1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ------------------------ FORM 10-Q/A ------------------------ (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED JUNE 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 0-28252 BROADVISION, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 94-3184303 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER) 585 BROADWAY, REDWOOD CITY, CALIFORNIA 94063 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (650) 261-5100 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 (COPY MISSING) Yes [X] No [ ]. As of July 31, 1999, there were 25,561,000 shares of the Registrant's Common Stock issued and outstanding. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 BROADVISION, INC. AND SUBSIDIARIES FORM 10-Q QUARTER ENDED JUNE 30, 1999 TABLE OF CONTENTS PAGE NO. -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets -- December 31, 1998 and June 30, 1999......................... 3 Consolidated Statements of Operations and Comprehensive Income -- Three and six months ended June 30, 1998 and 1999........... 4 Consolidated Statements of Cash Flows -- Six months ended June 30, 1998 and 1999..................... 5 Notes to Consolidated Financial Statements.................. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 10 Item 3. Quantitative and Qualitative Disclosures about Market Risk........................................................ 17 PART II. OTHER INFORMATION Item 1. Legal Proceedings........................................... 17 Item 2. Changes in Securities and Use of Proceeds................... 17 Item 3. Defaults upon Senior Securities............................. 17 Item 4. Submission of Matters to a Vote of Security Holders......... 17 Item 5. Other Information........................................... 18 Item 6. Exhibits and Reports on Form 8-K............................ 18 SIGNATURES............................................................. 18 2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS BROADVISION, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA) ASSETS DECEMBER 31, JUNE 30, 1998 1999 ------------ -------- Current assets: Cash, and cash equivalents................................ $ 61,878 $ 53,735 Short-term investments.................................... -- 18,823 Accounts receivable, less allowance for doubtful accounts of $788 and $1,018 for December 31, 1998 and June 30, 1999, respectively..................................... 15,361 21,479 Prepaids and other........................................ 3,589 3,820 -------- -------- Total current assets.............................. 80,828 97,857 Property and equipment, net................................. 8,034 9,978 Long-term investments....................................... 11,546 28,286 Other assets................................................ 1,154 1,077 -------- -------- Total assets...................................... $101,562 $137,198 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 2,243 $ 3,336 Accrued expenses.......................................... 4,933 7,312 Unearned revenue.......................................... 1,918 3,298 Deferred maintenance...................................... 6,157 10,165 Current portion of capital lease obligations.............. 709 547 Current portion of long-term debt......................... 548 548 -------- -------- Total current liabilities......................... 16,508 25,206 Capital lease obligations................................... 270 16 Long-term debt.............................................. 2,924 2,600 Deferred income taxes....................................... -- 529 Other liabilities........................................... 51 35 -------- -------- Total liabilities................................. 19,753 28,386 -------- -------- Commitments Stockholders' equity: Convertible preferred stock, $0.0001 par value; 5,000 shares authorized; none issued and outstanding......... -- -- Common stock, $0.0001 par value; 50,000 shares authorized; 24,796 and 25,508 shares issued and outstanding at December 31, 1998 and June 30, 1999, respectively...... 2 3 Additional paid-in capital................................ 98,767 109,306 Deferred compensation..................................... (555) (389) Accumulated other comprehensive income.................... 3,198 13,243 Accumulated deficit....................................... (19,603) (13,351) -------- -------- Total stockholders' equity........................ 81,809 108,812 -------- -------- Total liabilities and stockholders' equity........ $101,562 $137,198 ======== ======== See accompanying notes to consolidated financial statements 3 4 BROADVISION, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------ ------------------ 1998 1999 1998 1999 ------- ------- ------- ------- Revenues: Software licenses................................. $ 8,018 $15,484 $15,297 $28,267 Services.......................................... 3,367 7,992 6,167 13,673 ------- ------- ------- ------- Total revenues............................ 11,385 23,476 21,464 41,940 Cost of revenues: Cost of license revenues.......................... 213 1,037 400 1,784 Cost of service revenues.......................... 2,092 4,624 3,711 7,945 ------- ------- ------- ------- Total cost of revenues.................... 2,305 5,661 4,111 9,729 ------- ------- ------- ------- Gross profit......................... 9,080 17,815 17,353 32,211 Operating expenses: Research and development.......................... 2,049 3,268 4,083 6,169 Sales and marketing............................... 6,243 10,019 12,104 17,684 General and administrative........................ 760 1,611 1,585 2,882 ------- ------- ------- ------- Total operating expenses.................. 9,052 14,898 17,772 26,735 ------- ------- ------- ------- Operating income (loss).............. 28 2,917 (419) 5,476 Other income, net................................... 665 593 613 1,110 ------- ------- ------- ------- Income before provision for income taxes.............................. 693 3,510 194 6,586 Provision for income taxes.......................... -- 195 -- 334 ------- ------- ------- ------- Net income........................... $ 693 $ 3,315 $ 194 $ 6,252 ======= ======= ======= ======= Basic earnings per share............................ $ 0.03 $ 0.13 $ 0.01 $ 0.25 ======= ======= ======= ======= Diluted earnings per share.......................... $ 0.03 $ 0.12 $ 0.01 $ 0.22 ======= ======= ======= ======= Shares used in computing basic earnings per share... 24,011 25,123 22,244 24,886 ======= ======= ======= ======= Shares used in computing diluted earnings per share............................................. 