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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - Q
(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, 1998
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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
585 Broadway, Redwood City, California 94063
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(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 days. YES _X_ NO ___
As of July 31, 1998 there were 24,240,320 shares of the Registrant's
Common Stock issued and outstanding.
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BROADVISION, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 30, 1998
TABLE OF CONTENTS
Page No.
--------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations -
Three and six months ended June 30, 1998 and 1997 3
Consolidated Balance Sheets -
June 30, 1998 and December 31, 1997 4
Consolidated Statements of Cash Flows -
Six months ended June 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosure About Market Risk 15
PART II OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 16
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BROADVISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
-------- -------- -------- --------
Revenues:
Software licenses $ 8,018 $ 4,098 $ 15,297 $ 7,246
Services 3,367 1,929 6,167 4,072
-------- -------- -------- --------
Total Revenues 11,385 6,027 21,464 11,318
Cost of revenues:
Cost of software licenses 213 425 400 639
Cost of services 2,092 1,001 3,711 2,144
-------- -------- -------- --------
Total cost of revenues 2,305 1,426 4,111 2,783
Gross profit 9,080 4,601 17,353 8,535
Operating expenses:
Research and development 2,049 1,802 4,083 3,482
Sales and marketing 6,243 4,257 12,104 8,461
General and administrative 760 700 1,585 1,446
-------- -------- -------- --------
Total operating expenses 9,052 6,759 17,772 13,389
Operating income (loss) 28 (2,158) (419) (4,854)
Interest and other income 797 187 915 408
Interest and other expense (132) (138) (302) (150)
-------- -------- -------- --------
Net income (loss) $ 693 $ (2,109) $ 194 $ (4,596)
======== ======== ======== ========
Basic and diluted earnings (loss) per share $ 0.03 $ (0.10) $ 0.01 $ (0.23)
======== ======== ======== ========
Shares used in computing
basic earnings (loss) per share 24,011 20,219 22,244 20,111
======== ======== ======== ========
Shares used in computing
diluted earnings (loss) per share 26,771 20,219 24,819 20,111
======== ======== ======== ========
<FN>
See Accompanying Notes to Consolidated Financial Statements
</FN>
3
BROADVISION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
June 30, 1998 December 31, 1997
-------- --------
ASSETS
Cash and cash equivalents $ 63,539 $ 8,277
Restricted cash -- 1,400
Short-term investments, restricted -- 796
Accounts receivable, less allowance for doubtful accounts and returns
of $532 and $671, for 1998 and 1997, respectively 9,844 9,586
Prepaids and other current assets 1,487 566
-------- --------
Total current assets 74,870 20,625
Property and equipment, net 7,440 6,467
Long-term investment, at cost 1,500 --
Other assets 1,222 250
-------- --------
Total assets $ 85,032 $ 27,342
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 4,379 $ 4,031
Unearned revenue 826 1,335
Deferred maintenance 3,699 2,552
Current portion of capital lease obligations 836 773
Current portion of long-term debt 548 449
-------- --------
Total current liabilities 10,288 9,140
Long-term liabilities 3,794 3,081
-------- --------
Total liabilities 14,082 12,221
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; 24,148 and
20,343 shares issued and outstanding for 1998 and 1997, respectively
95,130 40,368
Deferred compensation (732) (1,605)
Accumulated deficit (23,448) (23,642)
-------- --------
Total stockholders' equity 70,950 15,121
-------- --------
Total liabilities and stockholders' equity $ 85,032 $ 27,342
======== ========
<FN>
See Accompanying Notes to Consolidated Financial Statements
</FN>
4
BROADVISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended June 30,
1998 1997
-------- --------
Cash flows from operating activities:
Net income (loss) $ 194 $ (4,596)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization 1,316 712
Amortization of deferred compensation 180 227
Allowance for doubtful accounts and returns 283 275
Revenue recognized on noncash transaction (1,031) --
Changes in operating assets and liabilities:
Accounts receivable (541) (1,856)
Prepaids and other current assets (504) (328)
Accounts payable and accrued expenses 348 (409)
Unearned revenue and deferred maintenance 419 (500)
Other liabilities (10) (4)
-------- --------
Net cash provided by (used for) operating activities 654 (6,479)
