstances,such as a worsening economic downturn, lease settlements and less thananticipated cash inflows from operations, invested assets, and subleases thatmay increase our use of available cash or need to obtain additional financing.Also, we may find it necessary to obtain additional equity or debt financing inorder to support more rapid expansion, develop new or enhanced services,respond to competitive pressures, acquire complementary businesses ortechnologies or respond to unanticipated requirements.

 

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

 

**Factors That May Affect Future OperatingResults**

 

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, 2003 andelsewhere therein and as disclosed in other documents filed with the Securitiesand Exchange Commission.

 

Significant fluctuations in future quarterly operating results may becaused by many factors including, among others, the timing of introductions orenhancements of products and services by us or our competitors, market acceptanceof new products, the mix of our products sold, changes in pricing policies byus or our competitors, our ability to retain customers, changes in our salesincentive plans, budgeting cycles of our customers, customer order deferrals inanticipation of new products or enhancements by us or our competitors,non-renewal of maintenance agreements, product life cycles, changes instrategy, seasonal trends, the mix of distribution channels through which ourproducts are sold, the mix of international and domestic sales, the rate atwhich new sales people become productive, changes in the level of operatingexpenses to support projected growth and general economic conditions. Weanticipate that a significant portion of our revenues will be derived from alimited number of orders, and the timing of receipt and fulfillment of any suchorders is expected to cause material fluctuations in our operating results,particularly on a quarterly basis. Due to the foregoing factors, quarterlyrevenues and operating results are difficult to forecast, and we believe thatperiod-to-period comparisons of our operating results will not necessarily bemeaningful and should not be relied upon as any indication of futureperformance. It is likely that our future quarterly operating results from timeto time will not meet the expectations of market analysts or investors, whichmay have an adverse effect on the price of our common stock.

 

Weare continuing efforts to reduce and control our expense structure. We believestrict cost containment and expense reductions are essential to achievingpositive cash flow and profitability. A number of factors could preclude usfrom successfully bringing costs and expenses in line with our revenues,including unplanned uses of cash, the inability to accurately forecast businessactivities and further deterioration of our revenues. If we are not able toeffectively reduce our costs and achieve an expense structure 

 

30

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commensurate with our business activities and revenues, we may haveinadequate levels of cash for operations or for capital requirements, whichcould significantly harm our ability to operate our business.

 

Werenewed and amended the SVB Facility during the first quarter of fiscal 2004. TheSVB Facility is secured by substantially all of our owned assets.  Theprimary financial covenant under the SVB Facility obligates us to maintaincertain levels of available cash, cash equivalents, short-term investments andlong-term investments (excluding equity investments). Falling below such levelswould be an event of default for which Silicon Valley Bank may, among otherthings, accelerate the payment of the facility. As of June 30, 2004, the Company was not in compliance withthe profitability and financial covenants of the commercial creditfacilities.  Subsequently, the Companyreceived a waiver from the bank regarding non-compliance.  Although the bank has provided this waiver,the Company is not in compliance with certain financial covenants in the SVBFacility and, as a result, cannot borrow under the SVB Facility.  The bank and the Company have agreed inprinciple to amend the SVB Facility, subject to the execution of a definitiveamendment, to modify the financial covenants and reduce the borrowing limitthere under from $27 million to $15 million. The Company believes that it will comply with the new financialcovenants.  While we plan to adhere to the financialcovenants of the SVB Facility as presently drafted or as it is expected to be modifiedand avoid an event of default in future periods, in the event that we areunable to avoid another event of default, it may be necessary or advisable toretire and terminate the SVB Facility and pay off all remaining balancesborrowed. Such a payoff would further limit our available cash and cashequivalents.

 

Our success depends largely on the skills, experience and performanceof key personnel. If we lose one or more key personnel, our business could beharmed. Our future success depends on our ability to continue attracting andretaining highly skilled personnel. We may not be successful in attracting,assimilating and retaining qualified personnel in the future. Furthermore, thesignificant downturn in our business environment had a negative impact on ouroperations. We are currently restructuring our operations and have takenactions to reduce our workforce and implement other cost containmentactivities. These actions could lead to disruptions in our business, reducedemployee morale and productivity, increased attrition and problems withretaining existing employees and recruiting future employees and increasedfinancial costs.

