BroadVision, Inc. and Vector Capital announced that BroadVision has entered into a definitive agreement to be acquired by a newly-formed Vector portfolio company. Under the terms of the merger agreement, current BroadVision stockholders will receive $0.84 per share in cash and BroadVision will operate going forward as a privately-held, independent software vendor. Under a separate agreement with the holders of its outstanding convertible notes, BroadVision, through additional capital to be provided by Vector, will make cash payments totaling approximately $16 million to retire the notes and associated warrants through the completion of the merger.

Vector Capital is a San Francisco-based private equity firm specializing in buyouts, spinouts, and recapitalizations of established technology companies. Vector has a proven track record of success in helping companies similar to BroadVision develop alternative strategies to revitalize growth and sustain success. Other Vector investments include LANDesk Software, Savi Technology, and Corel Corporation, which Vector took private in 2003 and subsequently successfully turned around. Vector is committed to, and will provide the capital for, maintaining BroadVision’s strong customer service and support programs and a high level of R&D investment. 

The proposed transaction is the culmination of a strategic evaluation process initiated in early 2005. Recognizing that it could face liquidity challenges by late 2005 if its financial performance did not meet or exceed its plan or if an unforeseen cash need arose, BroadVision engaged a financial advisor to assist in the evaluation and pursuit of a sale of the Company to a strategic or financial acquirer or a "merger of equals" transaction. This process led to discussions with more than 25 potential strategic partners and investors, including Vector and numerous other private equity firms, during the first half of 2005. After no potential strategic partner exhibited sustained interest, BroadVision turned its focus to concluding an agreement with Vector or one other private equity firm that remained interested in pursuing a transaction on terms comparable to those reflected in the Vector agreement.

As BroadVision has previously disclosed, a combination of developments in recent months has exacerbated its prospective liquidity issues. Many of these issues relate to the company’s outstanding convertible notes. Following is a summary of the background and key terms and issues related to the notes and to the company’s bank borrowings:

In November 2004, the company raised $16 million of cash through the issuance of convertible notes to certain investors. The primary use of the proceeds of the notes was to extinguish excess long-term real estate obligations. The terms of the convertible notes require the company to make principal and interest payments in either cash or, if certain conditions are met, shares of common stock starting June 1, 2005.

Unexpected delays in obtaining the effectiveness of the company’s SEC registration statement relating to the notes are causing the company to: 1) incur additional penalty payments to the note holders at the rate of $160,000 per month, and 2) be required to make principal, interest and penalty payments in cash instead of stock.

Due to the company’s recent financial performance and other unanticipated uses of cash, additional note amortization payments of $1 million per month will be required beginning on September 1, 2005. As a result, the company will be required to repay $4 million more of the notes in 2005 than originally anticipated.

As of June 30, 2005, the company reported a principal balance due under the notes of approximately $14.9 million and outstanding bank borrowings of $15.6 million, which in the aggregate exceeded by approximately $3.7 million its cash and cash equivalents of approximately $26.8 million. Of the $15.6 million of bank borrowings at June 30, 2005, $15.0 million was repaid in early July 2005, and there can be no assurances that future borrowings will be available to the company under its bank facilities. Further recent developments will create additional, near-term liquidity pressures. The 22% reduction-in-force announced on July 5, 2005, while important in order to adjust expenses to a level more consistent with anticipated revenues, will result in pre-tax severance costs of approximately $1.3 million in the second and third quarters of 2005. In addition, BroadVision reported second quarter license revenue of $3.4 million, less than 50% of the license revenue reported in the same quarter of the prior year, and total net revenue of approximately $15.5 million, nearly 9% below the midpoint of the company’s range of guidance of $16.0 to $18.0 million.

Due to the above factors and the continuing challenges the company perceives in the enterprise software sales environment, BroadVision’s June 30, 2005 net cash balance will likely be insufficient to meet its obligations in the second half of 2005. The deteriorated and uncertain liquidity outlook, coupled with a continued challenging environment for software sales, the high costs of operating a public company and feedback from numerous potential strategic partners, most of whom declined to pursue discussions, led BroadVision to the conclusion that an outright acquisition of the company in a cash transaction represented the most desirable outcome for its stockholders. 

The merger agreement has been approved by BroadVision’s board of directors upon the recommendation of a Special Committee comprised of four independent directors, and the buyout of the outstanding convertible notes has been approved by BroadVision’s board of directors and the note holders by the requisite majority action. The proposed merger transaction is subject to approval by the holders of a majority of the outstanding shares of BroadVision’s common stock. Dr. Chen, BroadVision’s President and CEO, and a related trust, who own in the aggregate approximately 17% of the outstanding shares of BroadVision’s common stock, have agreed to vote in favor of the transaction. Vector has expressed its desire to have Dr. Chen, BroadVision’s founder, remain involved with the company after the merger and has entered into an arrangement with Dr. Chen under which he may purchase up to 9.5% of the equity securities of the company formed to acquire BroadVision. The transaction is also subject to other customary closing conditions and is expected to close in the late third or fourth quarter of 2005.