Cash flows from investing activities:
Additions to property and equipment (2,074) (1,073)
Purchase of long-term investment (1,500) --
Other assets (139) (67)
Purchase of short-term investments -- (1,532)
Maturity of short-term investments 796 2,850
-------- --------
Net cash provided by (used for) investing activities (2,917) 178
Cash flows from financing activities:
Net change in restricted cash 1,400 --
Proceeds from issuance of common stock 55,455 488
Proceeds from borrowings, net 1,095 --
Capital lease payments (425) (200)
-------- --------
Net cash provided by financing activities 57,525 288
Net increase (decrease) in cash and cash equivalents 55,262 (6,013)
Cash and cash equivalents at beginning of period 8,277 17,608
======== ========
Cash and cash equivalents at end of period $ 63,539 $ 11,595
======== ========
Supplemental disclosures of cash flow information:
Other current and noncurrent assets acquired in noncash revenue transaction $ 1,250 $ --
======== ========
Unearned revenue and deferred maintenance - noncash revenue transaction $ 219 $ --
======== ========
Non-cash investing and financing activities:
Acquisition of equipment under capital lease $ 215 $ 178
======== ========
Deferred compensation forfeited due to voluntary terminations $ 693 $ --
======== ========
<FN>
See Accompanying Notes to Consolidated Financial Statements
</FN>
5
BROADVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization and Summary of Significant Accounting Policies
Nature of Business - BroadVision, Inc. ("BroadVision" or the "Company")
develops, markets and supports fully integrated application software solutions
exclusively designed to manage one-to-one relationships for the extended
enterprise. These total end to end solutions enable a business to capitalize on
the Internet as a unique platform to enhance commerce, provide critical
self-service functions or deliver targeted personalized information to
customers, suppliers, distributors, employees, or any other constituent of their
extended enterprise on a real-time interactive basis.
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, 1998 and for
the three and six months ended June 30, 1998 and 1997 are unaudited. The balance
sheet at December 31, 1997 has been derived from the audited financial
statements at that date but does not reflect all informational disclosures
previously reported in accordance with Generally Accepted Accounting Principles.
In the Company's opinion, the financial statements presented herein include all
necessaary 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 financial statements should be read
in conjunction with the financial statements and notes thereto included with the
Company's annual report on Form 10-K and other documents 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.
Prepaid Royalties - Prepaid royalties relating to purchased software to be
incorporated and sold with the Company's software products are amortized as a
cost of revenue either on a straight-line basis over the remaining term of the
royalty agreement or on the basis of projected product revenues, whichever
results in greater amortization.
Long-term Investment - The Company accounts for nonmarketable equity investments
(consisting of less than 20% of an investee's outstanding voting stock) based on
the cost method; given the Company does not have the ability to significantly
influence the operating and financial policies of the investee. Any impairment
in the value of long-term investments, which is other than a temporary decline,
is charged to the period in which such loss occurs.
Noncash Transaction - During the quarter ended June 30, 1998, the Company
recognized software product revenue, amounting to $1,031,000 or 9% of total
revenues, related to a noncash transaction. In this transaction, the Company
delivered its software products to a vendor and in return received a negotiated
lump sum settlement for internal development rights and future royalty payments
to that vendor through 2001. Prior to this transaction, the Company had an
existing arrangement with the vendor whereby the Company made royalty payments
to the vendor based on a percentage of current product revenues.
6
Comprehensive Income - Effective January 1, 1998, the Company adopted the
provisions of Statement of Financial Accounting Standard ("SFAS") No. 130,
Reporting of Comprehensive Income. Comprehensive income includes all changes in
equity during a period except those resulting from the issuance of shares of
stock and distributions to stockholders. There were no material differences
between net income (loss) and comprehensive income (loss) during the three and
six month periods ended June 30, 1998 and 1997.