26,771 28,154 24,819 27,946 ======= ======= ======= ======= COMPREHENSIVE INCOME: Net income........................................ $ 693 $ 3,315 $ 194 $ 6,252 Other comprehensive income, net of tax: Unrealized long-term investment gains.......... -- 2,816 -- 10,045 ------- ------- ------- ------- Total comprehensive income................ $ 693 $ 6,131 $ 194 $16,297 ======= ======= ======= ======= See accompanying notes to consolidated financial statements 4 5 BROADVISION, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) SIX MONTHS ENDED JUNE 30, ------------------- 1998 1999 ------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................................ $ 194 $ 6,252 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.......................... 1,316 1,921 Amortization of deferred compensation.................. 180 166 Provision for doubtful accounts and returns............ 283 230 Revenue resulting from non-monetary transactions....... (1,031) -- Amortization of prepaid royalties...................... -- 167 Changes in operating assets and liabilities: Accounts receivable.................................... (541) (6,348) Prepaid expenses and other............................. (514) (246) Accounts payable and accrued expenses.................. 348 3,472 Unearned revenue and deferred maintenance.............. 419 5,388 ------- -------- Net cash provided by operating activities......... 654 11,002 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment........................ (2,074) (3,865) Purchase of long-term investments......................... (1,500) -- Increase in other assets.................................. (139) (90) Purchase of short-term investments........................ -- (18,823) Maturity of short-term investments........................ 796 -- ------- -------- Net cash used for investing activities............ (2,917) (22,778) CASH FLOWS FROM FINANCING ACTIVITIES: Net change in restricted cash............................. 1,400 -- Proceeds from (repayments of) borrowings, net............. 1,095 (324) Payments on capital lease obligations..................... (425) (416) Proceeds from issuance of common stock, net............... 55,455 4,373 ------- -------- Net cash provided by financing activities......... 57,525 3,633 Net increase (decrease) in cash and cash equivalents........ 55,262 (8,143) Cash and cash equivalents, beginning of period.............. 8,277 61,878 ------- -------- Cash and cash equivalents, end of period.................... $63,539 $ 53,735 ======= ======== SUPPLEMENTAL CASH FLOW DISCLOSURES: Cash paid for interest.................................... $ 172 $ 177 Cash paid for income taxes................................ 84 431 Investments acquired through non-monetary transactions.... 1,250 -- Unearned revenue and deferred maintenance from non-monetary transactions.............................. 219 -- Equipment acquired under capital leases................... 215 -- Deferred compensation forfeited due to voluntary terminations........................................... 693 -- Net unrealized gain on long-term investments.............. -- 10,045 Contributed capital -- income tax benefit from stock option exercises....................................... -- 6,167 See accompanying notes to consolidated financial statements. 5 6 BROADVISION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS -- BroadVision, Inc. (the "Company") develops, markets and supports application software solutions for one-to-one relationship management across the extended enterprise. These solutions enable businesses to use the Internet as a platform to conduct electronic commerce, offer online customer self-service and support, deliver targeted information and provide online financial services. Each of these capabilities can be provided to all constituents of the extended enterprise, including: customers, suppliers, partners, distributors and employees. The BroadVision One-to-One product suite allows businesses to tailor Web site content to the needs and interests of individual users by personalizing each visit on a real-time basis. The Company's applications interactively capture Web site visitor profile information, organize the enterprise's content, target that content to each visitor based on easily constructed business rules and execute transactions. BASIS OF PRESENTATION -- The accompanying consolidated financial statements include the accounts of BroadVision and its wholly owned subsidiaries. They have been prepared in accordance with the established guidelines for interim financial information as provided by the instructions to Form 10-Q and Article 10 of Regulation S-X. All significant intercompany transactions have been eliminated in consolidation. The financial results and related information as of June 30, 1999 and for the three and six months ended June 30, 1998 and 1999 are unaudited. The balance sheet at December 31, 1998, has been derived from the audited consolidated financial statements at that date but does not necessarily reflect all of the informational disclosures previously reported in accordance with Generally Accepted Accounting Principles. In the Company's opinion, the consolidated financial statements presented herein include all necessary adjustments, consisting of normal recurring adjustments, to fairly state the Company's financial position, results of operations, and cash flows for the periods indicated. The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included with the Company's Form 10-K and other documents that have been filed with the Securities and Exchange Commission. The results of the Company's operations for the interim periods presented are not necessarily indicative of operating results for the full fiscal year or any future interim periods. NET LOSS PER SHARE -- Statement of Financial Accounting Standard ("SFAS") No. 128, Earnings Per Share, requires the presentation of basic and diluted earnings per share. Earnings per share is calculated by dividing net income applicable to common stockholders by a weighted average number of shares outstanding for the period. Basic earnings per share are determined solely on common shares; whereas, diluted earnings per share includes common equivalent shares, as determined under the treasury stock method. 6 7 BROADVISION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following table sets forth basic and diluted earnings per share computational data for the periods presented (in thousands, except per share amounts): THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, ----------------- ----------------- 1998 1999 1998 1999 ------ ------- ------ ------- Net income............................................ $ 693 $ 3,315 $ 194 $ 6,252 ====== ======= ====== ======= Weighted average common shares outstanding utilized for basic earnings per share........................ 24,011 25,123 22,244 24,886 Weighted average common equivalent shares outstanding: Employee common stock options....................... 2,700 2,766 2,502 3,030 Common stock warrants............................... 60 30 73 30 ------ ------- ------ ------- Total weighted average common and common equivalent shares outstanding utilized for diluted earnings per share..................... 26,771 28,154 24,819 27,946 ====== ======= ====== ======= Basic earnings per share.............................. $ 0.03 $ 0.13 $ 0.01 $ 0.25 ====== ======= ====== ======= Diluted earnings per share............................ $ 0.03 $ 0.12 $ 0.01 $ 0.22 ====== ======= ====== ======= NEW ACCOUNTING PRONOUNCEMENTS -- The Financial Accounting Standards Board ("FASB") issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 137. SFAS No. 133 addresses the accounting for derivative instruments, including certain derivative instruments embedded in other contracts. Under SFAS No. 133, entities are required to record and carry all derivative instruments at fair value as either assets or liabilities. The accounting for changes in fair value (i.e., gains or losses) of a derivative instrument depends on whether it qualifies as part of a hedging relationship, has been so designated as such and the underlying reason for holding it. The Company must adopt SFAS No. 133, as amended, by January 1, 2001, and does not expect such adoption will have any material effect on its financial statements. In December 1998, the Accounting Standards Executive Committee ("AcSEC") of the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 98-9 Software Revenue Recognition, With Respect to Certain Transactions, which requires recognition of revenue using the "residual method" in a multiple-element arrangement when fair value does not exist for one or more of the delivered elements in the arrangement. Under the "residual method", the total fair value of the undelivered elements is deferred and subsequently recognized in accordance with SOP 97-2. The Company will adopt SOP 98-9 on January 1, 2000. The Company does not expect a material change to its revenue accounting as a result of the provisions of SOP 98-9. NOTE 2. SELECTIVE BALANCE SHEET DETAIL Property and equipment consisted of the following (in thousands): DECEMBER 31, JUNE 30, 1998 1999 ------------ -------- Furniture and fixtures................................ $ 1,001 $ 1,164 Computers and software................................ 8,662 12,263 Leasehold improvements................................ 3,725 3,826 ------- ------- 13,388 17,253 Less accumulated depreciation and amortization...... (5,354) (7,275) ------- ------- $ 8,034 $ 9,978 ======= ======= 7 8 BROADVISION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Accrued expenses consisted of the following (in thousands): DECEMBER 31, JUNE 30, 1998 1999 ------------ -------- Employee benefits..................................... $ 678 $ 1,008 Commissions and bonuses............................... 2,013 2,526 Taxes payable......................................... 785 1,173 Royalties payable..................................... 138 1,009 Other................................................. 1,319 1,596 ------- ------- $ 4,933 $ 7,312 ======= ======= NOTE 3. COMMERCIAL CREDIT FACILITIES The Company has various credit facilities with a commercial lender. The credit facilities include a note payable ($3.1 million as of June 30, 1999), a term debt credit facility that provides for up to $3.0 million in total borrowings, and a revolving line of credit that provides for up to $5.0 million of additional borrowings based on eligible accounts receivable. As of June 30, 1999, the Company had no outstanding borrowings under its term debt credit facility and total outstanding commitments of $2.8 million in the form of standby letters of credit under its revolving line of credit. The Company's credit facilities include covenants that impose certain restrictions on the payment of dividends and other distributions and require the Company to maintain monthly financial covenants, including a minimum quick ratio, tangible net worth ratio and minimum cash reserves. The minimum cash reserves covenant is replaced with a "minimum debt service coverage ratio" upon six consecutive quarters of profitability. Borrowings are collateralized by a security interest in substantially all of the Company's owned assets. As of June 30, 1999, the Company was in compliance with its commercial credit facility covenants. NOTE 4. GEOGRAPHIC, SEGMENT AND SIGNIFICANT CUSTOMER INFORMATION The Company adopted the provisions of SFAS No. 131, Disclosure about Segments of an Enterprise and Related Information, during 1998. SFAS No. 131 establishes standards for the reporting by public business enterprises of information about operating segments, products and services, geographic areas, and major customers. The methodology for determining what information is reported is based on the organization of operating segments and the related information that the Chief Operating Decision Maker ("CODM") uses for operational decisions and financial performance assessments. The Company sells its products and provides services worldwide through a direct sales force, independent distributors, value-added resellers, and system integrators. It currently operates in three primary regions, the Americas, which includes North and South America; Europe, which includes Eastern and Western Europe and the Middle East; and Asia/Pacific, which includes the Pacific Rim and the Far East. The Company's CODM is considered to be the Company's Chief Executive Officer ("CEO"). The CEO reviews financial information presented on a consolidated basis accompanied by disaggregated information for products and services and revenues by geographic region for purposes of making operating decisions and assessing financial performance. 8 9 BROADVISION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Disaggregated financial information regarding the Company's products and services and revenues by geographic region is as follows (in thousands): THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------ ------------------ 1998 1999 1998 1999 ------- ------- ------- ------- Software licenses: One-To-One Enterprise............................. $ 4,384 $ 1,179 $ 8,354 $ 4,586 One-To-One WebApps................................ 3,634 14,305 6,943 23,681 Services............................................ 2,257 5,332 4,269 9,063 Maintenance......................................... 1,110 2,660 1,898 4,610 ------- ------- ------- ------- Total Revenues............................ $11,385 $23,476 $21,464 $41,940 ======= ======= ======= ======= Revenues: Americas.......................................... $ 5,753 $18,405 $11,815 $29,746 Europe............................................ 4,025 3,675 6,804 7,637 Asia/Pacific...................................... 1,607 1,396 2,845 4,557 ------- ------- ------- ------- Total Company............................. $11,385 $23,476 $21,464 $41,940 ======= ======= ======= ======= DECEMBER 31, JUNE 30, 1998 1999 ------------ -------- Identifiable assets: Americas.................................................. $ 99,343 $134,748 Europe.................................................... 1,754 1,880 Asia/Pacific.............................................. 465 570 -------- -------- Total Company..................................... $101,562 $137,198 ======== ======== During the three and six months ended June 30, 1998 and the three months ended June 30, 1999, no single customer accounted for more than 10% of the Company's total revenues. During the six months ended June 30, 1999, one customer accounted for 11% of the Company's total revenues. 9 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Except for historical information contained or incorporated by reference in this section, the following discussion contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ significantly from those discussed herein. Factors that could cause or contribute to these differences include, but are not limited to, those discussed herein with this quarterly report on Form 10-Q, the Company's annual report on Form 10-K, and other documents filed with the Securities and Exchange Commission. Any forward-looking statements speak only as of the date such statements are made. OVERVIEW The Company develops, markets and supports application software solutions for one-to-one relationship management across the extended enterprise. These solutions enable businesses to use the Internet as a platform to conduct electronic commerce, offer online customer self-service and support, deliver targeted information and provide online financial services. Each of these capabilities can be provided to all constituents of the extended enterprise, including: customers, suppliers, partners, distributors and employees. The BroadVision One-To-One product suite allows businesses to tailor their Web site content to the needs and interests of individual users by personalizing each visit on a real-time basis. The Company's applications interactively capture Web site visitor profile information, organize the enterprise's content, target that content to each visitor based on easily constructed business rules, and execute transactions. The Company believes the benefits of these applications include enhanced customer satisfaction and loyalty, increased business volume, greater brand awareness, reduced costs to service customers and to execute transactions, and enhanced employee productivity. The Company sells its products and services worldwide through a direct sales force, independent distributors, resellers and system integrators. It also has a global network of strategic business relationships with key industry platform and Web developer partners. The Company also engages in strategic business alliances to assist in the marketing, selling and developing of customer applications. The Company also places a strategic emphasis on developing technology alliances in order to ensure that its products are based on industry standards and that it is positioned to take advantage of current and emerging technologies. The benefits of this approach include enabling the Company to focus on its core competencies while reducing time to market and simplifying the task of designing and developing applications for itself and its customers. The Company's revenues are derived from software license fees and fees charged for its services. Software license revenues are recognized when a non-cancelable license agreement has been signed and the customer acknowledges an unconditional obligation to pay, the software product has been delivered, there are no uncertainties surrounding product acceptance, the fees are fixed and determinable and collection is considered probable. Software license revenues, in general, are recognized upon consummation of the sale. The Company's professional services include its Strategic Services Group, Interactive Services Group, Content and Creative Services Group, Education Services Group and Technical Support Group. Maintenance fees relating to technical support and upgrades are recognized ratably over the contracted period. Consulting-related services revenues are typically recognized as services are performed. Cost of license revenues includes royalties payable to third parties for software that is either embedded in, or bundled and sold with, the Company's products; commissioned agent fees paid to distributors; and the costs of product media, duplication, packaging and other associated manufacturing costs. Cost of services consists primarily of employee-related costs, third-party consultant fees incurred on consulting projects, post-contract customer support and instructional training services. Research and development expenses consist primarily of salaries, employee-related benefit costs and consulting fees incurred in association with the development of the Company's products. Costs incurred for the research and development of new software products are expensed as incurred until such time that technological feasibility, in the form of a working model, is established, at which point these costs are capitalized subject to recoverability. Costs incurred subsequent to the establishment of a working model but prior to general release have not been significant. To date, the Company has not capitalized any software development costs. Sales and marketing expenses consist primarily of salaries, employee-related benefit costs, 10 11 commissions and other incentive compensation, travel and entertainment and marketing-related expenditures such as collateral materials, trade shows, public relations and creative services. General and administrative expenses consist primarily of salaries, employee-related benefit costs and professional service fees. RESULTS OF OPERATIONS REVENUES For the three months ended June 30, 1999, total revenues increased 106% to $23.5 million as compared to $11.4 million for the three months ended June 30, 1998. For the six months ended June 30, 1999, total revenues increased 95% to $41.9 million as compared to $21.5 million for the six months ended June 30, 1998. A summary of our software and services revenues by geographic region is as follows: SOFTWARE % SERVICES % TOTAL % -------- --- -------- --- ------- --- (DOLLARS IN THOUSANDS) Three Months Ended June 30, 1998 Americas............................... $ 3,391 42% $ 2,362 70% $ 5,753 51% Europe................................. 