 

We face a number of risks and uncertainties relate to the rapidlyevolving nature of the markets in which we operate. These related market risksinclude, among other things, the evolution of the online commerce market, thedependence of online commerce on the development of the Internet and itsrelated 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.

 

Therehas been a general downturn in the Unites States of America and globaleconomy.  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.  Financial comparisons discussed herein maynot be indicative of future performance.

 

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

 

***Related Party Transactions***

 

BroadVision has an investment of 19.9% in Roundarch, a CustomerRelationship Management, or CRM services company. We have a resellerrelationship with Roundarch whereby Roundarch is an implementation partner whointegrates our software products with other third-party software products intoCRM customer installations.  During the three months ended June 30,2004 and 2003, transactions involving Roundarch represented $4,900 and $179,000of our revenue, respectively.  For thesix months ended June 30, 2004 and 2003, revenues from Roundarch were$6,900 and $202,000, respectively.

 

**Item 3****.  Quantitative and Qualitative DisclosuresAbout Market Risk**

 

Our exposure to market risk for changes in interest rates relatesprimarily to our investment portfolio. We had no derivative financialinstruments as of June 30, 2004 and December 31, 2003.We place our investments in instruments that meet high credit quality standardsand the amount of credit exposure to any one issue, issuer and type ofinstrument is limited.  Our interest rate risk related to borrowingshistorically has been minimal as interest expense related to borrowings hasbeen immaterial for the three and six-month periods ended June 30, 2004and 2003.

 

During the second quarter of fiscal 2004, we drew down $27.0 million onour revolving line of credit.  Interest is payable monthly at the bank’sprime rate and principal is due in full in February 2005. Additionally, we have two outstanding term loans as of June 30, 2004. Interest on those term loans are between the bank’s prime rate (4.00% asof June 30, 2004) and the banks prime rate (4.00% as of June 30, 2004)plus 1.25%.

 

 

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

 

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

 

All short-term investments have a remainingmaturity of twelve months or less. Total short-term and investment unrealizedgains (losses) were $0 and $1,000 for the six months ended June 30, 2004and 2003, respectively.

 

Our cash and cash equivalents consisted of the following as of June 30,2004 (in thousands):

 
| ** **            | ** ** | **Amortized  costs** | ** ** | **Unrealized  gains** | ** ** | **Unrealized  losses** | ** ** | **Fair  value** | ** ** |
|-----------------------|------------|----------------------|------------|-----------------------|------------|------------------------|------------|-----------------|------------|
| Cash                  |       | $                    | 64,989     |                  | $          | —                 |       | $               | —     |   | $ | 64,989 |   |
| Money market          |       | 23,767               |       | —                |       | —                 |       | 23,767          |       |
| Corporate notes/bonds |       | 407                  |       | —                |       | —                 |       | 407             |       |
|                  |       | 89,163               |       | —                |       | —                 |       | 89,163          |       |
|                       |            |                      |            |                       |            |                        |            |                 |            |  |  |  |  |

 

Includedin the table above in cash and cash equivalents are $22.3 million ofnon-current restricted cash and investments.

 

Ourcash and cash equivalents consisted of the following as of December 31,2003 (in thousands):

 
| ** **            | ** ** | **Amortized  costs** | ** ** | **Unrealized  gains** | ** ** | **Unrealized  losses** | ** ** | **Fair  value** | ** ** |
|-----------------------|------------|----------------------|------------|-----------------------|------------|------------------------|------------|-----------------|------------|
| Cash                  |       | $                    | 65,592     |                  | $          | —                 |       | $               | —     |   | $ | 65,592 |   |
| Money market          |       | 32,602               |       | —                |       | —                 |       | 32,602          |       |
| Corporate notes/bonds |       | 409                  |       | —                |       | —                 |       | 409             |       |
|                  |       | $                    | 98,603     |                  | $          | —                 |       | $               | —     |   | $ | 98,603 |   |

 

Includedin the table above in cash and cash equivalents are non-current restricted cashand investments of $19.8 million.