Net Loss Per Share - The Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, Earnings Per Share, which 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 is determined solely on
common shares, whereas, diluted earnings per share includes common equivalent
shares, as determined under the treasury stock method.
The following table sets forth the basic and diluted earnings (loss)
per share computational data for the periods presented.
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
(In thousands, except per share amounts) 1998 1997 1998 1997
-------- -------- -------- --------
Net income (loss) $ 693 $ (2,109) $ 194 $ (4,596)
======== ======== ======== ========
Weighted average common shares outstanding
utilized for basic earnings (loss) per share 24,011 20,219 22,244 20,111
Weighted average common equivalent shares outstanding:
Employee common stock options 2,700 -- [1] 2,502 -- [1]
Common stock warrants 60 -- [1] 73 -- [1]
-------- -------- -------- --------
Total weighted average common and common
equivalent shares outstanding utilized
for diluted earnings (loss) per share 26,771 20,219 24,819 20,111
======== ======== ======== ========
Basic earnings (loss) per share $ 0.03 $ (0.10) $ 0.01 $ (0.23)
======== ======== ======== ========
Diluted earnings (loss) per share $ 0.03 $ (0.10) $ 0.01 $ (0.23)
======== ======== ======== ========
<FN>
[1] The Company incurred a net loss for the indicated period. Accordingly,
common equivalent shares are excluded from the diluted loss per share
calculation because they are antidilutive.
</FN>
New Accounting Pronouncements - The FASB recently issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. 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 carry all derivative instruments in the balance sheet at fair
value. The accounting for changes in the fair value (i.e., gains or losses) of a
derivative instrument depends on whether it has been designated and qualifies as
part of a hedging relationship and, if so, the reason for holding it. The
Company must adopt SFAS No. 133 by January 1, 2000. The Company has not
determined the impact that SFAS No. 133 will have on its financial statements.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") No. 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. SOP No. 98-1 requires
that certain costs related to the development or purchase of internal-use
software be capitalized and amortized over the estimated useful life of the
software. SOP No. 98-1 is effective for financial statements issued for fiscal
years beginning after December 15, 1998. The Company does not expect the
adoption of SOP No. 98-1 to have a material impact on its results of operations.
7
Note 2. Selective Balance Sheet Detail
Property and Equipment consisted of the following (in thousands):
June 30, December 31,
1998 1997
----------- ---------
Furniture and fixtures $ 871 $ 636
Computers and software 6,874 5,458
Leasehold improvements 3,418 2,780
----------- ---------
11,163 8,874
Less accumulated depreciation and amortization (3,723) (2,407)
----------- ----------
$ 7,440 $ 6,467
=========== =========
Accrued expenses consisted of the following (in thousands):
June 30, December 31,
1998 1997
----------- ----------
Employee benefits $ 601 $ 420
Commissions and bonuses 1,309 833
Directors and officers insurance premiums -- 57
Taxes payable 354 366
Contractors fees 169 162
Other 495 330
----------- ----------
$ 2,928 $ 2,168
=========== ==========
Note 3. Commercial Credit Facilities
The Company has a revolving line of credit (based on eligible accounts
receivable) and a term debt credit facility with its commercial lender that
provide for up to $2.3 million and $4.8 million of total borrowings,
respectively. As of June 30, 1998, the Company had total borrowings of $3.7
million under its term debt credit facility and outstanding commitments in the
form of two standby letters of credit totaling $2.2 million under its revolving
line of credit.
The Company's credit facilities include covenants which 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, 1998 the Company was in compliance with its commercial credit facility
covenants.
Note 4. Common Stock
During March 1998, the Company completed a successful secondary public
stock offering and issued 3,000,000 shares of common stock for net proceeds of
approximately $46.6 million. During April 1998, the Company's Underwriters
exercised their over-allotment option and the Company issued an additional
455,850 shares of common stock for net proceeds of approximately $7.1 million.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, 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 SUCH
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 SUCH
FORWARD-LOOKING STATEMENTS SPEAK ONLY AS OF THE DATE SUCH STATEMENTS ARE MADE.