3,478 43 547 16 4,025 35 Asia/Pacific........................... 1,149 15 458 14 1,607 14 ------- --- ------- --- ------- --- Total.......................... $ 8,018 100% $ 3,367 100% $11,385 100% ======= === ======= === ======= === Three Months Ended June 30, 1999 Americas............................... $12,163 79% $ 6,242 78% $18,405 78% Europe................................. 2,362 15 1,313 16 3,675 16 Asia/Pacific........................... 959 6 437 6 1,396 6 ------- --- ------- --- ------- --- Total.......................... $15,484 100% $ 7,992 100% $23,476 100% ======= === ======= === ======= === Six Months Ended June 30, 1998 Americas............................... $ 7,501 49% $ 4,314 70% $11,815 55% Europe................................. 5,731 37 1,073 17 6,804 32 Asia/Pacific........................... 2,065 14 780 13 2,845 13 ------- --- ------- --- ------- --- Total.......................... $15,297 100% $ 6,167 100% $21,464 100% ======= === ======= === ======= === Six Months Ended June 30, 1999 Americas............................... $19,619 69% $10,127 74% $29,746 71% Europe................................. 4,830 17 2,807 21 7,637 18 Asia/Pacific........................... 3,818 14 739 5 4,557 11 ------- --- ------- --- ------- --- Total.......................... $28,267 100% $13,673 100% $41,940 100% ======= === ======= === ======= === For the three months ended June 30, 1999, software license revenues increased 93% to $15.5 million as compared to $8.0 million for the three months ended June 30, 1998. For the six months ended June 30, 1999, software license revenues increased 85% to $28.3 million as compared to $15.3 million for the six months ended June 30, 1998. The increase in software license revenues is attributable to continued strong market acceptance for the Company's core competencies and technology; its strategic focus of leveraging partner relationships; its expanding range of products and product functionality; and, to a lesser extent, product pricing increases that were effective October 1, 1998. As a result, the Company is attracting new customers and its existing customer base is generating additional revenues through increased use of already-developed Web sites and the introduction of new Web sites within the same organization. During the three months ended June 30, 1999, the Company licensed approximately 49 new end-user customers and 63 new partners, which compares with approximately 17 new end-users and 24 new partners during the three months ended June 30, 1998. During the six months ended June 30, 1999, the Company licensed approximately 82 new end-user customers and 24 new partners, which compares with approximately 45 new end-user customers and 11 new partners during the six months ended June 30, 1998. As of June 30, 1999, the Company licensed over 11 12 280 end-user customers and 95 partners, which compares with over 195 end-user customers and 75 partners as of December 31, 1998 and 150 end-user customers and 55 partners as of June 30, 1998. For the three months ended June 30, 1999, total services revenues increased 137% to $8.0 million as compared to $3.4 million for the three months ended June 30, 1998. For the six months ended June 30, 1999, total services revenues increased 122% to $13.7 million as compared to $6.2 million for the six months ended June 30, 1998. The increase in professional services revenue is a result of the Company's increased business volumes and a higher level of customer support revenues derived from a larger installed customer base. The Company continues to add internal headcount within its professional services organizations to support the higher business volumes and has increased its emphasis on leveraging its integrator partner relationships. Increasingly sophisticated and customer-specific use of the Company's products has recently caused accelerated demand for its professional services. However, the Company's strategy of developing business alliances with system integrators and other third-party professional services organizations to support its products may in the future result in a decline in professional services revenues as a percentage of total revenues. Maintenance revenues continue to increase and were $4.6 million for the six months ended June 30, 1999 as compared to $1.9 million for the six months ended June 30, 1998. COST OF REVENUES In the table below, the percentage of cost of license revenues is calculated based on total software license revenues, the percentage of cost of services revenues is calculated based on total services revenues and the percentage of total cost of revenues is calculated based on total revenues. THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ---------------------------- ---------------------------- 1998 % 1999 % 1998 % 1999 % ------ --- ------ --- ------ --- ------ --- (IN THOUSANDS) Cost of license revenues............ $ 213 3% $1,037 7% $ 400 3% $1,784 6% Cost of services revenues........... 2,092 62 4,624 58 3,711 60 7,945 58 ------ --- ------ --- ------ --- ------ --- Total cost of revenues.............. $2,305 20% $5,661 24% $4,111 19% $9,729 23% ====== === ====== === ====== === ====== === Cost of software licenses increased 387% during the three months ended June 30, 1999 to $1.0 million as compared to $213,000 for the three months ended June 30, 1998. Cost of software licenses increased 346% during the six months ended June 30, 1999 to $1.8 million as compared to $400,000 for the six months ended June 30, 1998. The increase in cost of software licenses, in both absolute dollar and relative percentage terms, is principally a result of royalties paid to third-party vendors for software used in conjunction with and sold with the Company's products. The higher third-party software sales add incremental revenues to the Company's own product sales but carry a higher cost of license factor in relation to the Company's own product sales. Royalty costs for third-party software embedded in the Company's product decreased in relative percentage terms as a result of the Company renegotiating a previously existing percentage based royalty arrangement into a prepaid fixed fee royalty for the period through 2001. Cost of services increased 121% during the three months ended June 30, 1999 to $4.6 million as compared to $2.1 million for the three months ended June 30, 1998. Cost of services increased 114% during the six months ended June 30, 1999 to $7.9 million as compared to $3.7 million for the six months ended June 30, 1998. The increase in cost of services in absolute dollar terms is a result of expanded business volumes as evidenced by increased services revenues. Overall costs increased as a result of additions to the Company's professional services staff and the employment of outside consultants to meet short-term consulting demands. 