 

***Concentrations of Credit Risk***

 

Financial assets that potentially subject us to significantconcentrations of credit risk consist principally of cash, cash equivalents,short-term investments and trade accounts receivable. We maintain our cash andcash equivalents and short-term investments with four separate financialinstitutions. We market and sell our products throughout the world and performongoing credit evaluations of our customers. We maintain reserves for potentialcredit losses. For the three and six month periods ended June 30,2004 and 2003, no single customer accounted for more than 10% of totalrevenue.  At June 30, 2004, no single customeraccounted for more than 10% of accounts receivable.

 

***Fair Value of Financial Instruments***

 

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

 

***Foreign Currency***

 

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

 

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***Equity Investments***

 

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

 

The total fair value of our cost method long-term equity investments inpublic and non-public companies as of June 30, 2004 was$1.4 million.  Due to other thantemporary declines, certain long term equity investments were impaired in thesecond quarter of 2004.  The total amountof this impairment was $300,000.

 

***Subsequent Events***

 

During July and August 2004, the Company reached agreements withcertain landlords to extinguish approximately $143 million of future excessreal estate obligations.  In theaggregate, the settlements involve current and future cash payments by theCompany of approximately $37.2 million, the issuance of a warrant to purchaseapproximately 700,000 shares of our common stock at an exercise price of $5.00per share after a one year period, anda residual obligation of approximately 6% of the obligation prior totermination.

 

The Company has made or will make cashpayments of $19.1 million in its current third fiscal quarter, and anadditional cash payment of $18.1 million in January 2005.  In addition, the Company may make a furthercash payment of $4.5 million thereafter if it exercises an option to terminatethe residual real estate obligation.  Inconnection with these agreements, the Company expects to record a restructuringgain of approximately $24 million in the quarter ending September 30, 2004.

 

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

 

Our Chief Executive Officer and our Chief Financial Officer areresponsible for establishing and maintaining “disclosure controls andprocedures” (as defined in the rules promulgated under the Securities ExchangeAct of 1934, as amended) for our company. Based on their evaluation of ourdisclosure controls and procedures (as defined in the rules promulgated underthe Securities Exchange Act of 1934), our Chief Executive Officer and our ChiefFinancial Officer concluded that our disclosure controls and procedures wereeffective as of June 30, 2004, the end of the period covered by thisreport.

 

***Changes in InternalControl Over Financial Reporting***

 

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

 

***Limitations on theEffectiveness of Controls***

 

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

 

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

 

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

 

The Company is subject to various claims and legal actions arising fromtime to time in the ordinary course of business. In the opinion of management,after consultation with legal counsel, the Company has adequate defenses foreach of the claims and actions, and we do not expect their ultimate dispositionto have a material effect on our business, financial condition or results ofoperations. Although management currently believes that the outcome of otheroutstanding legal proceedings, claims and litigation involving us will not havea material adverse effect on our business, results of operations or financialcondition, litigation is inherently uncertain, and there can be no assurancethat existing or future litigation will not have a material adverse effect onour business, results of operations or financial condition.

 

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

 

Notapplicable.

 

**Item 3.****          ****Defaults Upon Senior Securities**

 

Notapplicable.

 

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

 

(a)                                  The Annual Meeting of Stockholders of theCompany was held on June 11, 2004.

(b)                                 Pehong Chen, David L. Anderson, James D.Dixon, Todd A. Garrett,  Koh Boon Hwee, Roderick C. McGeary,  T. Michael Nevens and Carl Pascarella wereelected as Directors.