OVERVIEW
BroadVision develops, markets and supports real time interactive fully
integrated application software solutions exclusively designed to manage
one-to-one relationships for the extended enterprise. These total end to end
solutions allow a business to capitalize on the Internet as a unique platform to
conduct commerce, provide critical self-service functions, and deliver targeted
personalized information to their customers, suppliers, distributors, employees,
or any other constituent of their extended enterprise.
BroadVision's product line provides a competitive advantage for
businesses by allowing them to specifically tailor Web site content to the
personalized needs and interests of individual visitors on a real-time
interactive basis. The BroadVision One-To-One applications accomplish this by
capturing Web site visitor profiles, dynamically organizing enterprise
information, targeting content to each individual visitor based on easily
constructed business rules, and by providing the means to facilitate the
execution of secure transactions. The Company believes the competitive
advantages of these applications include, among other things, enhanced customer
satisfaction and loyalty, increased business volumes, lower costs to service
customers and execute transactions, as well as significantly enhanced employee
productivity.
The Company's core product, the BroadVision One-To-One Application
System, was first made commercially available in December 1995. The Company's
latest commercially available version, Version 3.0, was released during the
fourth quarter of 1997 and supports five languages (English, German, Japanese,
Chinese, and Korean) and four major client/server databases (Oracle, Sybase,
Informix, and Microsoft SQL Server). During the quarter ended June 30, 1997, the
Company released a beta version of its next generation of software, Version 4.0
of the BroadVision One-To-One Application System, which is anticipated to be
available for general release later in 1998. A complementary family of three
packaged application products based on the BroadVision One-To-One Application
System-- One-To-One Commerce, One-To-One Financial, and One-To-One Knowledge
- --were first made commercial available in 1997. The WebApp products are built
upon and tightly integrated with the Company's core technology and provide
specifically enhanced functionality for the distinct customer requirements
involved in managing one-to-one relationships within product merchandising,
financial services, and knowledge management.
The Company sells its products and services worldwide through a direct
sales force, independent distributors, value-added resellers, and system
integrators. It also has a global network of strategic business relationships
with key industry platform and Web developer partners. To date the Company has
achieved good market acceptance for its products. However, the Company has a
relatively limited operating history, and its prospects must be evaluated in
light of the risks and uncertainties frequently encountered by a company within
its early stages of development. Some of the risks and uncertainties associated
with the Company's stage of development relate to the new and rapidly evolving
markets in which it operates. These related market risks include, among other
things, the early stage of development for online commerce, the dependence of
online commerce on the continued development of the Internet and its related
infrastructure, the uncertainty of 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 continue to, among other
things, successfully implement its marketing strategies, respond to competitive
developments, 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 herein under the caption "Factors Affecting Quarterly Operating Results";
and 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.
9
RESULTS OF OPERATIONS
Revenues
The Company's revenues are derived from software license fees and fees
charged for its services. The Company recognizes software license revenues when
a non-cancelable license agreement has been signed, the software product has
been shipped, there are no uncertainties surrounding product acceptance, the
fees are fixed and determinable, and collection is considered probable. Revenues
allocated to software license fees, in general, are recognized upon consummation
of the sale and the portion allocated to maintenance and support is recognized
over the contracted period, which is typically one year. Professional services
revenues, in general, are recognized as services are performed.