12 13 OPERATING EXPENSES A summary of our operating expenses is set forth in the following table. The percentage of expenses is calculated based on total revenues. THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ------------------------------ ------------------------------ 1998 % 1999 % 1998 % 1999 % ------- --- ------- --- ------- --- ------- --- (DOLLARS IN THOUSANDS) Research and development..... $ 2,049 18% $ 3,268 14% $ 4,083 19% $ 6,169 15% Sales and marketing.......... 6,243 55 10,019 43 12,104 56 17,684 42 General and administrative... 760 7 1,611 6 1,585 8 2,882 7 ------- --- ------- --- ------- --- ------- --- Total operating expenses..... $ 9,052 80% $14,898 63% $17,772 83% $26,735 64% ======= === ======= === ======= === ======= === Research and development expenses increased 59% during the three months ended June 30, 1999 to $3.3 million as compared to $2.0 million for the three months ended June 30, 1998. Research and development expenses increased 51% during the six months ended June 30, 1999 to $6.2 as compared to $4.1 million for the comparable period the six months ended June 30, 1998. The increase in research and development expenses in absolute dollar terms is primarily attributable to personnel costs for added headcount within those operations involved in the enhancement of existing applications and the development of our next generation of products. Research and development expenses, as a percentage of total revenues, decreased because revenues have increased at a higher rate relative to expenses. Sales and marketing expenses increased 60% during the three months ended June 30, 1999 to $10.0 million as compared to $6.2 million for the three months ended June 30, 1998. Sales and marketing expenses increased 46% during the six months ended June 30, 1999 to $17.7 million as compared to $12.1 million for the six months ended June 30, 1998. The increases in sales and marketing expenses in absolute dollar terms reflect the cost of hiring additional sales and marketing personnel, increased commission payments resulting from higher revenues, developing and expanding sales distribution channels, and expanding promotional activities and marketing-related programs. Sales and marketing expenses, as a percentage of total revenues, decreased because revenues have increased at a higher rate relative to expenses. General and administrative expenses increased 112% during the three months ended June 30, 1999 to $1.6 million as compared to $760,000 for the three months ended June 30, 1998. General and administrative expenses increased 82% during the six months ended June 30, 1999 to $2.9 million as compared to $1.6 million for the six months ended June 30, 1998. The increase in general and administrative expenses in absolute dollar terms is attributable to additional administrative and management personnel, higher professional services fees and additional infrastructure to support the expansion of our operations. General and administrative expenses, as a percentage of total revenues, decreased because revenues have increased at a higher rate relative to expenses. INCOME TAXES During the six month period ended June 30, 1999, we recognized tax expense of $334,000 at an effective tax rate of approximately 5%. Due to our continuing trend of positive earnings, we reversed a portion of our valuation allowance against the previously deferred tax assets for which realization is considered more likely than not. LIQUIDITY AND CAPITAL RESOURCES DECEMBER 31, JUNE 30, 1998 1999 ------------ -------- (IN THOUSANDS) Cash, cash equivalents and liquid short-term investments......................................... $61,878 $72,558 ======= ======= Working capital....................................... $64,320 $72,651 ======= ======= Working capital ratio................................. 4.9:1 3.9:1 ======= ======= 13 14 At June 30, 1999, the Company had $72.6 million of cash, cash equivalents and liquid short-term investments, which represents an increase of $10.7 million as compared to December 31, 1998. The Company currently has no significant capital commitments other than obligations under operating leases and $3.1 million of outstanding term debt under its existing credit facility with a commercial bank. Cash provided by operating activities was $11.0 million and $650,000 for the six months ended June 30, 1999 and 1998, respectively. Cash used for investing activities was $22.8 million and $2.9 million for the six months ended June 30, 1999 and 1998, respectively, and was primarily for capital expenditures and purchase of short-term investments. Cash provided by financing activities was $3.6 million and $57.5 million for the six months ended June 30, 1999 and 1998, respectively, and consists primarily of proceeds from the issuance of common stock. The Company believes that its available cash and short-term investment resources, cash generated from operations and amounts available under its commercial credit facilities will be sufficient to meet its expected working capital and capital expenditure requirements for at least the next 12 months. This estimate is a forward-looking statement that involves risks and uncertainties, and actual results may vary as a result of a number of factors, including those discussed below and elsewhere herein. The Company may need to raise additional funds in order to support more rapid expansion, develop new or enhanced services, respond to competitive pressures, acquire complementary businesses or technologies, or respond to unanticipated requirements. The Company may seek to raise additional funds through private or public sales of securities, strategic relationships, bank debt, financing under leasing arrangements, or otherwise. If additional funds are raised through the issuance of equity securities, the percentage ownership of the stockholders of the Company will be reduced, stockholders may experience additional dilution, or such equity securities may have rights, preferences, or privileges senior to those of the holders of the Company's Common Stock. There can be no assurance that additional financing will be available on acceptable terms, if at all. If adequate funds are not available or are not available on acceptable terms, the Company may be unable to develop or enhance its products, take advantage of future opportunities, or respond to competitive pressures or unanticipated requirements, which could have a material adverse effect on the Company's business, financial