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

 

i.  Election of Directors

 
| ** **          | ** ** | **For**    | ** ** | **Withheld** | ** ** |
|---------------------|------------|------------|------------|--------------|------------|
| Pehong Chen         |       | 25,928,078 |       | 207,060      |       |
| David L. Anderson   |       | 25,953,368 |       | 181,770      |       |
| James D. Dixon      |       | 25,922,539 |       | 212,599      |       |
| Todd A. Garrett     |       | 25,924,806 |       | 210,332      |       |
| Koh Boon Hwee       |       | 25,951,688 |       | 183,450      |       |
| Roderick C. McGeary |       | 25,952,474 |       | 182,664      |       |
| T. Michael Nevens   |       | 25,927,323 |       | 207,815      |       |
| Carl Pascarella     |       | 25,483,561 |       | 651,577      |       |

 

 

ii.  To approve an amendment tothe Company’s Amended and Restated Certificate of Incorporation to reduce (i)the total authorized number of shares from 2,010,000,000 to 223,333,334 shares,(ii) the authorized number of shares of common stock from 2,000,000,000 to222,222,223 and (iii) the authorized number of shares of preferred stock from10,000,000 to 1,111,112.

 
| For:     |   | 8,584,816 |   | Against:   |   | 336,657    |
|----------|--------|-----------|--------|------------|--------|------------|
|     |   |      |   |       |   |       |
| Abstain: |   | 44,996    |   | Not Voted: |   | 17,168,669 |

 

This proposal required the approval by stockholders holding of amajority of the outstanding shares of Common Stock.  Shares indicated as Not Voted representshares held in street name by banks and brokerage firms that were not voted bythe firms because they had not received direction from the beneficial holderson how to vote the shares.  On thismatter, brokerage firms do not have discretion to vote the shares absentdirection for the beneficial owners.  Asa result of the shares not voted, the proposal failed.

 

iii.  To ratify the selection bythe Audit Committee of the Board of Directors of BDO Seidman, LLP asindependent auditors of the Company for its fiscal year endingDecember 31, 2004.

 

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| For:     |   | 25,929,769 |   | Against:   |   | 133,901 |
|----------|--------|------------|--------|------------|--------|---------|
|     |   |       |   |       |   |    |
| Abstain: |   | 37,152     |   | Not Voted: |   | 34,316  |

 

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

 

Notapplicable.

 

**Item 6****.****          ****Exhibits and Reports on Form8-K**

 

(a)                                  Exhibits

 
| **Exhibits** | ** ** | **Description**                                                                                                                                          |
|--------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |       |                                                                                                                                                     |
| 31.1         |       | Certification of the Chief Executive Officer of BroadVision                                                                                              |
| 31.2         |       | Certification of the Chief Financial Officer of BroadVision                                                                                              |
| 32.1         |       | Certification of the Chief Executive Officer and Chief Financial  Officer of BroadVision pursuant to Section 906 of the Sarbanes-Oxley Act  of 2002 |

 

(b)                                 Reportson Form 8-K

 

The following Current Report on Form 8-K was filed during the quarterended June 30, 2004:

 
| On April 21, 2004, the Company filed a Current Report on Form 8-K  related to the announcement of its financial results for the quarter ended  March 31, 2004. |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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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: August 09, 2004 | By:        | /s/   Pehong Chen                                                                              |   |
|                       |       | Pehong  Chen                                                                                        |
|                       |       | Chairman  of the Board, President and Chief Executive Officer (Principal Executive  Officer)        |
|                       |       |                                                                                                |
| Date: August 09, 2004 | By:        | /s/   William E. Meyer                                                                         |   |
|                       |       | William  E. Meyer                                                                                   |
|                       |       | Executive  Vice President and Chief Financial Officer  (Principal Financial and Accounting Officer) |
|                            |            |                                                                                                     |  |  |

 

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**BROADVISION, INC. QUARTERLY REPORT ONFORM 10-Q JUNE 30, 2004**

 

**INDEX TO EXHIBITS**

 
| **Exhibit** | ** ** | **Description**                                                                                                                                          |
|-------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |       |                                                                                                                                                     |
| 31.1        |       | Certification of the Chief Executive Officer of BroadVision                                                                                              |
| 31.2        |       | Certification of the Chief Financial Officer of BroadVision                                                                                              |
| 32.1        |       | Certification of the Chief Executive Officer and Chief Financial  Officer of BroadVision pursuant to Section 906 of the Sarbanes-Oxley Act  of 2002 |

 

37

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