Total Company revenues increased 89% during the current quarter ended
June 30, 1998 to $11.4 million as compared to $6.0 million for the quarter ended
June 30, 1997. For the six months ended June 30, 1998, total Company revenues
increased 90% to $21.5 million as compared to $11.3 million for the comparable
period during 1997. A summary of the Company's revenues by geographic region is
as follows:
(In thousands) Software % Services % Total %
------------------------- --------------- --------- ---------------- ------
Quarter Ended:
June 30, 1998
North America $ 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 %
================================================================================================================
June 30, 1997
North America $ 1,147 28 % $ 1,060 55 % $ 2,207 37 %
Europe 2,395 58 459 24 2,854 47
Asia/Pacific 556 14 410 21 966 16
- ----------------------------------------------------------------------------------------------------------------
Total $ 4,098 100 % $ 1,929 100 % $ 6,027 100 %
================================================================================================================
Six Months Ended:
June 30, 1998
North America $ 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 %
================================================================================================================
June 30, 1997
North America $ 2,593 36 % $ 1,988 49 % $ 4,581 41 %
Europe 3,654 50 794 19 4,448 39
Asia/Pacific 999 14 1,290 32 2,289 20
- ----------------------------------------------------------------------------------------------------------------
Total $ 7,246 100 % $ 4,072 100 % $ 11,318 100 %
================================================================================================================
Software product license revenues increased 96% during the current
quarter ended June 30, 1998 to $8.0 million as compared to $4.1 million for the
quarter ended June 30, 1997. For the six months ended June 30, 1998, license
revenues increased 111% to $15.3 million as compared to $7.2 million for the
comparable period during 1997. The increases in software license revenues are
principally a result of continued strong market acceptance for the Company's
core technology, BroadVision One-To-One, and its three complementary WebApp
packaged solutions, BroadVision One-To-One Commerce, BroadVision One-To-One
Financial, and BroadVision One-To-One Knowledge. WebApps were first introduced
in 1997 and have become an integral part of the total application solutions
purchased by customers. During the six months ended June 30, 1998, the Company
licensed approximately 56 new customers (including system integration /
distributor partners) which compares to approximately 50 during the six months
ended June 30, 1997 and approximately 104 for the full fiscal year ended
December 31, 1997. During the quarter ended June 30, 1998, the company released
a beta version of its next generation of software, BroadVision One-To-One 4.0,
which is anticipated to be available for general release later in 1998.
10
During the quarter ended June 30, 1998, the Company recognized software
product revenue, amounting to $1,031,000 or 9% of total revenues, related to a
noncash transaction. In this transaction, the Company delivered its software
products to a vendor and in return received a negotiated lump sum settlement for
internal development rights and future royalty payments to that vendor through
2001. Prior to this transaction, the Company had an existing arrangement with
the vendor whereby the Company made royalty payments to the vendor based on a
percentage of current product revenues.
Total services revenues increased 75% during the current quarter ended
June 30, 1998 to $3.4 million as compared to $1.9 million for the quarter ended
June 30, 1997. For the six months ended June 30, 1998, services revenues
increased 51% to $6.2 million as compared to $4.1 million for the comparable
period during 1997. Services revenues consist primarily of professional services
and maintenance. The Company's professional services include application design
and implementation of BroadVision One-To-One technology, project management,
custom development of application objects and templates, and product education
and training. Professional services are generally offered on a time and
materials basis. Maintenance revenue is generally derived from annual service
agreements and is recognized ratably over the period of the agreement, typically
one year. Maintenance fees are based on a percentage of list price for the
related software.
Professional services revenues increased 52% during the current quarter
ended June 30, 1998 to $2.3 million as compared to $1.5 million for the quarter
ended June 30, 1997. For the six months ended June 30, 1998, professional
services revenues increased 32% to $4.3 million as compared to $3.3 million for
the comparable period during 1997. Professional services revenues as a
percentage of total services revenues were 67% and 77% during the first quarters
of 1998 and 1997, respectively, and were 69% and 80% during the six months ended
June 30, 1998 and 1997, respectively. Professional services revenues increased
in absolute dollar terms as a result of higher business volumes evidenced by the
increase in license revenues. In relative terms, professional services revenues
as a percentage of total services revenues declined as a result of the Company
leveraging its professional services. The Company has pursued a strategy of
utilizing partners in order to maximize deployments. This allows the Company to
achieve higher volumes without corresponding increases in its services
organization. As the Company's strategy of developing business alliances with
third parties continues to expand and the Company's licensed customer base of
maintenance contracts grows, professional services revenues as a percentage of
total services revenues may continue to decline.