condition, and operating results. FACTORS AFFECTING QUARTERLY OPERATING RESULTS The Company expects to experience significant fluctuations in quarterly operating results that may be caused by many factors including, but not limited to, those discussed below and herein with this quarterly report on Form 10-Q, as contained in the Company's annual report on Form 10-K under the caption "Risk Factors" and elsewhere therein, and as disclosed in other documents filed with the Securities and Exchange Commission. Significant fluctuations in future quarterly operating results may be caused by many factors including, among others, the timing of introductions or enhancements of products and services by the Company or its competitors, the length of the Company's sales cycle, market acceptance of new products, the pace of development of the market for online commerce, the mix of the Company's products sold, the size and timing of significant orders and the timing of customer production or deployment, demand for the Company's products, changes in pricing policies by the Company or its competitors, changes in the Company's sales incentive plans, budgeting cycles of its customers, customer order deferrals in anticipation of new products or enhancements by the Company or its competitors, nonrenewal of maintenance agreements, product life cycles, software defects and other product quality problems, changes in strategy, changes in key personnel, the extent of international expansion, seasonal trends, the mix of distribution channels through which the Company's products are sold, the mix of international and domestic sales, changes in the level of operating expenses to support projected growth, and general economic conditions. The Company anticipates that a significant portion of its revenues will be derived from a limited number of orders, and the timing of receipt and fulfillment of any such orders is expected to cause material fluctuations in the Company's operating results, particularly on a quarterly basis. As with many software companies, the Company anticipates that it will make the major portion of each quarter's deliveries near the end of each quarter and, as a result, short delays in delivery of products at the end of a quarter could adversely affect operating results for that quarter. In addition, the Company intends to continue to increase its personnel, including its domestic and international direct sales 14 15 force. The timing of such expansion and the rate at which new sales people become productive could also cause material fluctuations in the Company's quarterly operating results. Due to the foregoing factors, quarterly revenues and operating results are difficult to forecast, and the Company believes that period-to-period comparisons of its operating results will not necessarily be meaningful and should not be relied upon as any indication of future performance. It is likely that the Company's future quarterly operating results from time to time will not meet the expectations of market analysts or investors, which may have an adverse effect on the price of the Company's Common Stock. The Company anticipates that its operating expenses will continue to be substantial in relation to total revenues as it continues the development of its technology, increases its sales and marketing activities, and creates and expands its distribution channels. There can be no assurance that the Company will be able to sustain its revenue growth or profitability. The Company's prospects must also be evaluated in light of the risks and uncertainties frequently encountered by a company in its early stages of development. Some of these risks and uncertainties relate to the new and rapidly evolving nature of the markets in which the Company operates. These related market risks include, among other things, the early stage of the developing online commerce market, the dependence of online commerce on the development of the Internet and its related infrastructure, the uncertainty pertaining to widespread adoption of online commerce, and the risk of government regulation of the Internet. Other risks and uncertainties facing the Company relate to the Company's ability to, among other things, successfully implement its marketing strategies, respond to competitive developments, continue to develop and upgrade its products and technologies more rapidly than its competitors, and commercialize its products and services by incorporating these enhanced technologies. There can be no assurance that the Company will succeed in addressing any or all of these risks. A more complete description of these and other risks relating to the Company's business is set forth in the Company's annual report on Form 10-K under the caption "Risk Factors" and elsewhere therein and other documents filed with the Securities and Exchange Commission. YEAR 2000 COMPLIANCE Background and Risks -- Many currently installed computer systems and software and devices with imbedded technology are coded to two digits for time sensitive dating purposes. Beginning with the year 2000, these date code fields will need to be four digit functional in order to distinguish between 21st century dates and 20th century dates. For example, computer programs that have date sensitive software may incorrectly recognize a date using "00" as the year 1900 rather than the year 2000. As a result, computer systems, software products and devices with imbedded technology used by many companies may need to be upgraded to comply with such "Year 2000" requirements. This type of Year 2000 error could potentially cause system failures or miscalculations that could disrupt operations, including among other things a temporary inability to process transactions, issue invoices or engage in similar normal business activities. Although the Company's products are Year 2000 compliant, the Company believes that the purchasing patterns of customers could potentially be affected by Year 2000 issues as companies expend significant resources to correct or patch their current software systems for Year 2000 compliance. These expenditures may result in reduced funds available to purchase software products such as those offered by the Company, which could have a material adverse effect on the Company's business, financial condition, and operating results. In addition, even if the Company's products are Year 2000 compliant, other systems or software used by the Company's customers may not be Year 2000 compliant. The failure of such noncompliant third-party software or systems could affect the perceived performance of the Company's products, which could have a material adverse effect on the Company's business, financial condition, and operating results. State of Readiness -- The Company uses various financial and managerial information systems within its operations in the United States, Europe and Asia, which the Company believes to be or will be Year 2000 compliant by the end of 1999. As part of its normal course of business, the Company analyzes its information system requirements in relation to its business operating goals and strategic objectives and is implementing new systems during 1999 that will be Year 2000 compliant. The Company has also analyzed its other systems and its material suppliers and vendors for Year 2000 issues which it believes to be or will be Year 2000 15 16 compliant by the end of 1999. Such other systems include non-information technology systems and services utilized by the Company in its business operations, such as power, telecommunications, security and general facilities. Costs for Year 2000 Compliance -- Costs that may be incurred by the Company pertaining to Year 2000 compliance issues include identification, assessment, remediation and testing efforts, as well as potential costs to be incurred by the Company with respect to Year 2000 issues of third parties. To date, the costs incurred by the Company directly related to Year 2000 issues have been minimal, even in cases where non-compliant information technology systems were redeployed or replaced. Contingency Plans -- The Company has a contingency plan for handling Year 2000 problems that are not detected and corrected prior to their occurrence and continues to assess its Year 2000 exposure areas in order to determine what additional steps, beyond those identified by the Company's internal review to date, are advisable. The Company's contingency plan includes adequate internal resources that would be available to analyze, assess and direct remediation efforts to address potential issues, back up systems that don't rely on computers, and alternative sources of supply. The Company presently believes that the Year 2000 issue will not pose significant operational problems for the Company. However, any failure of the Company to adequately address any unforeseen Year 2000 issue could adversely affect the Company's business, financial condition, and results of operations. In addition, if all of the Year 2000 issues are not properly identified, or adequate assessment, remediation and testing are not effected timely with respect to Year 2000 problems that are identified, there can be no assurance that the Year 2000 issue would not have a material adverse impact on the Company's results of operations or adversely affect the Company's relationships with customers, vendors, partners or others. Additionally, there can be no assurance that the Year 2000 issues of other entities will not have a material adverse impact on the Company's systems or results of operations. 16 17 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's market risk exposure for interest rate changes relates primarily to its investment portfolio. The Company had no derivative financial instruments as of June 30, 1999 or December 31, 1998. The Company places its investment portfolio in high quality instruments and the amount of credit exposure to any one issue, issuer and type of instrument is limited. The Company does not expect any material loss with respect to its investment portfolio. The Company's investment portfolio holdings as of June 30, 1999 were analyzed to determine their sensitivity to interest rate changes. As part of our sensitivity analysis, we assumed an adverse change in interest rates of between 50 and 250 basis points and the expected effect was not material. The Company is also subject to market risk relating to equity price changes concerning its long-term investment holdings, which consist of marketable and non-marketable equity securities. As of June 30, 1999, the Company's long-term investment holdings had a carrying value of $28.3 million, a historical cost of value of $8.3 million and associated unrealized gains of $19.9 million. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On December 11, 1998, BroadVision filed a lawsuit against Art Technology Group, Inc. ("ATG") in the Northern District of California. The complaint alleges that ATG is infringing BroadVision's U.S. Patent No. 5,710,887 and seeks injunctive relief and unspecified damages. On February 3, 1999, ATG filed an answer and counterclaim against BroadVision in which ATG seeks judgment for non-infringement and invalidity of the patent. Trial is set for October 16, 2000. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Not applicable ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The Annual Meeting of Stockholders of the Company was held on May 12, 1999. (b) Pehong Chen, David L. Anderson, Yogen K Dalal, Koh Boon Hwee, Todd A. Garrett and Carl Pascarella were elected as directors. (c) The matters voted upon and the voting of the stockholders with respect thereto are as follows: (i) The election of directors: FOR WITHHELD ---------- -------- Pehong Chen............................................. 20,816,729 146,170 David L. Anderson....................................... 20,817,064 145,835 Yogen K Dalal........................................... 20,817,034 145,865 Koh Boon Hwee........................................... 20,817,079 145,820 Todd A. Garrett......................................... 20,817,064 145,835 Carl Pascarella......................................... 20,817,064 145,835 (ii) To approve the Company's Equity Incentive Plan, as amended, to increase the aggregate number of shares of Common Stock authorized for issuance under such plan by 900,000: For: 14,878,751 Against: 6,069,634 Abstain: 14,514 Broker Non-Vote 0 17 18 (iii) To approve the Company's Employee Stock Purchase Plan, as amended, to increase the aggregate number of shares of Common Stock authorized for issuance under such plan by 300,000: For: 20,742,608 Against: 203,236 Abstain: 17,055 Broker Non-Vote 0 (iv) To ratify the selection of KPMG LLP as independent auditors of the Company for the fiscal year ending December 31, 1999: For: 20,944,727 Against: 10,467 Abstain: 7,505 Not Voted 200 ITEM 5. OTHER INFORMATION Not applicable ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits ITEM DESCRIPTION ---- ----------- 27 Financial Data Schedule SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BROADVISION, INC Date: September 3, 1999 /s/ PEHONG CHEN -------------------------------------------------------- Pehong Chen President and Chief Executive Officer (Principal Executive Officer) Date: September 3, 1999 /s/ RANDALL C. BOLTEN -------------------------------------------------------- Randall C. Bolten Vice President, Operations and Chief Financial Officer (Principal Financial and Accounting Officer) 18