Maintenance revenues increased 152% during the current quarter ended
June 30, 1998 to $1.1 million as compared to $400,000 for the quarter ended June
30, 1997. For the six months ended June 30, 1998, maintenance revenues increased
129% to $1.9 million as compared to $800,000 for the comparable period during
1997. Maintenance revenues as a percentage of total services revenues were 33%
and 23% during the quarters ended June 30, 1998 and 1997, respectively and were
31% and 20% during the six months ended June 30, 1998 and 1997, respectively.
The increases in maintenance revenues are a result of expanding software sales
and a larger installed base of software licenses. As of June 30, 1998, the
Company had licensed its products to over 205 customers. This compares with over
150 customers as of December 31, 1997, and over 95 customers as of June 30,
1997. As the Company's installed license base grows, its maintenance revenues as
a percentage of total services revenues may continue to increase.
Cost of Revenues
Three Months Ended June 30, Six Months Ended June 30,
------------------------------------------ -----------------------------------------
(in thousands) 1998 % 1997 % 1998 % 1997 %
- -------------- -------------------- --------------------- -------------------- --------------------
Cost of software licenses[1] $ 213 3% $ 425 10% $ 400 3% $ 639 9%
Cost of services[2] 2,092 62 1,001 52 3,711 60 2,144 53
------------ ------------ ------------ ------------
Total cost of revenues[3] $ 2,305 20 $ 1,426 24 $ 4,111 19 $ 2,783 25
============ ============ ============ ============
<FN>
[1] - Percentage is calculated based on total software license revenues for
the period indicated
[2] - Percentage is calculated based on total services revenues for the period
indicated
[3] - Percentage is calculated based on total revenues for the period
indicated
</FN>
Cost of software licenses 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.
11
Cost of software licenses decreased 50% during the current quarter
ended June 30, 1998 to $213,000 as compared to $425,000 for the quarter ended
June 30, 1997. For the six months ended June 30, 1998, cost of software licenses
decreased 37% to $400,000 as compared to $639,000 for the comparable period
during 1997. Cost of software licenses decreased in both absolute dollar and
relative percentage terms during 1998 as compared to 1997 due to lesser
commissioned agent sales and a higher Company generated sales during the current
period as compared to the comparable prior year period.
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.
Cost of services increased 109% during the current quarter ended June
30, 1998 to $2.1 million as compared to $1.0 million for the quarter ended June
30, 1997. For the six months ended June 30, 1998, cost of services increased 73%
to $3.7 million as compared to $2.1 million for the comparable period during
1997. Cost of services increased in absolute dollar terms during 1998 as
compared to 1997 as 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 arrangements. The increase in cost of
services as a percentage of services revenues is a result of higher utilization
of outside consultants in relation to the extent previously utilized during the
prior periods. The Company expects that services costs will continue to increase
in absolute dollars as the Company continues to expand its services organization
to support higher business volumes.
Operating Expenses
Three Months Ended June 30, Six Months Ended June 30,
---------------------------------------- ---------------------------------------
(in thousands) 1998 %[1] 1997 %[1] 1998 %[1] 1997 %[1]
- -------------- -------------------- --------------------- -------------------- --------------------
Research and Development $ 2,049 18% $ 1,802 30% $ 4,083 19% $ 3,482 31%
Sales and Marketing 6,243 55 4,257 71 12,104 56 8,461 75
General and Administrative 760 7 700 11 1,585 8 1,446 12
-------------------- --------------------- -------------------- --------------------
Total Operating Expenses $ 9,052 80% $ 6,759 112% $ 17,772 83% $ 13,389 118%
==================== ===================== ==================== ====================
<FN>
[1] - Expressed as a percent of total revenues for the period indicated
</FN>
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.
Research and development expenses increased 14% during the current
quarter ended June 30, 1998 to $2.0 million as compared to $1.8 million for the
quarter ended June 30, 1997. For the six months ended June 30, 1998, research
and development expenses increased 17% to $4.1 as compared to $3.5 million for
the comparable period during 1997. The increases in absolute dollars are
primarily attributable to personnel costs for added headcount within those
operations involved in the enhancement of existing applications and the
development of the Company's next generation of products. Research and
development expenses, as a percent of total revenues, decreased because revenues
have increased at a higher rate relative to expenses. The Company anticipates
that research and development expenses will continue to increase in absolute
dollars terms. Development costs incurred for the research and development of
new software products are expensed as incurred until technological feasibility
in the form of a working model has been established, at which time such costs
are capitalized, subject to recoverability. As of June 30, 1998, no such
software development costs had been capitalized because the costs incurred
between the time a working model is established and the time new software
products are available for general release have been insignificant.
Sales and marketing expenses consist primarily of salaries,
employee-related benefit costs, commissions and other incentive compensation,
travel and entertainment, and marketing program related expenditures such as
collateral materials, trade shows, public relations, and creative services.
12
Sales and marketing expenses increased 47% during the current quarter
ended June 30, 1998 to $6.2 million as compared to $4.3 million for the quarter
ended June 30, 1997. For the six months ended June 30, 1998, sales and marketing
expenses increased 43% to $12.1 million as compared to $8.5 million for the
comparable period during 1997. The overall increases in absolute dollars in
sales and marketing expenditures reflect the cost of hiring additional sales and
marketing personnel, developing and expanding its sales distribution channels,
and expanding promotional activities and marketing related programs. Sales and
marketing expenses, as a percent of total revenues, decreased because revenues
have increased at a higher rate relative to expenses. The Company intends to
continue to expand its direct sales and marketing efforts and expects that sales
and marketing expenses will continue to increase in absolute dollar terms.
General and administrative expenses consist primarily of salaries,
employee-related benefit costs, and professional service fees.
General and administrative expenses increased 9% during the current
quarter ended June 30, 1998 to $760,000 as compared to $700,000 for the quarter
ended June 30, 1997. For the six months ended June 30, 1998, general and
administrative expenses increased 10% to $1.6 million as compared to $1.4
million for the comparable period during 1997. The increases in absolute dollars
in general and administrative expenses are attributable to additional
administrative and management personnel, higher professional fees associated
with legal and accounting matters on nonstandard transactions, and additional
infrastructure to support the expansion of the Company's operations. General and
administrative expenses, as a percent of total revenues, decreased because
revenues have increased at a higher rate relative to expenses. The Company
expects to continue to add administrative staff to support broadened operations.
As a result, the Company expects that general and administrative expenses will
continue to increase in absolute dollar terms.
The Company recorded deferred compensation relating to the difference
between the exercise price and the deemed fair value of the Company's Common
Stock with regards to shares issueable upon exercise of options granted prior to
its initial public stock offering in June of 1996. As of June 30, 1998 the
Company had total deferred compensation of $732,000, which is being amortized to
cost of services, research and development, selling and marketing, and general
and administrative expenses over the vesting periods of the respective options,
generally 60 months. Deferred compensation expense for the quarters ended June
30, 1998 and 1997 was $88,000 and $117,000, respectively; and for the six months
ended June 30, 1998 and 1997 it was $180,000 and $227,000, respectively. During
the quarter ended June 30, 1998, the Company reversed $693,000 of unamortized
deferred compensation through a debit to common stock related to unexercised
stock options forfeited by employees due to voluntary terminations.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1998, the Company had $63.5 million of cash and cash
equivalents as compared to $10.4 million of cash, cash equivalents, restricted
cash and short-term investments as of December 31, 1997, which represents an
increase of $53.1 million. The increase in cash and cash equivalents was
principally attributable to proceeds from the issuance of common stock. During
March 1998, the Company issued 3,000,000 shares of common stock in connection
with a secondary public stock offering that netted the Company total proceeds of
approximately $46.6 million. During April 1998, the Underwriters for the
Company's secondary stock offering exercised their over-allotment option and the
Company issued an additional 455,850 shares of common stock for net proceeds of
approximately $7.1 million. During the six months ended June 30, 1998, the
Company used approximately $2.1 million for capital expenditures, approximately
$1.5 million for the purchase of an equity investment in a partner; and raised
approximately $55.5 million from the issuance of common stock, approximately
$3.1 million from additional borrowings, maturity of investments or cash that
became unrestricted, and approximately $700,000 was provided by operating
activities. The Company currently has no significant capital commitments other
than its obligations under equipment and operating leases, commitments of $2.2
million relating to standby letters of credit, and $3.7 million of outstanding
term debt. The Company has a commercial credit facility that provides for up to
total borrowings of $7.1 million ($1.2 million of available credit as of June
30, 1998).
The Company believes that its available cash 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 more than the next 12 months.
13
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 that 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, in the near term, to
increase significantly its personnel, including its domestic and international
direct sales 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. In
addition, the Company's limited operating history makes the prediction of future
results of operations difficult and, accordingly, there can be no assurance that
the Company will be able to sustain its revenue growth or profitability. The
Company's limited operating history also requires that its prospects 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. It is also 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.
14
Year 2000 Compliance - Many currently installed computer systems and software
products are coded to accept two digit entries in the date code field. These
date code fields will need to accept four digit entries to distinguish 21st
century dates from 20th century dates.
As a result, in less than two years, computer systems and software used
by many companies may need to be upgraded to comply with such "Year 2000"
requirements. Although the Company's products are Year 2000 compliant, the
Company believes that the purchasing patterns of customers and potential
customers may 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.
The Company utilizes various financial and managerial information
systems within its operations in the United States, Europe and Asia which the
Company believes to be Year 2000 compliant. Presently, the Company is analyzing
its information system requirements in relation to its business operating goals
and strategic objectives and, as part of its normal course of business, expects
to implement new company-wide systems in the foreseeable future which would be
Year 2000 compliant. The Company is also analyzing its other systems to identify
any potential Year 2000 issues and will take appropriate corrective action based
on the results of such analysis. Management has not yet determined the cost, if
any, related to achieving complete Year 2000 compliance.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
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 11,
1998.
(b) Pehong Chen, David L. Anderson, Yogen K Dalal, Koh Boon Hwee 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 Pehong Chen, David L. Anderson, Yogen K Dalal,
Koh Boon Hwee and Carl Pascarella as directors:
For: 18,039,411 Withheld: 3,376
(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 975,000:
For: 15,225,994 Against: 2,814,243
Abstain: 2,500 Broker Non-Vote: 50
(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 200,000:
For: 17,959,674 Against: 36,380
Abstain: 1,789 Broker Non-Vote: 44,944
(iv) To ratify the selection of KPMG Peat Marwick LLP as
independent auditors of the Company for the fiscal year ending
December 31, 1998:
For: 18,040,737 Against: 2,050
15
ITEM 5. OTHER INFORMATION
Pursuant to the Company's bylaws, stockholders who wish to bring
matters or propose nominees for director at the Company's 1999 annual meeting of
stockholders must provide specified information to the Company between 60 to 90
days prior to the first anniversary of the 1998 annual meeting (unless such
matters are included in the Company's proxy statement pursuant to Rule 14a-8
under the Securities Exchange Act of 1934, as amended).
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: August 13, 1998 /s/ Pehong Chen
----------------------------- -------------------------------------------------------
Pehong Chen
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 13, 1998 /s/ Randall C. Bolten
----------------------------- -------------------------------------------------------
Randall C. Bolten
Vice President, Operations and Chief Financial Officer
(Principal Financial and Accounting Officer)
16
INDEX TO EXHIBITS
Exhibit
No. Description
--- -----------
27 Financial Data Schedule
17